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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22,
1998 REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 2431 87-036526
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(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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755 BOARDMAN -- CANFIELD ROAD
SOUTH BRIDGE EXECUTIVE CENTER
BUILDING G WEST
BOARDMAN, OHIO 44512
(330) 965-9910
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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FRANK J. AMEDIA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
755 BOARDMAN -- CANFIELD ROAD
SOUTH BRIDGE EXECUTIVE CENTER
BUILDING G WEST
BOARDMAN, OHIO 44512
(330) 965-9910
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copies to:
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CHRISTOPHER D. JOHNSON, Esq. MICHAEL WAGER, Esq.
Squire, Sanders & Dempsey L.L.P. Benesch, Friedlander, Coplan & Aronoff LLP
40 North Central Avenue 2300 BP America Bldg., 200 Public Square
Phoenix, Arizona 85004 Cleveland, Ohio 44114
(602) 528-4000 (216) 363-4500
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Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF SHARES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE REGISTRATION FEE(1)
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Common Stock ($.001 par value).................... $25,200,000.00 $7,434.00
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(1) The registration fee has been calculated pursuant to Rule 457(o) under the
Securities Act of 1933, which permits the registration fee to be calculated
solely on the basis of the maximum aggregate offering price of the
securities without including the number of shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MAY 22, 1998
PROSPECTUS
SHARES
[LOGO] AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
COMMON STOCK
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All of the shares of common stock, $.001 par value per share (the
"Common Stock"), offered hereby are being issued and sold by American
Architectural Products Corporation ("AAPC" or the "Company"). Prior to this
offering (the "Offering"), there has been only a limited public market for the
Common Stock. It is currently anticipated that the public offering price for the
Common Stock will be between $ and $ per share. See
"Underwriting" for a discussion of the factors considered in determining the
public offering price. The Company has applied for quotation of the Common Stock
on the Nasdaq National Market under the symbol "AAPC."
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS
AND "DILUTION" ON PAGE 17 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.................................... $ $ $
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Total(3)..................................... $ $ $
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(1) Certain stockholders of the Company (collectively, the "Selling
Stockholders") and the Company have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Principal and Selling
Stockholders" and "Underwriting."
(2) Before deducting expenses, estimated at $ , payable by the Company.
(3) The Selling Stockholders have granted the Underwriters an option exercisable
for thirty days from the date of this Prospectus (the "Over-Allotment
Option") to purchase up to additional shares of Common Stock solely
to cover over-allotments, if any. The Company will not receive any proceeds
from the sale of the Common Stock by the Selling Stockholders pursuant to
the Over-Allotment Option. If the Over-Allotment Option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Principal and
Selling Stockholders" and "Underwriting."
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if issued to and accepted by them. The Underwriters
reserve the right to withdraw, cancel or modify such offer and reject any order
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made against payment therefor at the offices of McDonald & Company
Securities, Inc. or through the facilities of the Depository Trust Company on or
about , 1998.
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MCDONALD & COMPANY WHEAT FIRST UNION
SECURITIES, INC.
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The date of this Prospectus is , 1998.
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[PAGE 2 -- INSERT PHOTOGRAPHS/GRAPHICS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
THE PURCHASE OF SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY,
STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE TRANSACTIONS, SEE
"UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY
ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and financial statements and notes
thereto contained elsewhere in this Prospectus. The Company and its subsidiaries
have registered trademarks on brand names contained in this Prospectus,
including Eagle(R), Encore(R) and Perma-Door(R), and this Prospectus also
contains brand names and trademarks of companies other than the Company and its
subsidiaries. Unless otherwise indicated, all information contained herein
assumes no exercise of the Over-Allotment Option granted to the Underwriters or
any other stock options or warrants issued by the Company. Potential investors
should carefully consider the information set forth under the heading "Risk
Factors."
THE COMPANY
The Company is a leading national manufacturer and distributor of a broadly
diversified line of windows, doors and related products ("fenestration
products") designed to meet a variety of residential and commercial consumer
demands in both the new construction and remodeling/replacement markets. Since
its entry into the fenestration industry in June 1994, the Company has completed
12 acquisition transactions and has established itself as one of the top ten
manufacturers in the United States of both vinyl and metal fenestration
products. The Company's pro forma net sales were $192.4 million for the year
ended December 31, 1997. The Company's strategy is to continue to increase its
market share, geographic presence and product diversity through aggressive
pursuit of additional strategic acquisitions of complementary businesses in the
highly fragmented $22.2 billion fenestration products industry.
The Company targets as acquisition candidates established fenestration
products companies and related material manufacturers that possess one or more
of the following attributes: national or regional niche market leadership;
recognized brand names; reputations for superior customer service; strong
management teams; predictable cash flows; and stable customer bases. The Company
believes that additional strategic acquisitions will allow the Company to
continue to: (i) reduce operating costs and improve margins through vertical
integration of material production capabilities with the Company's door and
window manufacturing operations; (ii) achieve significant cost reductions
through centralized purchasing, sharing central administrative services and
implementation of the Company's best operating and management practices; (iii)
further leverage its highly recognized brand names and nationwide multi-channel
distribution capabilities; and (iv) further diversify the Company's geographic,
product and market focus. To execute its growth strategy, the Company has
assembled a seasoned, entrepreneurial management team, with more than 100 years
of combined experience in the fenestration industry.
Consistent with its growth strategy, the Company completed six acquisitions
during 1997, which represented $111 million in 1997 pro forma net sales.
Additionally, in January of 1998, the Company acquired the vinyl extrusion
division of Easco, Inc., which reported 1997 net sales of approximately $16.1
million. This acquisition significantly increases the Company's production
capabilities in the fast-growing vinyl fenestration products segment. In January
of 1998, the Company also consummated the acquisition of substantially all of
the assets of Blackhawk Architectural Products, a Midwest manufacturer of steel
security screens and screen doors with 1997 net sales of approximately $0.9
million. On February 18, 1998, the Company entered into a letter of intent to
acquire the Weather-Seal division of Louisiana-Pacific Corporation, a
manufacturer and distributor of aluminum and vinyl extrusions, vinyl and wood
windows, and patio doors. On April 16, 1998, the Company acquired substantially
all the assets of Denver Window Corporation, a Colorado-based manufacturer of
specialty residential wood windows, which reported 1997 net sales of
approximately $1.8 million.
Fenestration product sales totaled approximately $22.2 billion in 1996.
Sales of residential fenestration products totaled approximately $15.1 billion
in 1996, including $7.9 billion in sales to the new construction market and $7.2
billion in sales to the remodeling/replacement market. Of the Company's total
1997 pro forma net sales, approximately 87.4% was attributable to residential
fenestration products. The National Wood Window and Door Association ("NWWDA")
has estimated that total U.S. sales of residential windows, which represented
approximately 65.1% of the Company's pro forma net sales in 1997, increased from
33.4 million units in 1991 to 48.9 million units in 1997, representing a
compound annual growth rate
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<PAGE> 5
("CAGR") of 6.6%, and that sales of residential entry doors, which represented
approximately 22.3% of the Company's pro forma net sales in 1997, increased from
11.0 million units in 1994 to 12.3 million units in 1997, representing a CAGR of
3.8%. Residential window and door sales are expected to continue to increase
over the next several years, with NWWDA forecasting sales of residential windows
and entry doors of 51.8 million units and 13.2 million units, respectively, in
the year 2000.
GROWTH STRATEGY
The Company intends to become the leading national manufacturer and
distributor of fenestration products. In order to achieve this objective, the
Company has consummated strategic acquisitions of a number of established
fenestration products companies, and its growth strategy contemplates continuing
this process by acquiring additional fenestration products companies that, like
the Company's previous acquisitions, can serve as platforms for future growth.
The Company's growth strategy is based on a number of key elements, including
the following:
- Increase Vertical Integration and Production Efficiencies. The Company
believes that it can continue to reduce its operating costs and improve
its margins through vertical integration of its vinyl extrusion, aluminum
extrusion and decorative glass production capabilities with its window
and door manufacturing operations. In addition, the Company believes that
additional cost savings can be realized through rationalization of
product lines, reconfiguration of production processes, reduction of
inventory levels and implementation of uniform management information
systems across the Company's various operating divisions.
- Achieve Additional Cost Savings. The Company believes it will continue
to reduce the total operating expenses of acquired businesses by
increasing the level of automation of acquired businesses, eliminating
duplicative administrative functions and consolidating certain management
functions performed separately by each business prior to its acquisition.
As the Company continues to expand through acquisitions and internal
growth, management expects the Company to further benefit as its
increased size provides greater purchasing leverage with suppliers,
thereby allowing the Company to negotiate more favorable pricing for raw
materials and equipment. Further, the Company continually reviews its
operations at the local and regional operating levels in order to
identify certain "best practices" that can be implemented throughout its
operations. Management believes this process of capitalizing on the
collective knowledge and experience of its various operating units will
allow the Company to achieve higher overall levels of customer
satisfaction and operating efficiency.
- Implement Marketing Strategy. The Company believes that many companies
in the fenestration industry have failed to implement the type of
coordinated, professional marketing strategy that is necessary to develop
strong manufacturer brand recognition and loyalty among distributors and
consumers. Through the application of targeted marketing techniques and
image advertising, the Company believes it will be able to effectively
communicate the quality, diversity and value of its product line to
potential purchasers.
- Further Leverage National Distribution System, Product Line and Brand
Name Recognition. The Company will seek to use its nationwide
distribution system and broad product line to penetrate new markets and
increase its share in existing markets. The Company also plans to
continue to capitalize on its well-recognized brand names and reputation
for quality and service to increase revenues by cross-selling its
products through its multiple distribution channels.
COMPETITIVE STRENGTHS
The Company's ability to successfully implement its growth strategy and
become the leading consolidator in the highly fragmented fenestration products
industry is based on a number of key competitive strengths, including the
following:
- Established Brand Names and Diverse Product Line. The Company believes
many of its windows and doors receive national and regional brand
recognition, including products marketed under the "Eagle,"
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"Taylor," "Binnings," "Danvid," "Western," "Perma-Door," "Vinyline,"
"Modernview," "Encore," "VinylSource," "Season-All Commercial" and
"Sumiglass" brand names.
- Multiple Distribution Channels and National Distributor Network. The
Company distributes its products through a combination of sales to
wholesalers, lumberyards and do-it-yourself home centers and direct sales
to architects and independent building contractors. The Company believes
that this distribution strategy maximizes the Company's market
penetration and reduces reliance upon any single distribution channel for
the sale of its products.
- Customer Service. The Company's systems, processes and organization are
designed specifically to provide a high level of customer service. The
Company believes that it offers its distributors high quality,
competitively priced products and short lead times while maintaining high
order-fill rates.
- Experienced, Entrepreneurial Management. The Company has assembled a
strong and experienced management team at both the corporate and
operating levels. The Company's officers, including the Chairman of the
Board, collectively have had significant involvement in more than 130
acquisition transactions, and management has a strong track record of
acquiring businesses and integrating them into the existing operations of
the Company.
- Vertical Integration. Through strategic acquisition transactions, the
Company has acquired aluminum and vinyl extrusion and glass production
capabilities, resulting in a high degree of vertical integration within
the Company's current manufacturing operations. In-house aluminum and
vinyl extrusion capacity allows the Company to ensure a low-cost,
reliable source of extrusions, control product quality and reduce
inventory levels. The Company believes that this vertical integration
provides the Company with a cost advantage over many of its competitors.
5
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THE OFFERING
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Common Stock outstanding prior to the Offering............. 13,458,479 shares(1)
Common Stock offered by the Company........................ shares(2)
Common Stock to be outstanding after the completion of the
Offering................................................. shares(2)
Use of proceeds............................................ The net proceeds will be used for future
acquisitions and working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol..................... "AAPC"
</TABLE>
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(1) As of May 1, 1998 and excluding shares of Common Stock issuable pursuant to:
(i) options to purchase an aggregate of 962,500 shares of Common Stock
pursuant to the Company's stock option plans, which have a current weighted
average exercise price of $3.76 per share, and an additional number of
shares of Common Stock reserved for issuance thereunder equal to 10% of the
shares of Common Stock issued and outstanding from time to time (not to
exceed 10,000,000 shares); (ii) warrants to purchase a total of 85,069
shares of Common Stock at an exercise price of $3.50 per share issued to
various lenders; (iii) options to purchase up to 150,000 shares of Common
Stock at an exercise price of $5.43 per share issued to an investor
relations firm; (iv) options to purchase up to 707,655 shares of Common
Stock at an exercise price of $3.75 per share issued to AAP Holdings, Inc.;
(v) options to purchase an aggregate of 471,770 shares of Common Stock at an
exercise price of $3.75 per share issued in connection with the acquisition
of Forte, Inc. in June 1994; (vi) options to purchase up to 100,000 shares
of Common Stock at an exercise price of $2.50 per share issued to a former
officer of the Company; and (vii) shares of Common Stock issuable pursuant
to the Company's obligation to issue to the former stockholders of Thermetic
on January 18, 1999 a number of shares of Common Stock having a market value
of $1,000,000 on such date. See "Management -- Employee Stock Option Plans,"
"Certain Relationships and Related Transactions" and "Underwriting."
(2) Assumes no exercise of the Over-Allotment Option. See "Underwriting."
RISK FACTORS
The shares of Common Stock offered hereby involve a high degree of risk and
immediate substantial dilution. Prospective purchasers of Common Stock should
carefully consider all information set forth in this Prospectus and, in
particular, should evaluate the specific factors set forth under "Risk Factors"
including, without limitation, risks relating to the Company's acquisition
strategy, the Company's lack of profitable operations and limited history of
combined operations, the Company's ability to achieve anticipated cost savings,
the Company's highly leveraged financial position, the Company's restrictive
debt covenants, the Company's reliance on the residential housing industry,
potential fluctuations in the Company's quarterly operating results, potential
fluctuations in raw materials costs and supply, the Company's reliance on
manufacturing facilities and suppliers, and competition. See "Risk Factors" and
"Dilution."
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The Company's principal executive offices are located at and its mailing
address is 755 Boardman - Canfield Road, South Bridge Executive Center, Building
G West, Boardman, Ohio 44512. The Company's telephone number is (330) 965-9910.
6
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SUMMARY FINANCIAL DATA
The following table sets forth certain summary financial data of the Company
for the periods ended and as of the dates indicated which are derived from and
described in the unaudited pro forma condensed consolidated financial statement
and in the Company's consolidated financial statements included elsewhere in
this Prospectus. The summary unaudited pro forma consolidated statement of
operations data give effect to certain acquisitions consummated in 1997 and the
December 10, 1997 offering of $125,000,000 of 11 3/4% Senior Notes due 2007 (the
"Senior Notes") as if they had occurred at January 1, 1997. The summary
unaudited pro forma consolidated financial data do not purport to represent what
the Company's results of operations would have actually been had those
transactions been consummated as of January 1, 1997 or to project the Company's
results of operations for any future period. The following information should be
read in conjunction with the consolidated financial statements and the unaudited
pro forma condensed consolidated financial statement of the Company and certain
other financial statements of companies acquired by the Company set forth
elsewhere in this Prospectus. The summary consolidated balance sheet data, as
adjusted, give effect to the Offering as if it had occurred on March 31, 1998.
The unaudited interim consolidated financial statements reflect all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair statement of the results for the interim periods. Results for interim
periods are not necessarily indicative of full-year results.
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THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, 1997 MARCH 31,
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HISTORICAL PRO FORMA(1) 1997 1998
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(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ 94,252 $ 192,398 $ 16,641 $ 45,608
Gross profit................................... 19,948 43,447 3,118 9,114
Selling, general and administrative expenses... 17,178 33,553 3,348 9,403
Income (loss) from operations.................. 2,770 9,894 (230) (289)
Interest expense............................... 3,928 15,612 615 3,678
Net loss....................................... (1,259) (5,625) (515) (2,609)
Basic and diluted loss per common share........ $ (0.10) $ (0.42) $ (0.04) $ (0.19)
Weighted average number of shares
outstanding.................................. 12,982,200 13,694,800 12,581,054 13,458,479
OTHER DATA:
Depreciation and amortization.................. $ 2,680 $ 4,947 $ 633 $ 1,577
Capital expenditures........................... 1,548 2,585 192 1,319
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DECEMBER 31, 1997 MARCH 31, 1998
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HISTORICAL HISTORICAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 40,132 $ 23,419
Working capital.......................................... 61,472 44,763
Total assets............................................. 158,324 161,152
Total debt(3)............................................ 126,518 126,231
Stockholders' equity..................................... 5,581 3,115
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(1) The pro forma financial data of the Company were derived from the unaudited
pro forma condensed consolidated financial statement included elsewhere in
this Prospectus.
(2) Adjusted to reflect the sale by the Company of shares of Common
Stock offered hereby at an assumed offering price of $ per share, after
deducting estimated underwriting discounts and commissions and offering
expenses.
(3) Total debt includes capital lease obligations.
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RISK FACTORS
An investment in the securities offered hereby involves a high degree of
risk, and this Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in such forward-looking statements as a result of a variety of
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. Prospective investors should consider carefully the
following factors, in addition to the other information contained in this
Prospectus, prior to making an investment in the Common Stock.
RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY
The Company intends to continue its significant growth through the
acquisition of additional businesses in the fenestration products industry. The
Company expects to face competition for acquisition candidates, particularly
from the large vertically integrated manufacturers of building products that
currently are active acquirors of fenestration companies as well as any other
manufacturers who adopt an integration strategy in the future. This competition
may limit the number of acquisition opportunities available to the Company and
may lead to higher acquisition prices which may not be justified by the future
sales and profitability of the companies acquired. In addition, there can be no
assurance that the Company will be able to identify, acquire or profitably
manage additional businesses or to integrate successfully any acquired
businesses into the Company without substantial costs, delays or other
operational or financial difficulties. Further, the Company's acquisition
strategy involves risks inherent in assessing the values, strengths, weaknesses
and profitability of acquisition candidates, including adverse short-term
effects on the Company's operating results, the failure of the acquired business
to achieve expected results, diversion of management's attention, failure to
retain key personnel of the acquired business and risks associated with
unanticipated events or contingent or unknown liabilities, such as
environmental, tax and other liabilities not reflected in financial statements,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company currently intends to use a combination of cash, debt
obligations and shares of Common Stock in making future acquisitions. Upon
completion of the Offering, the Company will have approximately $
available for future acquisitions, including $ of the net proceeds of
the Offering. Once these proceeds are depleted, to the extent the Company is
unable to use Common Stock to make future acquisitions, its ability to grow, and
to implement its internal growth plans, will be limited by its ability to raise
additional capital for these purposes through debt or additional equity
financings. There can be no assurance that the Company will be able to raise
capital on acceptable terms or in amounts sufficient to adequately finance its
growth strategy and other cash needs. In addition, the extent to which the
Company is willing or able to use Common Stock for acquisitions will depend on
its market value from time to time and the willingness of potential sellers of
acquisition targets to accept it as full or partial payment. The issuance of
Common Stock for such purpose could have a dilutive effect on the
then-outstanding capital stock of the Company. Further, acquisitions could
result in the accumulation of substantial goodwill and intangible assets, which
would result in amortization charges to the Company and adversely affect
earnings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and
"Business -- Growth Strategy."
LACK OF PROFITABLE OPERATIONS; LIMITED HISTORY OF COMBINED OPERATIONS
The Company was formed through the consolidation of a number of companies
in the fenestration products industry, some of which had historically incurred
substantial operating losses and, in certain periods, experienced negative cash
flows. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Company's pro forma net loss for the year ended
December 31, 1997 was $5.6 million, and there can be no assurance that the
Company will be able to achieve and maintain profitability. The Company's
ability to achieve profitability is dependent upon a number of factors,
including the successful integration of acquired businesses and implementation
of manufacturing improvement and cost reduction efforts, as well as various
factors beyond the Company's control, such as the impact of raw material price
fluctuations, the demand for the Company's products, the level of residential
and non-residential construction and remodeling activity and expenditures, and
the effect of general economic conditions on the
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Company's markets. The failure of the Company to achieve profitability could,
among other things, hinder its ability to service its debt, to consummate future
acquisition transactions, to make capital expenditures and to take advantage of
other business opportunities, any one of which could have a material adverse
effect on the Company's financial condition and results of operations.
Furthermore, the operations of the Company and the recently acquired companies
described herein have been conducted as separate and distinct businesses, each
with its own management team, sales force and operations. While the Company
believes, based on its history with prior acquisitions, that it can successfully
integrate the operations of the acquired companies, there can be no assurance
that this will be the case. In addition, there also can be no assurance that the
Company will be able to realize expected operating and economic efficiencies
from the acquisitions that have occurred to date.
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS
Certain of the businesses recently acquired by the Company have
historically operated with higher cost structures than that of the Company. The
Company has developed a detailed cost savings and integration strategy with
respect to acquired companies, which includes the consolidation of certain
purchasing, production, administrative, sales and management functions. The cost
savings anticipated by management reflect numerous assumptions as to purchasing
and other efficiencies. The Company could face regulatory, contractual and other
restrictions on its ability to implement the cost reductions. There can be no
assurance that the Company will be successful in reducing the overhead and other
costs associated with its acquisitions, or that realization of such cost
reductions will not be delayed. In addition, there can be no assurance that
unforeseen costs and expenses or other factors will not offset, in whole or in
part, the expected cost savings or other components of the Company's operating
plan.
RISKS ASSOCIATED WITH HIGHLY LEVERAGED FINANCIAL POSITION
The Company's long term debt includes $125 million principal amount of the
Senior Notes. In addition, the Company is currently in negotiations to secure a
revolving credit facility, and it is expected that the maximum availability
under such facility initially will be $25 million. At March 31, 1998, the
Company had total indebtedness of $126.2 million. The Company's ability to
service, or to refinance on favorable terms, its indebtedness depends on its
future performance, which is subject to a number of factors, some of which are
beyond the Company's control, including general economic and market conditions
and competition. In addition, the Company's recent losses and substantial
existing indebtedness may limit the Company's ability to raise capital or borrow
additional funds.
The Company's high level of debt and debt service requirements will have
several important effects on its future operations, including the following: (i)
the Company has significant cash requirements to service debt, which reduces
funds available for operations and future business opportunities and increases
the Company's vulnerability to economic downturns and industry conditions; (ii)
the Company's leveraged position increases its vulnerability to competitive
pressures; and (iii) funds available for working capital, capital expenditures,
acquisitions and general corporate purposes are limited. Each of these factors
could have a material adverse effect on the Company's financial condition and
results of operations. Further, certain of the Company's competitors currently
operate on a less leveraged basis and may have greater operating and financial
flexibility than the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Capitalization."
RESTRICTIVE DEBT COVENANTS
The financing agreements to which the Company and its subsidiaries are
parties (including the indenture pursuant to which the Senior Notes were issued
(the "Indenture")) include certain covenants that, among other things, restrict
the ability of the Company to: dispose of assets; incur additional indebtedness;
incur guarantee obligations; prepay other indebtedness; pay dividends; create
liens on assets; enter into sale and leaseback transactions; make investments,
loans or advances; make acquisitions; engage in mergers or consolidations;
change the business conducted by the Company; make capital expenditures; or
engage in certain transactions with affiliates and otherwise restrict certain
corporate activities. If the Company is successful in obtaining a revolving
credit facility, the agreements relating thereto are likely to contain similar
or further covenants and restrictions. There can be no assurance that the
Company will be able to satisfy these
9
<PAGE> 11
covenants in the future. A default under the documents governing indebtedness of
the Company could have a significant adverse effect on the market value of the
Common Stock.
RELIANCE ON RESIDENTIAL HOUSING INDUSTRY
Approximately 87.4% of the Company's 1997 pro forma net revenue was
attributable to sales of residential fenestration products. Demand in the
residential window and door manufacturing industry is influenced by the levels
of residential construction and remodeling/replacement activity. Trends in each
of these sectors directly impact the financial performance of the Company.
Accordingly, the strength of the U.S. economy, the age of existing homes, job
growth, consumer confidence, consumer credit and interest rates have a direct
impact on the Company's results of operations. Any decline in new residential
housing starts and/or demand for replacement/remodeling products could have a
material adverse effect on the Company's business. The Company's reliance on the
residential housing industry causes demand for the Company's products to be
highly cyclical, and any temporary or permanent decline in demand for
residential fenestration products could have a material adverse effect on the
Company. See "Business -- Industry Overview."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's business is seasonal since its primary revenues are driven by
residential construction. Inclement weather, particularly in the Northeast and
Midwest regions of the United States during the winter months, usually reduces
the level of building and remodeling activity in both the home improvement and
new construction markets and, accordingly, has an adverse impact on the demand
for the Company's products. Seasonal fluctuation in the demand for the Company's
products could have a material adverse effect on the Company's results of
operations. Because a high percentage of the Company's manufacturing overhead
and operating expenses are relatively fixed throughout the year, net income has
historically been lower in quarters with lower sales. As a result, the Company's
operating results and stock price could be volatile, particularly on a quarterly
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FLUCTUATIONS IN RAW MATERIAL COSTS AND SUPPLY; RELIANCE ON MANUFACTURING
FACILITIES AND SUPPLIERS
The Company purchases aluminum, steel, vinyl, wood, glass and other raw
materials from various suppliers. While such materials are available from
numerous sources, commodity raw materials are subject to fluctuations in price.
Because such materials in the aggregate constitute significant components of the
Company's cost of goods sold, such fluctuations could have a material adverse
effect on the Company's results of operations. Although the Company historically
has been able to pass on to its customers gradual increases in raw material
prices, there can be no assurance that the Company will continue to be able to
do so in the future. In addition, sharp increases in material prices are more
difficult to pass through to the customer in a short period of time and may
negatively impact the short-term financial performance of the Company. Loss of
or interruptions of operations at any of the Company's manufacturing facilities
could adversely affect the Company's operations. In addition, although there are
numerous suppliers of raw materials to the Company's operations, the shift to a
new supplier could result in delays or higher costs, which could adversely
affect operating results. See "Business -- Manufacturing."
COMPETITION
The Company has numerous competitors in the fenestration products market,
at both the manufacturing and the distribution levels. Certain of the Company's
principal competitors have substantially less leverage than the Company, have
greater financial and other resources, and have greater brand recognition.
Accordingly, such competitors may be better able to withstand changes in
conditions within the industries in which the Company operates and have
significantly greater operating and financial flexibility than the Company. As a
result of the competitive environment in the markets in which the Company
operates, the Company faces (and will continue to face) pressure on sales prices
of its products from competitors, as well as from large customers. As a result
of such pricing pressures, the Company may experience future reductions in the
profit margins on its sales, or may be unable to pass future raw material price
or labor cost increases on to its customers (which would also reduce profit
margins). In addition, there can be no assurance that the
10
<PAGE> 12
Company will not encounter increased competition in the future, which could have
a material adverse effect on the Company's business. See
"Business -- Competition."
RELIANCE ON KEY PERSONNEL
The success of the Company depends to a large degree on a number of key
employees, and the loss of the services provided by any of them could have a
material adverse effect on the Company. In particular, the loss of the services
provided by Frank J. Amedia, the President, Chief Executive Officer and a
director of the Company, could have a material adverse effect on the Company. In
November 1997, Mr. Amedia entered into an employment agreement with the Company
for an initial three-year period. In addition, the Company may from time to time
enter into employment agreements with certain other key employees. There can be
no assurance, however, that any such employment agreements will prevent the
Company from losing the services of any of its key employees, including Mr.
Amedia. See "Management."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS; ADVERSE EFFECTS OF ISSUANCE OF
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 20,000,000 shares of Preferred Stock, par value $.001
per share (the "Preferred Stock"). The Board of Directors is expressly
authorized to divide the shares of Preferred Stock into one or more classes or
series and to fix and determine the voting powers and other rights and
preferences of such Preferred Stock. Although the Company has no current plans
to issue any shares of Preferred Stock, issuance of such Preferred Stock could
materially and adversely affect the voting powers and other rights of the
holders of Common Stock. The issuance of Preferred Stock or of rights to
purchase Preferred Stock could be used to discourage an unsolicited acquisition
proposal. In addition, the possible issuance of Preferred Stock could discourage
a proxy contest, make more difficult the acquisition of a substantial block of
Common Stock or limit the price that investors might be willing to pay in the
future for shares of Common Stock. The Company's Certificate of Incorporation
and Bylaws also contain a number of provisions which could deter takeover
attempts, and certain provisions of Delaware law applicable to the Company also
could delay or make more difficult a merger, tender offer or proxy contest
involving the Company. Upon a change of control, the Company may also be
required under the Indenture to repurchase all or a portion of the Senior Notes
at 101% of the principal amount thereof, plus accrued and unpaid interest to the
date of repurchase. There can be no assurance that the Company would have
sufficient funds to make any required repurchase, which could further delay or
hinder takeover attempts or limit the price that investors might be willing to
pay in the future for shares of Common Stock. See "Capitalization."
The Company's Board of Directors is empowered, without further stockholder
approval, to issue shares of Preferred Stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of the Common Stock. Although the Company has no
current plans to issue any shares of Preferred Stock, there can be no assurance
that shares of Preferred Stock will not be issued at some time in the future. In
the event of issuance, the Preferred Stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. See "Description of Capital Stock -- Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Of the shares of Common Stock which will be outstanding upon
completion of the Offering, 7,548,633 shares (the "AAPH Shares") are owned by
AAP Holdings, Inc. ("AAPH"), an affiliate of certain directors and officers of
the Company, and 2,953,082 shares (the "Amedia Shares") are owned by Frank J.
Amedia, the Company's President and Chief Executive Officer. Both the AAPH
Shares and the Amedia Shares may currently be sold subject to the volume
limitations and other restrictions of Rule 144 promulgated under the Securities
Act. AAPH and Mr. Amedia have agreed, however, not to sell, transfer, assign,
pledge or otherwise dispose of their respective shares for a 180 day period from
the date of this Prospectus without the prior written consent of McDonald &
Company Securities, Inc. The other directors and executive officers of the
Company, the Selling Stockholders and certain other stockholders of the Company
have also agreed not to sell, transfer, assign, pledge or otherwise dispose of
their shares of Common Stock or any securities convertible into or exercisable
or exchangeable for any shares of Common Stock, except in certain circumstances,
for a
11
<PAGE> 13
period of 180 days from the date of this Prospectus without the prior written
consent of McDonald & Company Securities, Inc. As of May 1, 1998, the Company
had outstanding options and warrants to purchase an additional 2,476,994 shares
of Common Stock at a weighted average exercise price of $3.80 per share. The
issuance of shares of Common Stock upon the exercise of options and warrants, as
well as the sale or availability for sale of the AAPH Shares and the Amedia
Shares, could materially adversely affect the market price of the Common Stock
and could impair the ability of the Company to raise capital in the future
through an offering of its equity securities. See "Shares Eligible for Future
Sale."
NO DIVIDENDS; DILUTION
The Company has not paid dividends on its Common Stock since its inception.
The Company currently intends to retain earnings to provide funds for the
operation and expansion of its business and, accordingly, does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. In
addition, the Indenture prohibits payment of dividends on the Common Stock.
Further, at the offering price of $ per share, purchasers of the Common
Stock offered hereby will experience immediate dilution of $ per share. See
"Dilution."
GOVERNMENTAL REGULATION; ENVIRONMENTAL MATTERS
The past and present business operations of the Company, and the past and
present ownership and operation of real property by the Company, are subject to
extensive federal, state, local and foreign laws and regulations, including laws
and regulations relating to the discharge of materials into the environment, the
handling and disposal of wastes or otherwise relating to the health, safety and
protection of the environment. Although the Company believes it is in
substantial compliance with all such material laws and regulations, there can be
no assurance that the Company will not incur costs to comply with, or claims or
liabilities under, such laws and regulations. The Company is subject to various
claims and contingent liabilities in the ordinary course of business, including
with respect to employment-related matters, tax matters and environmental
matters. Although there can be no assurance in this regard, the Company believes
that known claims or contingencies will not have a material adverse effect on
its business, results of operations or financial condition.
POTENTIAL LABOR DISPUTES
Approximately 150 of the Company's 2,100 current employees are covered by
collective bargaining agreements that expire in March 2000 and February 2002. In
addition, the Company has experienced union-organizing activities at its Eagle
facility. The Company believes that its relations with its employees are good.
There can be no assurance, however, that the Company will not experience work
stoppages or slowdowns in the future. There also can be no assurance that the
Company's non-union facilities will not become subject to successful labor union
organizational efforts or that labor costs will not materially increase. See
"Business Employees."
CONTROLLING STOCKHOLDER
AAPH was, as of May 1, 1998, the direct owner of 7,548,633 shares of Common
Stock (which constituted approximately 56.1% of the Company's issued and
outstanding Common Stock as of such date) and held options to purchase an
additional 707,655 shares of Common Stock. Due to its ownership of a majority of
the Company's Common Stock, AAPH will be able to direct and control the policies
of the Company, including mergers, sales of all or substantially all of the
Company's assets, and similar transactions. Certain of the Company's officers
and directors are affiliates of AAPH. See "Management."
LIMITED MARKET AND VOLATILITY OF PRICE OF COMMON STOCK
Prior to the Offering, the bid and asked prices of the Common Stock were
quoted in the National Daily Quotation Service (the "pink sheets") and on the
OTC Electronic Bulletin Board. The volume of trading in the Common Stock has
been low, and the Common Stock has experienced significant price volatility.
Accordingly, the market value of the Common Stock is not readily ascertainable.
The public offering price for the shares offered hereby has been determined by
negotiations between the Company and the Underwriters and may not be indicative
of the price at which the Common Stock will trade after the Offering. See
"Underwriting." There can be no assurance that an active trading market for the
Common Stock ultimately
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<PAGE> 14
will develop and continue upon consummation of the Offering or that the price of
the Common Stock will not decline below the initial public offering price. The
trading prices of the Common Stock could be subject to wide fluctuations in
response to variations in the Company's operating results, announcements by the
Company or others, developments affecting the Company or its competitors,
reports by analysts, and other events and factors. In addition, the stock market
has experienced extreme price and volume fluctuations in recent years. These
fluctuations have had a substantial effect on the market prices for many
companies, often unrelated to their performance, and may adversely affect the
market price for the Common Stock.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Unaudited Pro Forma Consolidated
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company, or industry results
or projections, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include, among others: failure
to successfully integrate acquired companies into the Company's business;
general economic and business conditions; industry trends; competition; raw
material costs and availability; loss of significant customers; changes in
business strategy or development plans; availability, terms and deployment of
capital; availability of qualified personnel; and other factors referenced in
this Prospectus. See "Risk Factors." These forward-looking statements speak only
as of the date of this Prospectus, and the Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
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<PAGE> 15
COMPANY HISTORY
The Company was originally incorporated in Utah in 1980 and was
reincorporated in Delaware in April 1997. Prior to entering the fenestration
products industry in June 1994, the Company was primarily engaged in the
business of computer software publishing and computer disk duplication.
Beginning in 1995, the Company began to de-emphasize its computer related
businesses and concentrate its efforts on expanding its fenestration products
business. In August 1996, the Company completed the disposal of its computer
related businesses.
The Company's fenestration products business was formed through the
consolidation of a number of established, well-known fenestration companies. A
summary of the Company's corporate and acquisition history is as follows:
<TABLE>
<S> <C> <C>
June 1994 -- The Company acquired Forte, Inc. ("Forte"). Based in
Youngstown, Ohio, Forte has been engaged in the manufacture
of commercial fenestration products, including aluminum
windows, window/door security screens and storm windows and
doors, since 1989.
August 1996 -- Eagle Window & Door, Inc. ("Eagle") and Taylor Building
Products Company ("Taylor"), which have been engaged in
manufacturing fenestration products since 1977 and 1946,
respectively, were merged into Eagle & Taylor Company
("ETC"). At the time of this merger, ETC was unaffiliated
with the Company.
December 1996 -- The Company combined with ETC through a share exchange
transaction. Concurrently with this transaction, Mallyclad
Corporation ("Mallyclad") and Vyn-L Corporation ("Vyn-L")
were merged into ETC. ETC became a subsidiary of the
Company, with Eagle, Taylor, Mallyclad and Vyn-L continuing
to operate as divisions of ETC. Mallyclad and Vyn-L were
subsequently sold. For accounting purposes, Eagle, Taylor,
Mallyclad and Vyn-L are considered predecessors of the
Company.
March 1997 -- The Company acquired Western Insulated Glass, Co.
("Western"). Based in Phoenix, Arizona, Western manufactures
aluminum windows and doors for medium- and high-end
residential applications in the Southwestern United States.
April 1997 -- The Company reincorporated in Delaware and changed its name
to "American Architectural Products Corporation."
July 1997 -- The Company acquired Thermetic Glass, Inc. ("Thermetic"), a
manufacturer of vinyl windows and doors which are marketed
primarily in the Midwest.
December 1997 -- The Company consummated a $125,000,000 private placement of
the Senior Notes. Concurrently with the issuance of the
Senior Notes, the Company consummated the acquisitions of
each of Binnings Building Products, Inc. ("Binnings"),
Danvid Company Inc. and Danvid Window Company (together,
"Danvid"), American Glassmith, Inc. ("American Glassmith")
and Modern Window Corporation ("Modern"). Both Binnings and
Danvid manufacture and distribute aluminum and vinyl windows
and doors, with Binnings' sales concentrated in the
Southeastern and Eastern regions of the United States and
Danvid's sales concentrated in the Southern and Southwestern
regions of the United States. Binnings also manufactures
aluminum extrusions, which are principally used to produce
aluminum windows. American Glassmith designs, manufactures
and assembles a wide variety of decorative glass lites for
residential fenestration applications. Modern manufactures
vinyl windows for sale in the Midwest.
</TABLE>
14
<PAGE> 16
<TABLE>
<S> <C> <C>
January 1998 -- The Company acquired the vinyl fenestration products
division of Easco, Inc., which it now operates under the
name "VinylSource." VinylSource extrudes vinyl window and
door profiles at its Austintown, Ohio facility.
Forte acquired substantially all the assets of Blackhawk
Architectural Products ("Blackhawk"), a manufacturer of
steel security screens and security screen doors. The
Blackhawk assets were relocated to Forte's Youngstown, Ohio
facility.
February 1998 -- The Company entered into a letter of intent to acquire the
Weather-Seal division of Louisiana-Pacific Corporation
("Weather-Seal"). Weather-Seal manufactures and distributes
wood and vinyl windows and patio doors, along with aluminum
and vinyl extrusions for both in-house use in its
manufacturing operations and for sale to third-party
purchasers.
April 1998 -- The Company acquired substantially all the assets of Denver
Window Corporation ("Denver"), a residential manufacturer of
specialty wood windows.
</TABLE>
Except as otherwise specified, or unless the context requires otherwise,
all references in this Prospectus to the "Company," "AAPC" or "American
Architectural Products Corporation" refer to American Architectural Products
Corporation and its subsidiaries, which presently consist of Forte, ETC,
Western, Thermetic, Binnings, Danvid, Modern, American Glassmith and
VinylSource. The Company's principal executive offices are located at and its
mailing address is 755 Boardman-Canfield Road, South Bridge Executive Center,
Building G West, Boardman, Ohio 44512. The Company's telephone number is (330)
965-9910.
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby, assuming a public offering price of per share,
and after deducting underwriting discounts and commissions and the estimated
offering expenses, are estimated to be approximately million. The Company
intends to apply such net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE AMOUNT PERCENTAGE OF
OF NET PROCEEDS NET PROCEEDS
------------------ -------------
(IN MILLIONS)
<S> <C> <C>
Acquisition of companies in the fenestration products
industry(1)............................................... $ %
Working capital(2).......................................... %
----- ---
Total..................................................... $ 100%
===== ===
</TABLE>
- ---------------
(1) The Company intends to use $ , or %, of the net proceeds from
the Offering to acquire complementary businesses in the fenestration
products industry. The Company does not intend to use any of the net
proceeds from the Offering to fund its planned acquisition of the
Weather-Seal division of Louisiana-Pacific Corporation.
(2) The Company believes that cash generated from operations, together with the
net proceeds from the Offering allocated for working capital purposes and
the expected proceeds from a new revolving credit facility, will be
sufficient to permit the Company to meet its expected operating needs,
planned capital expenditures and debt service requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The allocation of the use of net proceeds represents management's estimates
based upon current business and economic conditions. Pending such uses, the net
proceeds from the Offering will be deposited in interest bearing accounts, or
invested in government obligations, certificates of deposit or similar
short-term, low risk investments.
The Company will not receive any of the proceeds from the exercise of the
Over-Allotment Option and the sale of Common Stock in the Offering by the
Selling Stockholders. See "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock since its inception.
The Company currently intends to retain earnings to provide funds for the
operation and expansion of its business and, accordingly, does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. The payment
of future dividends is within the discretion of the Board of Directors and will
depend upon the Company's future earnings, if any, its capital requirements,
financial condition and other relevant factors. In addition, the ability of the
Company to pay dividends is limited by the terms of the Indenture and various
other loan and financing agreements to which the Company is a party. See "Risk
Factors -- Restrictive Debt Covenants."
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<PAGE> 18
DILUTION
The net tangible book value of the Common Stock at March 31, 1998 was
approximately $(37.7) million, or $(2.80) per share. Net tangible book value per
common share represents the book value of the Company's tangible assets less
total liabilities divided by the number of shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the amount
per share paid by purchasers of Common Stock in the Offering and the net
tangible book value per share of Common Stock immediately after completion of
the Offering. After giving effect to the sale of the shares of Common Stock
offered hereby (at an assumed public offering price of $ per share) and
the application of the net proceeds therefrom, the net tangible book value of
the Common Stock at March 31, 1998, would have been $ million, or
$ per share. This represents an immediate increase in net tangible book
value per share of $ to existing stockholders and an immediate dilution
of $ ( %) per share to new investors. The following table
illustrates the per share effect of this dilution on an investor's purchase of
shares:
<TABLE>
<S> <C> <C>
Assumed public offering price per share of Common Stock..... $
Net tangible book value per share of Common Stock at March
31, 1998............................................... $(2.80)
Increase in net tangible book value per share of Common
Stock attributable to new investors.................... $
As adjusted net tangible book value per share of Common
Stock after the Offering.................................. $
------
Dilution per share of Common Stock to new investors......... $
======
</TABLE>
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<PAGE> 19
CAPITALIZATION
The following table sets forth (i) the historical capitalization of the
Company at March 31, 1998, and (ii) the capitalization of the Company, as
adjusted to give effect to the sale by the Company of shares of Common
Stock offered hereby at an assumed public offering price of $ per share
and the application of the estimated net proceeds therefrom. The table should be
read in conjunction with "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements of the Company and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------
HISTORICAL AS ADJUSTED(1)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 23,419 $
======== =======
Long-term debt, including current maturities:
11 3/4% Senior Notes due 2007............................. 125,000
Capital lease obligations................................. 1,231
-------- -------
Total senior debt................................. 126,231
-------- -------
Stockholders' Equity:
Preferred Stock, $.001 par value, 20,000,000 shares
authorized; no shares issued and outstanding........... --
Common Stock, $.001 par value, 100,000,000 shares
authorized; 13,458,479 shares(2) issued and
outstanding, historical; and shares issued and
outstanding, as adjusted............................... 13
Additional paid-in capital................................ 6,454
Retained earnings (deficit)............................... (3,352)
-------- -------
Total stockholders' equity........................ 3,115
======== =======
Total capitalization.............................. $129,346 $
======== =======
</TABLE>
- ---------------
(1) Adjusted to reflect the sale by the Company of shares of Common
Stock offered hereby at an assumed offering price of $ per share, after
deducting estimated underwriting discounts and commissions and offering
expenses.
(2) Does not include shares of Common Stock issuable, as of March 31, 1998,
pursuant to: (i) options to purchase an aggregate of 912,500 shares of
Common Stock pursuant to the Company's stock option plans, which have a
weighted average exercise price of $3.70 per share, and an additional number
of shares of Common Stock reserved for issuance thereunder equal to 10% of
the shares of Common Stock issued and outstanding from time to time (not to
exceed 10,000,000 shares); (ii) warrants to purchase a total of 156,497
shares of Common Stock at an exercise price of $3.50 per share issued to
various lenders; (iii) options to purchase up to 150,000 shares of Common
Stock at an exercise price of $5.43 per share issued to an investor
relations firm; (iv) options to purchase up to 707,655 shares of Common
Stock at an exercise price of $3.75 per share issued to AAPH; (v) options to
purchase an aggregate of 471,770 shares of Common Stock at an exercise price
of $3.75 per share issued in connection with the acquisition of Forte in
June 1994; (vi) options to purchase up to 100,000 shares of Common Stock at
an exercise price of $2.50 per share issued to a former officer of the
Company; and (vii) shares of Common Stock issuable pursuant to the Company's
obligation to issue to the former stockholders of Thermetic on January 18,
1999 a number of shares of Common Stock having a market value of $1,000,000
on such date. See "Management -- Employee Stock Option Plans,"
"Underwriting" and "Certain Relationships and Related Transactions."
18
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENT
The accompanying Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1997 (the "Pro Forma Financial
Statement") illustrates the effects of the 1997 acquisitions of Western,
Thermetic, Binnings, Danvid, American Glassmith and Modern (collectively, the
"1997 Acquisitions") and the December 10, 1997 offering of Senior Notes
(collectively, the "Transactions"). The 1997 Acquisitions were accounted for as
purchases, with purchase prices allocated among the assets acquired and
liabilities assumed based on their estimated fair values, and the results of
their operations included in the Company's consolidated financial statements
from the respective dates of acquisition.
In the accompanying Pro Forma Financial Statement, the historical results
of operations of the 1997 Acquisitions for the periods prior to their inclusion
in the Company's consolidated financial statements are presented under the
heading "1997 Acquisitions" (due to the significance of Binnings and Danvid,
their historical financial data are presented separately under this heading).
The Pro Forma Financial Statement is based on the historical results of
operations of the Company for the year ended December 31, 1997 and of the 1997
Acquisitions for the periods in 1997 prior to the dates of their acquisitions.
The Pro Forma Financial Statement gives effect to the Transactions as though
each transaction had occurred on January 1, 1997.
A pro forma balance sheet is not presented because the Transactions are
reflected in the balance sheet included in the March 31, 1998 consolidated
financial statements of AAPC which are included elsewhere in this Prospectus. A
pro forma statement of operations for the three months ended March 31, 1998 is
not presented because no transactions that would require pro forma effect
occurred in that period.
The Pro Forma Financial Statement reflects pro forma adjustments that are
based on the available information and assumptions that the Company believes are
reasonable, and do not necessarily reflect the results of operations of the
Company that would have actually resulted had the Transactions to which pro
forma effect is given been consummated as of the date or for the period
indicated, or that may be obtained in the future. In preparing the Pro Forma
Financial Statement, the Company believes that it has used 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 Securities and Exchange Commission (the
"Commission"). The Pro Forma Financial Statement does not reflect certain
changes in the operating cost structure of the companies acquired that are
contemplated in connection with the Transactions.
The Pro Forma Financial Statement should be read in conjunction with the
historical financial statements of the Company and of certain acquired companies
as listed on the Index to Financial Statements on page F-1 of this Prospectus.
See "Note 2 -- Recapitalization and Acquisitions" to the Company's consolidated
financial statements regarding the Company's historical acquisition
transactions.
19
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 ACQUISITIONS(1)
------------------------------ PRO FORMA AAPC
AAPC BINNINGS DANVID OTHERS ADJUSTMENTS PRO FORMA
---------- -------- ------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $ 94,252 $42,180 $41,339 $14,627 $ 0 $ 192,398
Cost of sales............... 74,304 29,591 33,822 11,254 (20)(2) 148,951
---------- ------- ------- ------- -------- ----------
Gross profit................ 19,948 12,589 7,517 3,373 20 43,447
Selling, general and
administrative expenses... 17,178 9,598 5,404 3,223 (1,850)(3) 33,553
---------- ------- ------- ------- -------- ----------
Income from operations...... 2,770 2,991 2,113 150 1,870 9,894
Interest expense............ 3,928 2,566 23 298 8,797(4) 15,612
Miscellaneous income........ (3) 0 (88) (2) 0 (93)
---------- ------- ------- ------- -------- ----------
Income (loss) before income
taxes..................... (1,155) 425 2,178 (146) (6,927) (5,625)
Income taxes (benefit)...... (390) 9 830 (45) (404)(5) 0
---------- ------- ------- ------- -------- ----------
Income (loss) from
continuing operations..... (765) 416 1,348 (101) (6,523) (5,625)
Dividends on Preferred
Stock..................... (75) 0 0 0 0 (75)
---------- ------- ------- ------- -------- ----------
Income (loss) available to
common stockholders....... $ (840) $ 416 $ 1,348 $ (101) $ (6,523) $ (5,700)
========== ======= ======= ======= ======== ==========
Basic and diluted earnings
(loss) per common share... $ (0.06) $ (0.42)
Weighted average number of
shares outstanding(6)..... 12,982,200 712,600 13,694,800
SUPPLEMENTAL INFORMATION:
Depreciation and
amortization.............. $ 2,680 $ 751 $ 193 $ 487 $ 836 $ 4,947
Capital expenditures........ 1,548 598 84 355 -- 2,585
</TABLE>
20
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(1) Represents historical financial data of the 1997 Acquisitions for the
periods prior to their inclusion in the Company's consolidated
financial statements.
(2) Represents the reduction in depreciation and amortization expense in
cost of sales resulting from adjustments to asset bases and useful
lives relating to the 1997 Acquisitions as follows:
<TABLE>
<S> <C>
Depreciation and amortization in cost of sales based on
asset bases resulting from the 1997 Acquisitions.......... $ 961
Elimination of depreciation and amortization in historical
cost of sales............................................. (981)
-----
$ (20)
=====
</TABLE>
(3) Represents net reduction in selling, general and administrative
expenses relating to the 1997 Acquisitions as follows:
<TABLE>
<S> <C>
Depreciation and amortization in selling, general and
administrative expenses based on asset bases resulting
from the 1997 Acquisitions................................ $ 1,154
Elimination of depreciation and amortization in historical
selling, general and administrative expenses.............. (297)
-------
Incremental depreciation and amortization in selling,
general and administrative expenses....................... 857
Additional compensation to officers under terms of
employment agreements entered into in connection with the
1997 Acquisitions......................................... 49
Elimination of compensation to executive officers, former
owners and members of the boards of directors which will
be nonrecurring as a result of the 1997 Acquisitions...... (2,377)
Savings on insurance costs due to the use of lower
contractual rates of the Company to provide insurance
coverage on the 1997 Acquisitions......................... (379)
-------
$(1,850)
=======
</TABLE>
(4) Represents the interest expense on the Senior Notes issued on December
10, 1997 and the elimination of historical interest expense as follows:
<TABLE>
<S> <C>
Interest on Senior Notes.................................... $14,688
Amortization of deferred financing costs relating to the
Senior Notes.............................................. 599
Other interest relating to the 1997 Acquisitions............ 135
Elimination of historical interest expense.................. (6,625)
--------
$8,797
========
</TABLE>
(5) Adjustment is made to eliminate the tax provision (benefit) in
determining the pro forma loss from continuing operations because 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.
(6) Weighted average number of shares used in pro forma presentation
includes the weighted average number of shares outstanding for 1997
adjusted to give effect to the shares issued and committed to be issued
in connection with the 1997 Acquisitions had these transactions taken
place on January 1, 1997. Common Stock equivalents are excluded as the
effect would be anti-dilutive.
21
<PAGE> 23
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company and
its predecessors for the five years ended December 31, 1997 and for the three
months ended March 31, 1997 and 1998. The selected historical financial data for
the Company for 1996 and 1997 were derived from the audited consolidated
financial statements of the Company for the period from June 19, 1996
(inception) through December 31, 1996 and for the year ended December 31, 1997
included elsewhere in the Prospectus. The selected historical financial data for
the Company for the three months ended March 31, 1997 and 1998 were derived from
the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. The selected historical financial data for Eagle,
Taylor, Mallyclad and Vyn-L (collectively, the "Predecessors") for 1995 and 1996
were derived from the audited combined financial statements of Eagle Window &
Door, Inc. and Subsidiaries and Taylor Building Products Company and the audited
combined financial statements of Mallyclad Corporation and Vyn-L Corporation
included elsewhere in the Prospectus. The historical financial data for the
Predecessors for 1994 were derived from the audited combined financial
statements of Eagle Window & Door, Inc. and Subsidiaries and Taylor Building
Products Company and the audited combined financial statements of Mallyclad
Corporation and Vyn-L Corporation that are not included in this Prospectus. The
selected historical financial data for the Predecessors for 1993 were derived
from the unaudited combined financial statements of Eagle Window & Door, Inc.
and Subsidiaries and Taylor Building Products Company, the unaudited financial
statements of Mallyclad Corporation and the unaudited financial statements of
Vyn-L Corporation that are not included in this Prospectus. The unaudited
interim consolidated financial statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods. Results for interim periods
are not necessarily indicative of full-year results.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Consolidated Financial Statements," and the
historical financial statements and the notes thereto of the Company, Eagle
Window & Door, Inc. and Subsidiaries, Taylor Building Products Company,
Mallyclad Corporation and Vyn-L Corporation included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PREDECESSORS(2) THE COMPANY(1)(3)
--------------------------------------- ------------------------
1996
1993 1994 1995 1996 1996 COMBINED(4)
-------- ------- -------- ------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $116,809 $97,209 $ 76,955 $41,887 $ 25,249 $67,136
Cost of sales........................... 103,260 87,181 71,164 35,430 19,027 54,457
-------- ------- -------- ------- ---------- -------
Gross profit............................ 13,549 10,028 5,791 6,457 6,222 12,679
Selling, general and administrative
expenses.............................. 20,211 14,929 12,983 7,440 4,060 11,500
Restructuring charge.................... 0 0 840 0 0 0
-------- ------- -------- ------- ---------- -------
Income (loss) from operations........... (6,662) (4,901) (8,032) (983) 2,162 1,179
Interest expense........................ 2,023 2,040 1,755 1,143 756 1,899
Interest income......................... 0 0 0 0 0 0
Miscellaneous expense (income).......... (192) (93) 299 480 5 485
-------- ------- -------- ------- ---------- -------
Income (loss) before income taxes and
extraordinary item.................... (8,493) (6,848) (10,086) (2,606) 1,401 (1,205)
Income taxes (benefit).................. (2,975) (2,509) (3,578) (908) 640 (268)
-------- ------- -------- ------- ---------- -------
Income (loss) before extraordinary
item.................................. (5,518) (4,339) (6,508) (1,698) 761 (937)
Extraordinary item, net of income tax
benefit............................... 0 0 0 0 0 0
-------- ------- -------- ------- ---------- -------
Net income (loss)....................... $ (5,518) $(4,339) $ (6,508) $(1,698) $ 761 $ (937)
======== ======= ======== ======= ========== =======
Basic income (loss) per common share
Income (loss) before extraordinary
item................................ $ 0.10
Extraordinary item.................... --
----------
Basic income (loss) per common
share............................... $ 0.10
==========
Diluted income (loss) per common share
Income (loss) before extraordinary
item................................ $ 0.09
Extraordinary item.................... --
----------
Diluted income (loss) per common
share............................... $ 0.09
==========
Weighted average common shares
outstanding, basic.................... ........ 7,884,000
Weighted average common shares
outstanding, diluted.................. 8,160,000
OTHER DATA:
Depreciation & amortization............. $ 3,354 $ 3,976 $ 3,392 $ 2,698 $ 442 $ 3,140
Capital expenditures.................... 2,229 1,993 2,621 1,683 429 2,112
<CAPTION>
THE COMPANY(1)(3)
-------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
PRO FORMA -----------------------
1997 1997(5) 1997 1998
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 94,252 $ 192,398 $ 16,641 $ 45,608
Cost of sales........................... 74,304 148,951 13,523 36,494
---------- ---------- ---------- ----------
Gross profit............................ 19,948 43,447 3,118 9,114
Selling, general and administrative
expenses.............................. 17,178 33,553 3,348 9,403
Restructuring charge.................... 0 0 0 0
---------- ---------- ---------- ----------
Income (loss) from operations........... 2,770 9,894 (230) (289)
Interest expense........................ 3,928 15,612 615 3,678
Interest income......................... 0 0 0 (355)
Miscellaneous expense (income).......... (3) (93) 13 91
---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item.................... (1,155) (5,625) (858) (3,703)
Income taxes (benefit).................. (390) 0 (343) (1,094)
---------- ---------- ---------- ----------
Income (loss) before extraordinary
item.................................. (765) (5,625) (515) (2,609)
Extraordinary item, net of income tax
benefit............................... (494) 0 0 0
---------- ---------- ---------- ----------
Net income (loss)....................... $ (1,259) $ (5,625) $ (515) $ (2,609)
========== ========== ========== ==========
Basic income (loss) per common share
Income (loss) before extraordinary
item................................ $ (0.06) $ (0.42) $ (0.04) $ (0.19)
Extraordinary item.................... $ (0.04) -- -- --
---------- ---------- ---------- ----------
Basic income (loss) per common
share............................... $ (0.10) $ (0.42) $ (0.04) $ (0.19)
========== ========== ========== ==========
Diluted income (loss) per common share
Income (loss) before extraordinary
item................................ $ (0.06) $ (0.42) $ (0.04) $ (0.19)
Extraordinary item.................... (0.04) -- -- --
---------- ---------- ---------- ----------
Diluted income (loss) per common
share............................... $ (0.10) $ (0.42) $ (0.04) $ (0.19)
========== ========== ========== ==========
Weighted average common shares
outstanding, basic.................... 12,982,200 13,694,800 12,581,054 13,458,479
Weighted average common shares
outstanding, diluted.................. 12,982,200 13,694,800 12,581,054 13,458,479
OTHER DATA:
Depreciation & amortization............. $ 2,680 $ 4,947 $ 633 $ 1,577
Capital expenditures.................... 1,548 2,585 192 1,319
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
PREDECESSORS(2) THE COMPANY(1)(3)
----------------------------- --------------------------------
MARCH 31,
---------
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents............... $ 250 $ 288 $ 861 $ 964 $ 40,132 $ 23,419
Total assets............................ 50,895 39,440 26,629 42,744 158,324 161,152
Working capital (deficit)............... 29,047 (5,276) (9,736) 176 61,472 44,763
Long term debt and capital lease
obligations(6)........................ 22 0 0 23,010 126,518 126,231
Stockholders' equity (deficit).......... 37,002 2,540 (3,969) 4,277 5,581 3,115
</TABLE>
- ---------------
(1) For financial reporting purposes, the Company represents AAPC after giving
effect to the series of transactions described below.
ETC was formed in June 1996. Effective June 25, 1996, ETC's ultimate
controlling stockholder acquired Mallyclad and Vyn-L. Subsequently, on
December 18, 1996, Mallyclad and Vyn-L were merged into ETC. Based on the
control maintained by this stockholder, the merger was considered a
transaction among companies under common control and, accordingly, accounted
for at the stockholder's historical cost and included in the accounts of ETC
effective June 25, 1996.
Effective August 29, 1996, ETC acquired Eagle and Taylor. The acquisition
was accounted for as a purchase with the assets acquired and the liabilities
assumed recorded at estimated fair values and the results of operations
included in ETC's financial statements from the date of acquisition.
Effective December 18, 1996, ETC acquired and combined with FCEI. The
acquisition was accounted for as a purchase and, accordingly, the assets
acquired and liabilities assumed by ETC were recorded at their estimated
fair values and the results of FCEI's operations are included in the
financial statements of ETC from the date of the acquisition. The merged
entity subsequently changed its name to American Architectural Products
Corporation.
For purposes of presenting the selected financial data, Eagle, Taylor,
Mallyclad and Vyn-L are considered to be Predecessors and their financial
data are presented on a combined basis. The financial data for the period
after the acquisitions are presented on different cost bases than the
financial data before the acquisitions and, therefore, are not comparable.
(2) Selected financial data for the Predecessors for 1993 through 1995 were
derived from the audited combined financial statements of Eagle and Taylor
for 1994 and 1995, and the unaudited combined financial statements of Eagle
and Taylor for 1993; the unaudited financial statements of Mallyclad for the
fiscal year ended November 30, 1993; the unaudited financial statements of
Vyn-L for the fiscal year ended February 28, 1994; and the audited combined
financial statements of Mallyclad and Vyn-L for the years ended November 30,
1994 and 1995. Selected financial data for the Predecessors for 1996 were
derived from the audited combined financial statements of Eagle and Taylor
for the period January 1, 1996 through August 29, 1996, and the audited
combined financial statements of Mallyclad and Vyn-L for the period December
1, 1995 through June 30, 1996.
(3) Selected financial data for the Company for 1996 and 1997 were derived from
the audited financial statements of the Company for the period from June
1996 (inception) through December 31, 1996, and the audited financial
statements for the year ended December 31, 1997. Selected financial data for
the Company for the three months ended March 31, 1998 were derived from the
unaudited consolidated financial statements of the Company. These financial
statements include the operations of Mallyclad and Vyn-L from June 25, 1996,
and the operations of Eagle and Taylor from August 29, 1996. The results of
operations of Western and Thermetic are included in the Company's 1997
selected financial data from March 14, 1997 and July 18, 1997, respectively,
their acquisition dates. The results of operations of the acquisitions
consummated on December 10, 1997 are included in the Company's selected
financial data from their acquisition date.
(4) Selected financial data under the heading "1996 Combined" include the 1996
selected financial data of the Predecessors (note (2) above) and the 1996
selected financial data of the Company (notes (1) and (3) above) without
giving effect to purchase accounting or the impact of financing and
capitalization relating to the acquisitions of Eagle, Taylor, Mallyclad,
Vyn-L and Forte.
(5) The pro forma financial data of the Company were derived from the unaudited
pro forma condensed consolidated financial statement included elsewhere in
this Prospectus.
(6) Includes revolving line of credit at December 31, 1996.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was formed through the consolidation of a number of established
fenestration companies as described below. For financial reporting purposes,
Eagle, Taylor, Mallyclad and Vyn-L are considered the predecessors of the
Company.
In August 1996, Eagle and Taylor were acquired by ETC as the foundation for
the consolidation of a series of acquisitions in the fenestration industry. In
December 1996, ETC acquired and combined with Forte Computer Easy, Inc.
("FCEI"), a publicly held company whose wholly owned subsidiary, Forte Inc., is
a manufacturer of commercial aluminum windows. Subsequent to this transaction,
the entity changed its name to American Architectural Products Corporation. ETC
and Forte became wholly-owned subsidiaries of the Company. AAPC has since
acquired Western, Thermetic, Binnings, Danvid, American Glasssmith, Modern and
VinylSource.
ETC was incorporated on June 19, 1996 and had no significant operations or
assets until it acquired two companies, Eagle and Taylor, on August 29, 1996.
The acquisition of Eagle and Taylor was accounted for as a purchase, with the
assets acquired and the 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 and Vyn-L, on June 25, 1996. On December 18, 1996,
Mallyclad and Vyn-L were merged into ETC concurrently with the FCEI combination
described above. 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 its acquisition by ETC's ultimate controlling stockholder are
included in the consolidated financial statements. Eagle, Taylor, Mallyclad and
Vyn-L, are considered predecessors of ETC for financial reporting purposes. The
business of Mallyclad and Vyn-L was sold on March 1, 1998 and is no longer part
of ETC.
On March 14, 1997, AAPC acquired the stock of Western and on July 18, 1997,
AAPC acquired the stock of 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, AAPC consummated the acquisitions of Binnings,
Danvid, American Glassmith, and Modern. The Company financed these acquisitions
with a portion of the proceeds from the issuance of the Senior Notes. The
acquisitions were accounted for as purchases, with purchase prices allocated
among the assets acquired and liabilities assumed based on their estimated fair
market values. The results of their operations were included in the AAPC
consolidated financial statements from the December 10, 1997 acquisition date.
See the financial statements of Binnings Building Products Company and of Danvid
Company, Inc. and Danvid Window Company included elsewhere in this Prospectus.
On January 23, 1998, the Company acquired the vinyl fenestration products
division of Easco, Inc., which now operates under the name VinylSource. The
acquisition was accounted for as a purchase, with the purchase price allocated
among the assets acquired and liabilities assumed based on their estimated fair
market values, and the results of its operations were included in the AAPC
consolidated financial statements from the January 23, 1998 acquisition date.
BASIS OF PRESENTATION
The following table sets forth net sales and expenses in aggregate dollars
and as a percentage of net sales for the Company and the Predecessors -- Eagle,
Taylor, Mallyclad and Vyn-L -- for the years ended December 31, 1995, 1996 and
1997, and the three months ended March 31, 1997 and 1998. As a result of the
acquisitions discussed above, and the related differences in cost bases of the
assets and liabilities of the Company after the acquisitions and the cost bases
of the Predecessors, the results of operations for the years presented are not
comparable. Such lack of comparability is explained in the discussion below. The
following
24
<PAGE> 26
financial data should be read in conjunction with the financial statements along
with notes thereto of the Company, Eagle Window & Door, Inc. and Subsidiaries
and Taylor Building Products Company, and Mallyclad Corporation and Vyn-L
Corporation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1995(1) 1996(2) 1997(3) 1997(3) 1998(3)
--------------- --------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT FOOTNOTES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $76,955 100.0% $67,136 100.0% $94,252 100.0% $16,641 100.0% $45,608 100.0%
Cost of sales........................... 71,164 92.5% 54,457 81.1% 74,304 78.9% 13,523 81.3% 36,494 80.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit............................ 5,791 7.5% 12,679 18.9% 19,948 21.1% 3,118 18.7% 9,114 20.0%
Selling, general and administrative
expenses(4)........................... 12,983 16.9% 11,500 17.1% 17,178 18.2% 3,348 20.1% 9,403 20.6%
Restructuring charge.................... 840 1.1% 0 0.0% 0 0.0% 0 0.0% 0 0.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) from operations........... (8,032) (10.5%) 1,179 1.8% 2,770 2.9% (230) (1.4%) (289) (0.6%)
Interest expense(4)..................... 1,755 2.3% 1,899 2.9% 3,928 4.1% 615 3.7% 3,678 8.1%
Miscellaneous expense (income).......... 299 0.4% 485 0.7% (3) 0.0% 13 0.1% (264) (0.6%)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Loss before income taxes and
extraordinary item.................... (10,086) (13.2%) (1,205) (1.8%) (1,155) (1.2%) (858) (5.2%) (3,703) (8.1%)
Income taxes (benefit)(4)............... (3,578) (4.7%) (268) (0.4%) (390) (0.4%) (343) (2.1%) (1,094) (2.4%)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Loss before extraordinary item.......... (6,508) (8.5%) (937) (1.4%) (765) (0.8%) (515) (3.1%) (2,609) (5.7%)
Extraordinary item, net of income tax
benefit............................... 0 0.0% 0 0.0% (494) (0.5%) 0 0.0% 0 0.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Net loss................................ $(6,508) (8.5%) $ (937) (1.4%) $(1,259) (1.3%) $ (515) (3.1%) $(2,609) (5.7%)
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(1) Financial data for 1995 is that of the Predecessors and were derived from
the audited combined financial statements of Eagle and Taylor for the year
ended December 31, 1995 and the audited combined financial statements of
Mallyclad and Vyn-L for the fiscal year ended November 30, 1995. Because the
financial data of the predecessors is presented on cost bases different from
that of the Company after the acquisitions, the financial data are not
comparable to the 1996 and 1997 financial data.
(2) Financial data presented for 1996 include the combination of financial data
of the Company and the Predecessors -- Eagle, Taylor, Mallyclad and Vyn-L.
Financial data for the Company for 1996 were derived from the audited
consolidated financial statements of the Company for the period from June
19, 1996 (inception) through December 31, 1996. These financial statements
include the operations of Mallyclad and Vyn-L from June 25, 1996, and the
operations of Eagle and Taylor from August 29, 1996. Financial data for
Eagle and Taylor for 1996 were derived from the combined audited financial
statements of Eagle and Taylor for the period from January 1, 1996 to August
29, 1996. Financial data for Mallyclad and Vyn-L for 1996 were derived from
the audited combined financial statements of Mallyclad and Vyn-L for the
period December 1, 1995 to June 25, 1996. Because the financial data for
1996 include data of the Company and the Predecessors, which are presented
on different cost bases, such data are not comparable to the financial data
for 1995 and 1997.
(3) Financial data for 1997 and 1998 were derived from the consolidated
financial statements of the Company. Because the financial data of the
Company for 1997 and 1998 are presented on different cost bases than the
financial data for 1995 and 1996, such data are not comparable.
(4) In addition to comparability issues relating to differences in asset and
liability bases described in notes (1) through (3) above, other factors
affect the comparability of the financial data from year to year. The former
parent of Eagle and Taylor provided treasury functions and allocated various
general and administrative expenses. Interest expense allocated by the
former parent of Eagle and Taylor approximated $1.8 million in 1995 and $1.1
million for the eight months ended August 29, 1996 and was treated as
contributed capital of Eagle and Taylor by the former parent. A management
fee based on budgeted sales was charged by the former parent to Eagle and
Taylor, approximating $1.3 million and $1.0 million
25
<PAGE> 27
for the year ended December 31, 1995 and the eight months ended August 29,
1996, respectively. Other expenses charged to Eagle and Taylor by the former
parent that were specifically incurred for those companies for items such as
general insurance, health insurance and workers compensation insurance
approximated $3.6 million and $1.7 million for the year ended December 31,
1995, and the eight months ended August 29, 1996, respectively. Eagle and
Taylor filed their tax returns on a consolidated basis with their former
parent and all provisions for federal and state income taxes, including
provisions for deferred taxes, were provided through intercompany accounts.
Because these charges to Eagle and Taylor from their former parent may
differ from such charges for those entities as part of the Company,
comparison of 1995, 1996 and 1997 may not be meaningful.
RESULTS OF OPERATIONS
Results of operations for the periods presented reflect a number of
significant events or factors. In 1995, the operations at Taylor were
restructured by eliminating non-core product lines and closing related
manufacturing and distribution facilities (the "Taylor Restructuring"). The near
term impact of these measures was a significant decrease in total sales and a
nonrecurring restructuring charge; however, in recent periods these measures
have produced an increase in gross margins at this operation. Gross profit from
Taylor was negatively impacted by the introduction of an automated door line,
which was installed in 1993. While attempting to reach targeted operational
efficiencies, Taylor was required to run a dual line for manufacturing doors
from 1993 until 1995, which adversely affected gross margin. Also, during the
majority of the period for which results of operations are presented, Eagle and
Taylor were being marketed for sale by their former parent. This had a negative
effect on sales at both divisions since distributors and their customers were
concerned about the future of these businesses. The sale of these facilities to
the Company in August 1996 permitted the divisions to stabilize their
long-standing relationships with customers by eliminating the uncertainty
concerning the direction and strategy of these businesses. This resulted in
increased sales at Eagle during 1996 and 1997.
The future operations of the Company will depend on a number of factors,
including the successful integration of the acquired companies to take advantage
of their increased purchasing power, distribution capabilities and product
lines; continued improvements in manufacturing processes, including greater
vertical integration; establishment of company-wide management information
systems; increased penetration of fast growing markets, both product (such as
vinyl) and geographic; continued growth in the new home and
remodeling/replacement markets; stability in raw material prices; continuation
of key customer and distributor relationships; and other factors.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO MARCH 31, 1997
Net Sales. Net sales for the three months ended March 31, 1998 increased
to $45.6 million from $16.6 million for the quarter ended March 31, 1997. The
$29.0 million increase is primarily due to $27.2 million in sales volume from
the inclusion of Western, Thermetic, Binnings, Danvid, American Glassmith,
Modern and VinylSource, the companies acquired in 1997 and 1998, and a $1.8
million increase in sales at the Company's wood and aluminum-clad wood window
manufacturer. This unit's increase in sales has resulted primarily from higher
volumes associated with more favorable weather conditions during the first
quarter.
Cost of Sales. Cost of sales for the three months ended March 31, 1998
amounted to $36.5 million, or 80.0% of sales, as compared to $13.5 million, or
81.3% of sales, for the same period of 1997. The $23.0 million dollar increase
is attributable primarily to the inclusion of the companies acquired in 1997 and
1998, which added costs of $20.7 million. Additionally, increased sales levels
at the Company's wood and aluminum-clad wood window manufacturer resulted in
additional costs of $1.3 million.
Gross Profit. The Company's gross profit increased to $9.1 million for the
three months ended March 31, 1998 from $3.1 million for the three months ended
March 31, 1997. The increase of $6.0 million resulted primarily from $5.8
million of gross profit added by the acquired companies. The Company's gross
margin was 20.0% and 18.7% for the three months ended March 31, 1998 and 1997,
respectively. The acquired companies discussed above generated a
weighted-average gross margin of 21.3%. Additionally, the Company's wood and
aluminum-clad wood window manufacturer has benefited from higher volumes
absorbing overhead.
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<PAGE> 28
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses were $9.4 million for the three months ended
March 31, 1998 as compared with $3.3 million for the three months ended March
31, 1997. SG&A expenses relating to the inclusion of the acquired companies were
$4.7 million. The remainder of the $6.1 million increase is due to $1.4 million
in increased costs associated with the operation and administration of a larger
and more diversified window and door manufacturer.
Income (Loss) from Operations. The Company had a loss from operations of
$0.3 million during the three months ended March 31, 1998 as compared with $0.2
million for the three months ended March 31, 1997. Operating income from the
newly acquired companies amounted to $1.2 million and was offset by the
increased operational and administrative costs discussed above.
Interest Expense. Interest expense for the three months ended March 31,
1998 was $3.7 million compared to interest expense of $0.6 million for the three
months ended March 31, 1997. The increase is due to the additional indebtedness
the Company incurred in late 1997. In December 1997, the Company issued $125
million of 11 3/4% Senior Notes due 2007. Approximately $33.0 million of the
proceeds of the Senior Notes were used to pay down existing debt facilities. The
weighted-average interest rate on the Company's debt and leases during the first
quarter of 1997 was approximately 9.8%.
Income Taxes. The Company has recorded income tax benefits in the amount
of $1.1 million. The Company has established a seasonal pattern of losses in the
first quarter offset by income in later quarters of the year. Therefore, income
tax benefits of $1.1 million have been realized in the three months ended March
31, 1998 because the tax benefits are expected to be realized during the year.
Net Loss. The Company's net loss for the three months ended March 31, 1998
was $2.6 million as compared to $0.5 million for the three months ended March
31, 1997. The factors cited above were responsible for the increase in the net
loss.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO COMBINED YEAR ENDED DECEMBER 31,
1996
Net Sales. Net Sales increased by $27.1 million, or 40.4%, to $94.2
million in 1997 as compared to $67.1 million in 1996. The increase was primarily
the result of the acquisitions of Western, Thermetic, Binnings, Danvid, American
Glassmith, and Modern. These acquisitions accounted for $13.1 million, or 48.3%,
of the total increase in net sales. The remaining increase was primarily due to
higher revenues at Eagle, which had an increase in net sales of $11.2 million.
The increase in revenue was primarily a result of increased volumes generated by
stabilized customer relationships, from new customer additions and an improved
product mix.
Cost of Sales. Cost of Sales increased from $54.5 million, or 81.1% of net
sales, for the year ended December 31, 1996, to $74.3 million, or 78.9% of net
sales, for the year ended December 31, 1997. The $19.8 million, or 36.3%,
increase in cost of sales was comprised of a $10.0 million increase resulting
from the above listed acquisitions and $9.8 million due to overall volume
increases.
Gross Profit. Gross Profit for the year ended December 31, 1997 was $19.9
million, representing an increase of $7.3 million, or 57.3%, from 1996. Gross
profit attributable to the companies acquired during 1997 was $3.1 million, or
42.5% of the overall increase. The remaining $4.2 million increase resulted
primarily from Eagle's increase of $4.0 million, Taylor's increase of $2.0
million, partially offset by the negative margin of $1.0 million from the
Company's contract commercial product line. Gross profit as a percentage of
sales increased from 18.9% in 1996 to 21.1% in 1997 as a result of an increase
in sales volumes relative to fixed costs.
Selling, General and Administrative Expenses. SG&A expenses increased $5.7
million, or 49.6%, to $17.2 million in 1997 as compared to $11.5 million in
1996. SG&A expenses as a percentage of sales were 18.2% in 1997 compared to
17.1% in 1996. The increase between years was primarily the result of the
inclusion of newly acquired companies of $2.6 million and additional
administrative costs related to the addition of a corporate headquarters and
corporate management of $2.4 million for 1997.
Income (Loss) from Operations. Income from operations increased $1.6
million from $1.2 million in 1996 to $2.8 million for 1997. The increase is
attributable to additional operating income of $0.5 million from
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<PAGE> 29
acquired companies and the increase in gross profit from existing operations,
partially offset by an increase in selling, general and administrative expenses.
Interest Expense. Interest expense for the years ended December 31, 1997
and 1996 was $3.9 million and $1.9 million, respectively. The $2.0 million
increase is primarily attributable to interest of $0.3 million from the
companies acquired in 1997, interest of $0.9 million on the Senior Notes issued
in December 1997 and interest on additional borrowings related to the operations
and working capital of $0.8 million. The previous parent of Eagle and Taylor
allocated interest expense to the entities during the eight months ended August
29, 1996 (predecessor period), and accordingly, interest expense is not
comparable with the same period in 1996.
Income Taxes. The Company recorded a tax benefit of $0.4 million at
December 31, 1997 on a net loss before extraordinary items of $1.2 million,
resulting in a tax benefit at an effective tax rate of 33.8%. Prior to their
acquisitions, Eagle and Taylor were included in the consolidated return of their
former parent, and accordingly, the provision for income taxes for the year
ended December 31, 1996 is not indicative of the amounts that would have been
recorded on a separate basis and are not comparable.
Extraordinary Loss. In 1997, the Company recorded an extraordinary item,
loss on extinguishment of debt of $0.5 million, net of related tax benefit of
$0.3 million, relating to a prepayment penalty and deferred financing costs
charged to expense on the retirement of existing debt with a portion of proceeds
of the Senior Notes.
Net Loss. The Company's consolidated net loss increased to $1.3 million in
1997 as compared to $0.9 million in 1996. The factors cited above were
responsible for the increase in the net loss.
COMPARISON OF COMBINED YEAR ENDED DECEMBER 31, 1996 TO COMBINED YEAR ENDED
DECEMBER 31, 1995
Net Sales. Net sales decreased 12.9%, to $67.1 million, for 1996 as
compared to $77.0 million for 1995. The decrease was primarily a result of the
Taylor Restructuring. This was offset, in part, by nominal increases in net
sales for the remaining operations as a result of increases in volume and
pricing during the year.
Cost of Sales. Cost of sales decreased from $71.2 million, or 92.5% of net
sales, for the year ended December 31, 1995, to $54.5 million, or 81.1% of net
sales, for the year ended December 31, 1996. The $16.7 million, or 23.5%,
decrease in cost of sales is primarily due to the $15.5 million decrease in cost
of sales at Taylor due to the Taylor Restructuring, which was substantially
completed in 1995. The decrease in cost of sales as a percentage of sales
primarily reflects efficiencies gained from the Taylor Restructuring and
production efficiencies arising from the increased use of automated
manufacturing equipment at Taylor.
Gross Profit. Gross profit for the year ended December 31, 1996 was $12.7
million, representing an increase of $6.9 million, or 119.0%, from 1995. Gross
profit as a percentage of sales increased from 7.5% in 1995 to 18.9% in 1996 due
to margin improvements resulting from the Taylor Restructuring. In addition,
lower depreciation for the period subsequent to the acquisition of Eagle and
Taylor due to lower bases of assets, based on the allocation of purchase price,
compared to the historical bases of assets prior to the acquisition, improved
gross profit.
Selling, General and Administrative Expenses. SG&A expenses as a
percentage of sales were 17.1% in 1996 compared to 16.9% in 1995. The percentage
increase was due primarily to the decrease in revenues between years while SG&A
expenses did not decline proportionately due to the fixed nature of certain
expenditures in this category. Although SG&A expenses as a percentage of sales
increased, total SG&A expenses decreased by $1.5 million, or 11.5%, to $11.5
million in 1996. The Taylor Restructuring accounted for a $2.7 million reduction
in SG&A expenses, which was partially offset by an increase in SG&A expenses for
Eagle of $1.1 million.
Income (Loss) from Operations. Income from operations, excluding the
nonrecurring restructuring charges in 1995, increased by $8.4 million from the
operating loss of $7.2 million in 1995. This is attributable to the improved
operating profit resulting from the Taylor Restructuring and the reduction in
SG&A expenses.
Interest Expense. Interest expense, as a percentage of sales, was 2.9% in
1996 compared to 2.3% in 1995. Interest expense increased by approximately $0.1
million, or 5.6%, to $1.9 million in 1996. The former parent of Eagle and Taylor
provided cash management services to Eagle and Taylor and charged interest
expense relating to the amounts payable to affiliates. This interest expense
approximated $1.8 million in 1995
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<PAGE> 30
and $1.1 million for the eight months ended August 29, 1996. Interest expense
for the combined year ended December 31, 1996 also includes approximately $0.8
million incurred by the Company during its ownership of Eagle and Taylor.
Income Taxes. The Company has recorded a tax benefit of $0.3 million on a
loss before taxes of $1.2 million for the combined year ended December 31, 1996.
The benefit results from income tax expense recorded at an effective rate of 46%
on income before taxes for the period under the Company's ownership and an
income tax benefit recorded at an effective rate of 35% on losses before taxes
of the Predecessors. The effective rate for the period under the Company's
ownership was determined using the Company's operating results and the bases of
its assets and liabilities adjusted for purchase accounting for the
acquisitions, and differs from the statutory tax rates as a result of valuation
allowance adjustment, non-deductible expenses and state taxes. Prior to the
acquisitions, Eagle and Taylor were included in the consolidated income tax
returns of their parent and recorded income taxes in their accounts at a
prescribed effective rate. Accordingly, income taxes for the combined year ended
December 31, 1996 are not indicative of the amounts that would have been
recorded on a stand-alone basis and are not comparable to prior years.
Net Loss. The Company's consolidated net loss decreased by $5.6 million,
or 86.2%, to $0.9 million in 1996 compared to $6.5 million net loss incurred in
1995. The Company reported net income of $0.8 million for the period under its
ownership. The factors cited above were responsible for the decrease in net loss
of the Company.
YEAR 2000
The Company is in the process of performing a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company presently believes that, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. However, if such modifications
and conversions are not completed timely, the Year 2000 problem may have a
material impact on the operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1995, 1996 and 1997 and the three
months ended March 31, 1998, the Company's principal sources of funds consisted
of cash from operations and various financings. Prior to December 1997, the
Company financed acquisitions through secured senior debt facilities and
subordinated debt. In December 1997, the Company issued the Senior Notes to
extinguish existing debt, finance the acquisitions of Binnings, Danvid, American
Glassmith and Modern and provide working capital, fund general corporate
expenses and finance future acquisitions.
Approximately $33.8 million of the net proceeds of the Senior Notes was
used to repay indebtedness under existing debt agreements, including prepayment
penalties. The weighted average interest rate of the indebtedness repaid on
December 10, 1997 was 9.7%. The Company used approximately $47.8 million of the
net proceeds of the Senior Note offering to pay the cash portion of the purchase
price for the acquisitions consummated on December 10, 1997 and approximately
$13.3 million of the net proceeds in connection with the acquisition of
VinylSource in January 1998.
The Company's principal liquidity requirements will be for debt service
requirements under the Senior Notes and for working capital needs and capital
expenditures. The Company's annual debt service requirements, including capital
lease obligations, will increase from $6.4 million in 1997 to $15.5 million
based on outstanding obligations as of December 31, 1997.
The Company is presently in negotiations to secure a revolving credit
facility of $25 million to provide additional liquidity. The Company believes
that cash generated from operations, together with the net proceeds from the
Offering allocated for working capital purposes and the expected proceeds from
the revolving credit facility, will be sufficient to permit the Company to meet
its expected operating needs,
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<PAGE> 31
planned capital expenditures and debt service requirements. However, there can
be no assurance that sufficient funds will be available from operations or under
future revolving credit or other borrowing arrangements to meet the Company's
cash needs. Future acquisitions may require additional financing and there can
be no assurance that such funds would be available on terms satisfactory to the
Company, if at all. Furthermore, the Company is limited in obtaining future
financing under the terms of the Senior Notes. In addition, the Company's future
operating performance and ability to meet its financial obligations will be
subject to future economic conditions and to financial, business and other
factors, many of which will be beyond the Company's control.
Cash provided by operations was $2.6 million, $4.5 million and $1.5 million
for the years ended December 31, 1995, 1996 and 1997, respectively. Cash used in
operations was $1.9 million in the three months ended March 31, 1998. The
decrease in cash provided by operations for 1997 from the prior year reflects
increases in the Company's working capital accounts which primarily consisted of
an increase in accounts receivable of $1.2 million, a decrease in accounts
payable of $1.9 million, offset by a $1.2 million decrease in inventories. The
Company's working capital requirements for inventory and accounts receivable are
impacted by changes in raw material costs, the availability of raw materials,
growth of the Company's business and seasonality. As a result, such requirements
may fluctuate significantly.
Capital expenditures for the years ended December 31, 1995, 1996 and 1997
and the three months ended March 31, 1998 were $2.6 million, $2.1 million, $1.5
million and $1.3 million, respectively. Capital outlays included manufacturing
equipment and computer software and hardware. In addition, in 1996 the Company
entered into a $1.6 million capital lease to purchase computer hardware and
software. Management expects that its capital expenditure program will continue
at a sufficient level to support the strategic and operating needs of the
Company's operating subsidiaries. This level of expenditure may be higher than
historical levels. Future capital expenditures are expected to be funded from
internally generated funds, leasing programs and the Company's credit
facilities.
The Company made cash payments of $53.0 million relating to acquisitions in
1997. This compares to $12.8 million in 1996. In January 1998, the Company
purchased all of the assets of the vinyl division of Easco, Inc., an Austintown,
Ohio manufacturer of vinyl extrusions for the fenestration industry. The cash
payment for this acquisition was $13.3 million. Also in January 1998, the
Company purchased all of the assets of Blackhawk, a steel entry door
manufacturer, for a cash payment of $400,000. In February 1998, the Company
signed a letter of intent with Louisiana-Pacific Corporation to purchase its
Weather-Seal division. This division consists of six manufacturing facilities
throughout Ohio producing aluminum and vinyl extrusions, and wood and vinyl
windows. The letter of intent obligated the Company to make a $1 million deposit
into an escrow account, which will be applied toward the purchase price. The
deposit will be considered a termination fee payable to Louisiana-Pacific
Corporation in the event the transaction does not close because the Company
abandons or otherwise fails to consummate the transaction unless because of
discovery or occurrence of any material or adverse condition. In March 1998, the
Company sold its Mallyclad division to a related party for cash proceeds of $1.2
million.
Cash payments on long term debt were $1.1 million, $23.6 million and $0.3
million for the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1998, respectively. Net activity on the Company's lines of
credit resulted in cash outflows of $5.9 million in 1997. The Company generated
proceeds of $125.0 million from the issuance of the Senior Notes in December
1997. In addition the Company paid approximately $6.0 million in related fees
and expenses associated with the debt financing. The Company expects to pursue
additional financing opportunities to fund its growth strategy. The Company
raised $0.4 million through the issuance of preferred stock during the second
and third quarters of 1997. The funds were used for general corporate purposes
during this time period.
SEASONALITY
The Company's business is seasonal since its primary revenues are driven by
residential construction. Inclement weather during the winter months,
particularly in the Northeast and Midwest regions of the United States, usually
reduces the level of building and remodeling activity in both the home
improvement and new construction markets and, accordingly, has an adverse impact
on the demand for fenestration
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<PAGE> 32
products. Traditionally, the Company's lowest sales levels usually occur during
the first and fourth quarters. The Company believes that its 1997 acquisitions
in the Southwestern and Southeastern United States will minimize the risk to the
Company for potentially unusual inclement weather conditions in the Midwest and
the Northeast. Because a high percentage of the Company's manufacturing overhead
and operating expenses are relatively fixed throughout the year, operating
income has historically been lower in quarters with lower sales. Working
capital, and borrowings to satisfy working capital requirements, are usually at
their highest level during the second and third quarters.
CYCLICALITY
Demand in the window and door manufacturing industry is influenced by new
home construction activity and the demand for replacement products. Trends in
the housing sector directly impact the financial performance of the Company.
Accordingly, the strength of the U.S. economy, the age of existing home stock,
job growth, consumer confidence, consumer credit, interest rates and migration
of the inter/intra U.S. population have a direct impact on the Company. Any
declines in new housing starts and/or demand for replacement products may
adversely impact the Company and there can be no assurance that any such adverse
effects would not be material.
INFLATION AND RAW MATERIAL COSTS
During the past several years, the rate of inflation has been relatively
low and has not had a significant impact on the Company's operations. However,
the Company purchases raw materials, such as aluminum, wood, vinyl and glass,
that are subject to fluctuations in price that may not reflect the general rate
of inflation, and are more closely tied to the supply of and demand for the
particular commodity. Specifically, there have been periods of significant and
rapid changes in aluminum prices, with a concurrent short-term impact on the
Company's operating margins. In some cases, generally where the increases have
been modest, the Company has been able to mitigate the effect of these price
increases over the long-term by passing them on to customers.
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<PAGE> 33
FENESTRATION INDUSTRY OVERVIEW
The market for residential fenestration products has grown steadily over
the past several years. Changes in design trends and consumer preferences have
increased demand for residential fenestration products. Homeowners seeking to
differentiate their residences are demanding more elaborate windows and doors as
well as a greater number of windows and doors. Heightened demand for feature
windows, massive entryways, greater design options on interior doors, and
decorative glass have all contributed to the industry's growth. Residential
fenestration product sales totaled approximately $15.1 billion in 1996, $7.9
billion of which represented sales to the new construction market and $7.2
billion of which represented sales to the remodeling/replacement market. Of the
Company's total 1997 pro forma net sales, approximately 87.4% was attributable
to residential fenestration products. The NWWDA has estimated that total U.S.
sales of residential windows, which represented approximately 65.1% of the
Company's pro forma net sales in 1997, increased from 33.4 million units in 1991
to 48.9 million units in 1997, representing a CAGR of 6.6%. The NWWDA also has
estimated that sales of residential entry doors, which represented approximately
22.3% of the Company's pro forma net sales in 1997, increased from 11.0 million
units in 1994 to 12.3 million units in 1997, representing a CAGR of 3.8%.
Residential window and door sales are expected to continue to increase over the
next several years, with NWWDA forecasting sales of residential windows and
entry doors of 51.8 million units and 13.2 million units, respectively, in the
year 2000.
The Company also anticipates continued strong demand for commercial
fenestration products. The NWWDA has projected that usage of windows in
non-residential construction will increase from 350 million square feet of
vision area in 1995 to an estimated 410 million square feet in 1998. Renovation
of existing buildings constitutes a substantial portion of the non-residential
window market. The replacement/remodeling segment is projected to account for
approximately 60% non-residential window sales over the next several years, and
demand for replacement/remodel non-residential windows and doors is expected to
remain strong as aging schools, hospitals and other institutional buildings are
renovated. In addition, construction of new schools, hospitals and other
institutional buildings, as well as renewed growth in office and other
commercial construction due to relatively low levels in office vacancy rates, is
expected to spur demand for non-residential fenestration products.
While the fenestration industry remains highly sensitive to the level of
new home construction activity, spending on residential remodeling and
replacement activity has increased and is currently comparable to the level of
spending on new home construction activity. Both the short-term and long-term
outlook for remodeling is positive due to the continued growth in the inventory
of existing homes and the aging of the housing stock. The increase in remodeling
and replacement benefits all fenestration product lines, including interior and
entry doors, energy efficient and custom windows and garage doors and decorative
glass. Spending on each increases as a result of the shift in consumer attitudes
toward windows and doors from merely a functional component of a house to an
important element in the design of the home.
PRODUCT COMPOSITION
The percentage of total residential windows and doors made of wood,
aluminum or vinyl varies significantly by region. A homeowner's or homebuilder's
choice of construction materials is based on factors such as cost, thermal
efficiency, ease of maintenance, architectural taste and regional custom. In the
Southern, Southeastern and Southwestern regions of the United States, aluminum
windows are historically the most widely used product because of their low cost,
durability and suitability to warm climates. Since aluminum is the least costly
window alternative, homebuilders often prefer aluminum products to reduce their
costs. Aluminum is not used as frequently in the Northern and Northeastern
regions because of historical architectural trends and the usually superior
insulating qualities of wood and vinyl windows.
Of the three primary construction materials used in residential windows and
doors, wood is the most thermally efficient material. Wood windows and doors
generally are more expensive and require more maintenance than aluminum or vinyl
products. Total U.S. sales of all-wood windows have declined slightly in the
1990s, while sales of aluminum-clad wood windows and vinyl-clad wood windows
have grown. Exterior cladding allows vinyl-clad and aluminum-clad wood windows
to offer greater durability and less maintenance along with an aesthetically
pleasing wooden interior.
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The vinyl window and door market is projected to be the fastest growing
area for fenestration product sales over the next several years. Vinyl windows
began to increase in popularity in the mid-1980s as a replacement product in the
Northern regions of the United States and, because of favorable pricing and
product improvements, they are also becoming a popular choice in new
construction. Vinyl windows and doors are generally more expensive than aluminum
windows and doors but less expensive than wood products. Historically, vinyl
windows have been less popular than aluminum windows in warmer climates because
of the higher cost of vinyl and because initial models of vinyl windows were
unable to withstand prolonged solar exposure. However, recent advances in vinyl
composition technology have increased the quality and durability of vinyl
windows and doors.
The following charts illustrate the estimated 1997 domestic market shares
of aluminum, wood and vinyl residential windows in the new residential
construction market, the remodeling/replacement market and the total residential
construction market:
<TABLE>
<CAPTION>
TOTAL
NEW CONSTRUCTION REPAIR/REMODEL RESIDENTIAL CONSTRUCTION
- ---------------- ----------------- ------------------------
<S> <C> <C> <C> <C> <C>
Aluminum 16.1% Aluminum 14.2% Aluminum 15.1%
Vinyl 31.7% Vinyl 47.8% Vinyl 40.2%
Wood 52.2% Wood 38.0% Wood 44.7%
- ---------------
</TABLE>
Source: NWWDA 1997 Industry Statistical Review and Forecast.
INDUSTRY FRAGMENTATION
The fenestration products market is highly fragmented and historically has
been characterized by small, entrepreneurial businesses. In 1997, only two
United States fenestration products companies posted sales in excess of one
billion dollars, and management believes that no single manufacturer of vinyl,
wood and metal doors and windows currently has annual revenues exceeding 6% of
total industry sales. As recently as 1995, the 100 largest fenestration
manufacturing companies accounted for less than 50% of total industry sales.
In recent years, growing public demand for higher performance and more
elaborate windows and doors has resulted in increased manufacturing costs. These
increased costs, as well as competitive pressures arising from better
technology, higher levels of computerization and enhanced marketing efforts,
have led to a shift away from small, independent manufacturers toward larger
manufacturers that have the ability to spread higher costs across broader
product lines and greater sales volumes and to better respond to accelerated
lead times. This industry fragmentation presents significant opportunities for
growth through acquisitions, a strategy the Company has been successful in
implementing to date.
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BUSINESS
GENERAL
The Company is a leading national manufacturer and distributor of a broadly
diversified line of windows, doors and related products designed to meet a
variety of residential and commercial consumer demands in both the new
construction and remodeling/replacement markets. Since its entry into the
fenestration industry in June 1994, the Company has completed 12 acquisition
transactions and has established itself as one of the top ten manufacturers in
the United States of both vinyl and metal fenestration products. The Company's
pro forma net sales were $192.4 million for the year ended December 31, 1997.
The Company's strategy is to continue to increase its market share, geographic
presence and product diversity through aggressive pursuit of additional
strategic acquisitions of complementary businesses in the highly fragmented
$22.2 billion fenestration products industry.
The Company targets as acquisition candidates established fenestration
products companies and related material manufacturers that possess one or more
of the following attributes: national or regional niche market leadership;
recognized brand names; reputations for superior customer service; strong
management teams; predictable cash flows; and stable customer bases. The Company
believes that additional strategic acquisitions will allow the Company to
continue to: (i) reduce operating costs and improve margins through vertical
integration of material production capabilities with the Company's door and
window manufacturing operations; (ii) achieve significant cost reductions
through centralized purchasing, sharing central administrative services and
implementation of the Company's best operating and management practices; (iii)
further leverage its highly recognized brand names and nationwide multi-channel
distribution capabilities; and (iv) further diversify the Company's geographic,
product and market focus. To execute its growth strategy, the Company has
assembled a seasoned, entrepreneurial management team, with more than 100 years
of combined experience in the fenestration industry.
Consistent with its growth strategy, the Company completed six acquisitions
during 1997, which represented $111 million in 1997 pro forma net sales.
Additionally, in January of 1998, the Company acquired the vinyl extrusion
division of Easco, Inc., which reported 1997 net sales of approximately $16.1
million. This acquisition significantly increases the Company's production
capabilities in the fast-growing vinyl fenestration products segment. In January
of 1998, the Company also consummated the acquisition of substantially all of
the assets of Blackhawk, a Midwest manufacturer of steel security screens and
screen doors with 1997 net sales of approximately $0.9 million. On February 18,
1998, the Company entered into a letter of intent to acquire the Weather-Seal
division of Louisiana-Pacific Corporation, a manufacturer and distributor of
aluminum and vinyl extrusions, vinyl and wood windows, and patio doors. On April
16, 1998, the Company acquired substantially all the assets of Denver Window
Corporation, a Colorado-based manufacturer of specialty residential wood
windows, which reported 1997 net sales of approximately $1.8 million.
In addition to growth through acquisitions, management believes there are
significant opportunities for internal growth. The Company's internal growth
strategy includes (i) using centralized procurement of raw materials and
equipment to negotiate favorable pricing; (ii) eliminating duplicative
administrative costs by consolidating administrative functions such as cash
management, financing arrangements, employee benefits, insurance and bonding;
(iii) increasing vertical integration of its aluminum and vinyl extrusion
capabilities with its window and door manufacturing operations; (iv) reducing
company-wide inventory levels; (v) implementing uniform management information
systems across all of the Company's operating units; (vi) focusing its marketing
efforts on a coordinated, company-wide marketing strategy; (vii) identifying and
implementing best management and operating practices; and (viii) further
leveraging the Company's highly recognized brand names and nationwide
multi-channel distribution capabilities.
GROWTH STRATEGY
The Company's objective is to become the leading national manufacturer and
distributor of a diversified line of fenestration products. By utilizing its
extensive product mix, national marketing strategy, distribution strength and
economies of scale, the Company will be able to continue to successfully
differentiate itself from its smaller, less sophisticated competitors. In order
to solidify its market position as a leading national
34
<PAGE> 36
fenestration products manufacturer and enhance internal revenue growth,
profitability and cost efficiencies, the Company's principal strategic
objectives are as follows:
- - EXPAND THROUGH STRATEGIC, COMPLEMENTARY ACQUISITIONS
The Company believes there are significant opportunities for consolidation
in the fenestration products industry and plans to continue to pursue an
aggressive acquisition program. Strategic acquisitions will allow the Company to
expand into geographic markets it does not currently serve by acquiring
well-established fenestration products companies that, like the Company's
previous acquisitions, can serve as "platforms" for future growth and possess
characteristics such as regional market leadership, recognized brand names,
reputations for superior customer service, and strong customer bases. Despite
the fragmentation in the industry, the Company believes there are companies that
have gained significant market share in their respective niche markets and that
the Company can efficiently expand its geographic coverage and improve
profitability by consolidating these companies.
Once the Company has established a platform in a given market, it generally
seeks to "add on" other well-established fenestration companies operating within
that region, in order to expand its market penetration. The Company believes
that adding manufacturing and distribution capabilities in regional markets will
allow it to manage inventories more effectively, improve recruiting and
retention of distributors, develop regionally tailored advertising and marketing
programs, and manage the procurement of raw materials more effectively.
- - INCREASE VERTICAL INTEGRATION AND PRODUCTION EFFICIENCIES
The Company believes that it can reduce its operating costs and improve its
margins through vertical integration of its vinyl extrusion, aluminum extrusion
and glass production capabilities with its window and door manufacturing
operations. Additional cost savings can be realized through rationalization of
product lines, reconfiguration of production processes, reduction of inventory
levels and implementation of uniform management information systems across the
Company's various operating divisions. Achieving higher operating efficiencies
also provides the Company with the competitive advantage of increased pricing
flexibility in relation to its competitors.
- - ACHIEVE ADDITIONAL COST SAVINGS
The Company believes it will continue to reduce the total operating
expenses of acquired businesses by increasing the level of automation of these
businesses, eliminating duplicative administrative functions and consolidating
certain management functions performed separately by each business prior to its
acquisition. In addition, the Company is currently implementing programs to
reduce costs at its acquired businesses in such areas as: the purchase of raw
materials; equipment procurement and maintenance; financing arrangements;
employee benefits; insurance; and bonding. As an example of the Company's
procurement initiatives, in 1998 the Company estimates it will purchase 11 times
the quantity of flat glass acquired by the Company in 1997. This enhanced
critical mass has allowed the Company to realize a 33% decrease in the average
cost per square foot of flat glass. As the Company continues to expand through
acquisitions and internal growth, management expects the Company to further
benefit as its increased size provides greater purchasing leverage with
suppliers, thereby allowing the Company to negotiate more favorable pricing for
raw materials and equipment.
- - IMPLEMENT MARKETING STRATEGY
The Company believes that many fenestration product companies have failed
to implement the type of coordinated, professional marketing strategy that is
necessary to develop strong manufacturer brand recognition and loyalty among
distributors and consumers. Through the application of targeted marketing
techniques and image advertising, the Company believes it will be able to
effectively communicate the quality, diversity and value of its product line to
potential purchasers. In addition, the Company's acquisition strategy includes
the integration of the marketing and distribution system of each acquired entity
with the Company's existing marketing and distribution systems to generate a
broader overall distribution network for both its existing products and the
newly acquired products. Furthermore, the Company emphasizes "cross-selling" to
increase sales to existing customers by introducing them to additional products
manufactured by the Company.
35
<PAGE> 37
- - LEVERAGE NATIONAL DISTRIBUTION SYSTEM, BROAD PRODUCT LINE AND BRAND NAME
RECOGNITION
The Company will seek to use its nationwide distribution system and broad
product line to penetrate new markets and increase its share in existing
markets. In addition, management plans to leverage the Company's national
presence by targeting fast growing regions, thereby enhancing growth potential
and reducing the Company's dependence on any single geographic market. The
Company also plans to continue to capitalize on its well-recognized brand names
and reputation for quality and service to increase revenues by cross-selling its
products through its multiple distribution channels.
- - IMPLEMENT BEST PRACTICES
Management reviews the operations of the Company at the local and regional
operating levels in order to identify certain "best practices" that can be
implemented throughout the organization. For example, the Company has initiated
operational improvements in the form of enhanced shop floor layouts, inventory
management, operating procedures and equipment rationalizations. Management
believes that this process of capitalizing on the collective knowledge and
experience of its various operating units will allow the Company to achieve
higher overall levels of customer satisfaction and operating performance.
COMPETITIVE STRENGTHS
The Company's position as one of the leading consolidators of fenestration
product manufacturing and distribution is attributable to a number of factors,
including the following:
- - ESTABLISHED BRAND NAMES AND DIVERSE PRODUCT LINE
The Company markets products under the "Eagle," "Taylor," "Binnings,"
"Danvid," "Western," "Perma-Door," "Vinyline," "Modernview," "Encore,"
"VinylSource," "Season-All Commercial" and "Sumiglass" brand names, some of the
most widely recognized brand names in the industry. The Company believes that
each of these brands has an established reputation within the fenestration
products industry for high quality, precision engineering and superior customer
service. The Company believes the strength of its brand names and reputation
will assist the Company in penetrating new markets and expanding distribution in
existing markets. The Company is one of a limited number of window and door
manufacturers that offers a diversified product line consisting of aluminum,
vinyl and wood products at all major price points. This diversity allows the
Company to capture a broader customer base by targeting specific economic and
geographic regions with products tailored to meet each region's particular
preferences. Additionally, the Company can offer wholesalers and do-it-yourself
home center buyers a "one-stop" shopping solution for many of their window and
door needs.
- - MULTIPLE DISTRIBUTION CHANNELS AND NATIONAL DISTRIBUTOR NETWORK
The Company distributes its products through a combination of sales to
wholesalers, lumberyards and do-it-yourself home centers and direct sales to
architects and independent building contractors. The Company believes that this
distribution strategy maximizes the Company's market penetration and reduces
reliance upon any single distribution channel for the sale of its products. In
addition, the Company has developed many long-standing relationships with key
distributors, which management believes provides the Company with a competitive
advantage as the Company further develops its national sales strategy. The
Company attributes its ability to establish productive relationships with many
of the strongest distributors in its markets to its: (i) broad product offerings
across all major price points; (ii) well recognized brand names; (iii)
reputation for high quality; and (iv) high level of customer service. These
factors have resulted in a loyal distributor base characterized by low turnover.
Although the Company tailors its marketing efforts to address specific regional
preferences, the Company's distribution network extends throughout the
continental United States. This national geographic scope, together with the
Company's diverse product line, enables the Company to rapidly respond to shifts
in regional consumer demand and reduces the Company's reliance on any single
geographic region for the sale of its products.
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<PAGE> 38
- - CUSTOMER SERVICE
The Company's systems, processes and organization are designed specifically
to provide a high level of customer service. The Company believes that it offers
its distributors high quality, competitively priced products and short lead
times while maintaining high order-fill rates.
- - EXPERIENCED, ENTREPRENEURIAL MANAGEMENT
The Company has assembled a strong and experienced management team at both
the corporate and operating levels. Collectively, the Company's senior officers
have a total of more than 100 years of experience in manufacturing and
distributing windows and doors. The Company's officers, including the Chairman
of the Board, collectively have had significant involvement in more than 130
acquisition transactions, and management has a strong track record of acquiring
businesses and integrating them into the existing operations of the Company. The
Company believes that it will be able to utilize management's broad experience
with integrating acquired businesses to allow it to continue to achieve cost
savings and operational synergies as it acquires additional businesses. As of
February 5, 1998, the Company's executive officers and directors collectively
owned 81.9% of the Company's outstanding Common Stock (including options and
warrants exercisable within 60 days thereafter).
- - VERTICAL INTEGRATION
Through strategic acquisition transactions, the Company has acquired
aluminum and vinyl extrusion and glass production capabilities, resulting in a
high degree of vertical integration within the Company's current manufacturing
operations. In-house aluminum and vinyl extrusion capacity allows the Company to
ensure a low-cost, reliable source of extrusions, control product quality and
reduce inventory levels. Management believes that this vertical integration
provides the Company with a cost advantage over many of its competitors.
PRODUCTS
The Company is one of a limited number of window and door manufacturers
which offer a broadly diversified product line. The Company's multiple product
lines can generally be separated into the following categories: (i) aluminum
windows; (ii) wood windows; (iii) vinyl windows; (iv) doors; (v) other
fenestration products; and (vi) vinyl and aluminum extrusions. The following
table summarizes the percentage of the Company's pro forma net sales for the
year ended December 31, 1997 in each of the its main product categories:
<TABLE>
<CAPTION>
PRODUCT CATEGORY SELECTED BRAND NAMES GEOGRAPHIC FOCUS PERCENTAGE
- ---------------- -------------------- ---------------- ----------
<S> <C> <C> <C>
Aluminum Windows Binnings, Danvid, Western, Forte Southwest, Southeast, Midwest 40.1%
Wood Windows Eagle National 23.8%
Vinyl Windows Vinyline, Modernview Southwest, Southeast, Midwest 8.9%
Doors Taylor, Perma-Door, Encore National 21.8%
Other Fenestration Products Sumiglass National 5.4%
Aluminum and Vinyl Extrusions VinylSource Midwest, Southeast 0%
</TABLE>
Aluminum Windows. The Company produces aluminum windows, including
single/double hung, horizontal rolling, fixed light and specialty windows, at
its Binnings and Danvid facilities. In addition, Western manufactures a full
line of aluminum products designed for the luxury home market in Arizona,
California and Nevada. Western's aluminum products include horizontal rolling
windows, casement windows, arched configurations and window wall systems. Forte
manufactures aluminum double-hung windows, projection windows and casement
windows at its Youngstown, Ohio plant, which are primarily targeted for use in
office buildings, schools and other non-residential buildings.
Wood Windows. Eagle, located in Dubuque, Iowa, manufactures a full line of
wood windows and doors. The Company's wood windows are all preservative treated
to withstand harsh weather conditions and are targeted at the higher priced
segment of the residential window market. Since Eagle's products are available
with primed, unprimed, stained or painted exteriors and interiors, consumers
have flexibility in choosing the finish they prefer. Eagle's products, which
include casement and double-hung windows, picture windows and
37
<PAGE> 39
geometrically shaped windows, are generally purchased for use in high-end custom
residential construction and renovation. Unlike most of its competitors who use
thin-rolled aluminum in the manufacture of aluminum-clad windows, the Company
manufactures extruded aluminum-clad casement and double hung-windows and
auxiliary windows. The thicker extruded aluminum cladding (a layer of aluminum
attached to a wooden interior framework) is designed to provide superior frame
rigidity, long product life, resistance to warping and easy maintenance. The
Company's aluminum-clad windows are available in 50 different colors and offer
greater customization options than many competitive products. The customer has
the option of selecting from stained, primed, painted or unfinished interior
surfaces and from a number of pre-finished exterior surfaces, certain of which
are resistant to ultraviolet (UV) ray degradation and salt spray. The Company's
aluminum-clad wood windows are designed for use in high-end residential and
non-residential construction and renovation.
Vinyl Windows. Thermetic and Modern manufacture vinyl replacement windows
sold under the trade name "Vinyline" and vinyl windows and doors for use in new
construction under the trade name "Modernview." Vinyl windows manufactured by
Binnings are sold throughout the Southeast as less expensive alternatives to
wood windows. Danvid also manufactures vinyl windows that are sold primarily in
the Southern and Southwestern United States. The Company's business strategy
includes continued emphasis on expanding its vinyl fenestration products
business through additional acquisitions and through internal growth.
Doors. Taylor designs and manufactures a complete line of steel entry
doors and advanced steel patio door systems. These products are sold under the
trade names "Taylor" and "Perma-Door." The Taylor stainable steel entry door
models are manufactured with a special surface texture in order to allow durable
staining. The steel entry systems are insulated using a urethane core to enhance
energy efficiency. The Company also manufactures and markets insulated steel
garage door panels under the trade names "Encore" and "Taylor." The Encore
garage door panels are constructed from galvanized, roll-formed laminated steel
and feature multicoat rust protection, rigid foam core insulation and 18-gauge
steel hinge reinforcements for extra strength and durability. At its Eagle
division, the Company produces wood patio doors and French doors for use in
high-end custom residential new construction and renovation, and Western's
aluminum products include sliding glass doors.
Other Fenestration Products. The Company's other fenestration products
include security screens and security screen doors, aluminum storm windows and
storm doors and decorative glass lites. One of Forte's key products is a
unitized security screen and window combination, designed to be functional and
aesthetically pleasing, which it markets to schools, institutions and other
office buildings. American Glassmith designs, manufactures and assembles
decorative glass lites for a variety of residential applications, including
windows, doors, transoms, cabinets, and sidelites. The decorative glass lites
are primarily distributed in the Northern United States. The American Glassmith
division also manufactures laminated glass which is sold under the Sumiglass
trademark. Sumiglass products are distributed nationally and are used in a
variety of applications, including doors, windows, sidelites, room partitions,
office dividers, skylights and glass handrails.
Aluminum and Vinyl Extrusions. The Company produces aluminum extrusions at
Binnings and vinyl extrusions at VinylSource. The Company uses a significant
portion of its vinyl and aluminum extrusion production to satisfy a portion of
its manufacturing needs. The Company believes that this in-house extrusion
capacity provides it with a low-cost, reliable source of raw materials and
reduces working capital requirements. To optimize production efficiency at the
Company's extrusion facilities, the Company also sells extrusion products to
third parties.
Within most of its fenestration and product lines, the Company offers a
variety of options in terms of price and performance characteristics. The
Company markets certain lines to high-end custom home builders and contractors
and to several niche non-residential markets, including hotels and motels,
schools, colleges, restaurants, and nursing homes. These premium product lines
are characterized by superior cladding and performance characteristics (i.e.,
strength, durability and low water/air infiltration), decorative glass and a
variety of flexible options. The premium aluminum-clad windows and doors offer
high levels of frame rigidity, longevity, warping resistance, and easy
maintenance. All of the Company's premium products are designed to promote
energy efficiency. Customers may select either clear insulated glass or low-E
glass for more extreme
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<PAGE> 40
climates. The Company also offers more moderately priced and lower priced
options for window and door consumers.
The Company distributes its products regionally throughout the United
States under a number of well-established brand names that are recognized for
their quality, value, engineering and customer service, including "Eagle,"
"Taylor," "Binnings," "Danvid," "Western," "Perma-Door," "Vinyline,"
"Modernview," "Encore," "VinylSource," "Season-All Commercial" and "Sumiglass."
This brand name recognition and reputation have enabled the Company to establish
long-standing relationships with leading wholesalers, lumberyards,
do-it-yourself home centers, architects and building contractors. The Company's
products are marketed and distributed in all 48 contiguous states and are
manufactured in 10 separate facilities. Management believes that the Company's
broad product line, recognized brand names and national geographic scope enable
the Company to satisfy distinct regional product preferences and target fast
growing markets, thereby minimizing the Company's reliance on any single
geographic region.
Some of the Company's products are currently manufactured for selected
regional distribution. For example, the Company manufactures a full line of
aluminum window and door products designed primarily for the luxury home market
in Arizona, Southern California and Nevada. This line includes horizontal
rolling windows, casement windows, sliding glass doors, Duo-Pane insulating
glass, retro-fit and conversion systems, sound control products, multi-slide
doors, geometric shaped configurations, and window wall systems. Danvid's
aluminum windows target the tract housing market in Texas and the Southeast,
where the lower cost of aluminum windows and the temperate climate make aluminum
windows the product of choice. Binnings produces an "impact window" that is
marketed and distributed in coastal areas subject to hurricane winds. Management
believes that the Company is a leading supplier of residential fenestration
products in each of the major regional markets in which it competes.
DISTRIBUTION AND MARKETING
The Company uses multiple distribution channels and brand names to maximize
market penetration. The Company distributes its windows and doors through (i)
one-step distribution to major do-it-yourself home centers, lumberyards and
specialty window and door stores; (ii) two-step distribution to wholesalers who
resell to do-it-yourself home centers and lumberyards; and (iii) direct sales to
homebuilders, remodelers and contractors. The following charts summarize the
Company's various distribution channels:
<TABLE>
<CAPTION>
DIRECT ONE-STEP TWO-STEP
DISTRIBUTION DISTRIBUTION DISTRIBUTION
------------ ------------ ------------
<S> <C> <C>
AAPC AAPC AAPC
| | |
| | Wholesaler
| | |
| Retailer* Retailer*
| | |
End User** End User** End User**
- ---------------
</TABLE>
* Retailers typically include retail home centers, lumberyards and, in one-step
distribution, Company-owned distribution centers.
** End users typically include remodelers, contractors, homeowners and
homebuilders.
In one-step distribution, the Company distributes to do-it-yourself home
centers and lumberyards and specialty window and door stores. These customers
maintain low levels of inventory and therefore require more frequent deliveries
and generally require higher levels of customer service than two-step
distributors. In two-step distribution, the Company sells to wholesalers who
resell the products to lumberyards and do-it-yourself home centers. Two-step
distributors are primarily utilized to service smaller retailers in rural areas
that do not
39
<PAGE> 41
generate sufficient volume to purchase directly from the Company. In contrast to
one-step distributors, two-step distributors often carry large inventory
positions in order to service the needs of its retail customers who generally
carry limited amounts of inventory.
The Company markets its products on a national basis, in all 48 contiguous
states through a sales force consisting of salaried and commissioned sales
representatives. Divisional sales managers coordinate the marketing activities
among the Company and the sales representatives. The sales representatives
concentrate on serving the Company's one-step, two-step, remodeler, and
non-residential contractor customers with marketing, sales and service support.
The Company's marketing strategy emphasizes customer service and support.
Management believes the key to effectively addressing changing customer
requirements, expanding existing customer base, and building supply
relationships with new distributors is the ability to respond with product,
delivery, and service in a complete and time-sensitive fashion.
As a long-time manufacturer and distributor of windows and doors, the
Company has developed long-standing relationships with many key distributors.
The Company believes that the strength of these relationships is a competitive
advantage as the Company further develops its national sales strategy. By
combining its regional leadership position with its broad offering of well-known
products, the Company strives to use the distributor relationships to increase
the penetration of its products into new geographic markets. For example, a
regional distributor who is familiar with the Company's products that have
historically been sold in that region may have a need for some of the Company's
products that are not well-known in that region. Distributors tend to
concentrate their business with a relatively small number of suppliers, and an
existing relationship with a distributor often will provide the Company with an
advantage over other potential suppliers. Accordingly, the Company's marketing
efforts focus on both "cross-selling" to its existing customers as well as
introducing new customers to its extensive product line.
PROPERTIES
The Company's principal manufacturing facilities and administrative offices
are located at the following sites:
<TABLE>
<CAPTION>
SIZE OWNED/
LOCATION (SQUARE FEET) LEASED PRODUCTS MANUFACTURED/SERVICES PERFORMED
-------- ------------- ------ ----------------------------------------
<S> <C> <C> <C>
Eagle
Dubuque, Iowa..................... 320,000 Owned Wood windows and doors and aluminum-clad
windows and doors; administration
Taylor Door
West Branch, Michigan............. 210,000 Owned Custom insulated steel entry systems;
steel garage doors and vinyl-clad doors;
administration
Forte
Youngstown, Ohio.................. 156,000 Owned Aluminum windows and security windows,
screens and doors; administration
Western
Phoenix, Arizona.................. 46,600 Leased Custom aluminum windows and doors
Corporate Headquarters
Boardman, Ohio.................... 6,400 Leased Executive offices; administration
Thermetic
Toluca, Illinois.................. 70,000 Owned Vinyl doors and windows
Danvid
Carrollton, Texas................. 169,000 Leased Aluminum windows and doors; vinyl
windows
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
SIZE OWNED/
LOCATION (SQUARE FEET) LEASED PRODUCTS MANUFACTURED/SERVICES PERFORMED
-------- ------------- ------ ----------------------------------------
<S> <C> <C> <C>
Binnings
Lexington, North Carolina......... 268,000 Owned Vinyl windows, aluminum windows and
storm windows and doors; administration
Binnings
Aventura, Florida................. 158,000 Owned Aluminum windows and aluminum patio
doors; distribution
American Glassmith
Columbus, Ohio.................... 60,000 Leased Decorative glass lites and laminated
glass products; administration
VinylSource
Austintown, Ohio.................. 163,000 Leased Vinyl window and door profiles; vinyl
extrusions
-------------
Total........................... 1,627,000
=============
</TABLE>
The Company also operates eight distribution centers in Florida, one in
Colorado and one in Michigan. Management believes the Company's manufacturing,
distribution and administrative facilities are sufficient to meet its current
needs.
MANUFACTURING
Wood, aluminum, steel, polyvinyl chloride and glass are the primary raw
materials used in the Company's manufacturing process. These raw materials are
readily available and may be procured from numerous suppliers. The Company
believes there are currently sufficient alternative sources of raw materials to
support its foreseeable manufacturing needs. The Company generally manufactures
products to fill specific purchase orders, and the purchase of raw materials is
usually closely linked to specific purchase orders. The Company is generally
able to reduce its exposure to raw material price increases through purchasing
controls, long-term purchase contracts and its ability to pass on price
increases to its customers. See "Risk Factors -- Fluctuations in Raw Material
Costs and Supply; Reliance on Manufacturing Facilities and Suppliers."
The Company manufactures and distributes a broad line of aluminum, vinyl
and wood windows and doors. In the aluminum window fabrication process,
extrusions are cut to size and notched and mechanically fastened to form frames,
comprised of sills and jambs, and sashes, comprised of center bars, lock rails,
lift rails and sash rails. Raw glass, purchased cut-to-size or sized in-house,
is insulated and finished. Prepared glass and component parts are assembled by
product type and transferred to a staged shipping area. In the vinyl fabrication
process, vinyl frame extrusions are cut, notched and welded. The frame is then
placed on assembly lines on which insulated glass and sashes are installed. In
the fabrication of wood window and door products, pre-cut, precision-milled wood
components are glued and screwed together, sanded and affixed with appropriate
hardware. These units are then glazed and packaged for final shipment.
The Company acts primarily as a designer, manufacturer, and finisher of its
end products. Except for custom molding the wood components of its windows and
doors, manufacturing decorative glass lites and extruding aluminum and vinyl,
the Company does not generally manufacture the component parts used in the
manufacture of its products. Although the Company extrudes aluminum at its
Binnings facility and vinyl at its VinylSource facility, it also purchases
extruded aluminum and vinyl from third-party suppliers. The outsourcing of
select component parts manufacturing allows the Company to focus on designing
and assembling high quality products for their target consumers. In addition,
the Company has consolidated the operations of Modern into Forte and Thermetic,
which is expected to result in increased production efficiency and cost savings.
COMPETITION
The fenestration products industry traditionally has been highly fragmented
and competitive. As recently as 1995, the 100 largest fenestration companies in
the aggregate comprised less than 50% of total industry
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<PAGE> 43
sales, and management estimates that the single largest fenestration company
currently has annual revenues of less than 6% of total industry sales. The
Company believes that it competes with other fenestration product manufacturers
primarily on the basis of the breadth of its product lines, the reliability and
speed of its services, and the quality, design and cost of its products. The
Company's main competitors include such firms as Andersen Corporation, Jeld-Wen
Inc. and Pella Corporation that manufacture products which compete with some of
the Company's product lines on a nationwide basis, as well as other firms that
manufacture a more limited array of products or distribute their products on a
regional or local level only. As consolidation in the fenestration industry
continues, competition on a nationwide basis is also likely to increase. In
addition, any decreases in total market demand for residential fenestration
products would be likely to result in increased industry competition.
BACKLOG
The Company has no material long-term customer supply contracts. The
Company's products are ordinarily manufactured to fill specific purchase orders,
and orders are generally filled within 60 days of submission of the purchase
order. Accordingly, the Company typically does not maintain significant backlog.
INTELLECTUAL PROPERTY
As of the date of this Prospectus, the Company owns 22 domestic patents and
4 foreign patents. Additionally, the Company owns 35 domestic trademark
registrations, 6 foreign trademark registrations, 9 domestic trademark
applications and 3 foreign trademark applications. The patents are of design,
manufacturing, and process types and the trademark protection applies to entity
name protection, as well as to product names. There can be no assurance that
other parties will not independently duplicate or develop similar technologies
or design around patented aspects of the Company's technologies, or that any of
the Company's patents, trademarks or pending applications will afford the
Company meaningful protection against competitors. Litigation may also be
necessary to enforce the Company's intellectual property rights or to determine
the scope and validity of others' proprietary rights, which could result in
substantial costs to the Company. The failure of the Company to protect its
proprietary information could have a material adverse effect on the Company's
business.
GOVERNMENTAL REGULATION AND INDUSTRY STANDARDS
The Company is subject to federal and state laws and regulations governing
the emission of particulate matter and the use, storage, handling and disposal
of certain paints, solvents and other chemicals used in the production of vinyl
cladding and adhesion. Although the Company believes that its activities comply
with the current standards prescribed by law, the risk of accidental
contamination to the environment or injury cannot be eliminated. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability could exceed the available resources of the Company. In
addition, each of the Company's production facilities is subject to regulation
by a number of governmental authorities, including regulations relating to
occupational health and safety, as well as federal and state laws governing such
matters as overtime and minimum wages. The Company believes that its operations
comply in all material respects with all applicable regulatory requirements.
However, any failure to comply with applicable regulations, or the adoption of
new regulations or changes in existing regulations, could impose additional
compliance costs on the Company, require a cessation of certain activities or
otherwise have a material adverse impact on the Company's business and results
of operations.
The Company also adheres to voluntary fenestration industry performance
guidelines established by the NWWDA and the American Architectural
Manufacturers' Association which, in turn, are used by the architectural
community for establishing window and door performance standards for both
residential and non-residential applications. Both of these organizations
establish threshold performance criteria, which qualify products for specific
levels of performance in the categories of water penetration, air infiltration,
and structural window and door integrity. Although the Company has historically
used commercial facilities to carry out product testing, the Company has
established a testing facility in its Youngstown, Ohio facility that is now
performing a significant number of these tests.
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<PAGE> 44
EMPLOYEES
As of March 31, 1998, the Company employed approximately 2,100 persons. Of
these, approximately 1,600 are hourly and approximately 500 are salaried.
Approximately 150 of the Company's current employees are covered by collective
bargaining agreements that expire in March 2000 and February 2002. The Company
believes that its relations with its employees are good. There can be no
assurance, however, that the Company will not experience work stoppages or
slowdowns in the future. In addition, there can be no assurance that the
Company's non-union facilities will not become subject to labor union
organizational efforts or that labor costs will not materially increase.
LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of its business, none of which, after giving effect to the
Company's existing insurance coverage, is expected to have a material adverse
effect on the Company.
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<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages (as of May 1, 1998) and
positions of directors and executive officers of the Company. The Board of
Directors of the Company currently consists of nine (9) members. Directors hold
office until their successors have been duly elected and qualified. Officers are
chosen by and serve at the discretion of the Board of Directors. A summary of
the background and experience of each of these individuals is set forth after
the table.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George S. Hofmeister 46 Chairman of the Board
Frank J. Amedia 45 President, Chief Executive Officer and Director
Joseph Dominijanni 41 Director and Treasurer
Richard L. Kovach 36 Vice President and Chief Financial Officer
David J. McKelvey 46 Vice President -- Development
Jeffrey V. Miller 51 Vice President -- Operations
Donald E. Lambrix, Jr. 56 Vice President -- Manufacturing
J. Larry Powell 55 Vice President -- Sales & Marketing
Jonathan K. Schoenike 37 General Counsel & Secretary
John J. Cafaro 46 Director
W.R. Jackson, Jr. 65 Director
Joseph C. Lawyer 52 Director
John Masternick 72 Director
Lawrence J. O'Dowd 60 Director
Charles E. Trebilcock 71 Director
</TABLE>
George S. Hofmeister has served as the Chairman of the Board since December
19, 1996. Mr. Hofmeister has served as Chief Executive Officer and Chairman of
the Board of American Commercial Holdings, Inc. ("ACH"), the parent company of
AAPH, since January 1996 and continues to serve in such roles. Mr. Hofmeister
also continues to serve as Vice Chairman of AP Automotive, Inc., a manufacturer
of automobile exhaust systems. Mr. Hofmeister has held that position since
February 14, 1996. From June 1, 1991 until December 15, 1995, Mr. Hofmeister
served as Chief Executive Officer and Chairman of the Board of EWI, Inc., a
manufacturer of automotive metal stampings.
Frank J. Amedia joined the Company's Board of Directors on June 8, 1994
following the acquisition of Forte, Inc. by the Company, and has served as its
President and Chief Executive Officer since that date. From June 8, 1994 until
December 19, 1996, Mr. Amedia also served as the Chairman of the Board of
Directors of the Company. Prior to joining the Company, Mr. Amedia was President
and Chief Executive Officer of Forte, which he founded in 1989 in Youngstown,
Ohio as a welded aluminum security screen and storm door fabricator and which he
expanded through various acquisitions. Forte's products were distributed through
a manufacturers' representative distribution business established by Mr. Amedia
in 1986. Prior to founding the manufacturers' representative business, Mr.
Amedia served in various capacities for the Youngstown Metropolitan Housing
Authority.
Joseph Dominijanni has served as the Company's Treasurer and a Director
since December 19, 1996. Mr. Dominijanni has also served as the Vice
President -- Finance of ETC since its inception. Mr. Dominijanni also currently
serves as Vice President -- Finance of ACH, the parent corporation of AAPH, and
American Commercial Industries, Inc., ("ACI"), a subsidiary of ACH that is
principally engaged in the manufacturing of automotive components. Mr.
Dominijanni joined ACH and ACI in May 1996. Mr. Dominijanni served as Vice
President -- Finance of EWI, Inc. a manufacturer of automotive metal stampings,
from June 1990 until April 1996. Prior to 1990, Mr. Dominijanni was a Senior
Manager with the accounting firm of Price Waterhouse.
44
<PAGE> 46
Richard L. Kovach joined the Company in January 1997 as its Vice President
and Chief Financial Officer. From 1991 until joining the Company, Mr. Kovach
assisted clients with finance and operations management issues in the Financial
Advisory Services and Management Consulting practice of Ernst & Young. From 1988
until 1991, Mr. Kovach was Manager of Financial Planning at Ferro Corporation.
Prior to joining Ferro Corporation, Mr. Kovach was with Arthur Andersen & Co.'s
Small Business Group.
David J. McKelvey joined the Company as Vice President in August 1995 and
also served as Secretary from December 1996 through November 1997. Prior to
joining the Company, Mr. McKelvey was Executive Vice President of Administration
and Development for The Cafaro Company, a major domestic shopping mall developer
engaged in the ownership, operation and management of enclosed regional shopping
centers. From 1992 through 1995, Mr. McKelvey also served as Executive Regional
Director of Real Estate for The Cafaro Company.
Jeffrey V. Miller joined the Company in May 1997 as Vice
President -- Operations. From 1995 to 1997, Mr. Miller served as President of
the North American Window Division of Gentek Building Products. From 1992
through 1994, Mr. Miller was Director of Vinyl Operations for SNE Corporation, a
division of Ply Gem Industries. Mr. Miller was general manager of the New
Construction Window Division and Vice President of Technology and Corporate
Development for Chelsea Building Products from 1989 to 1992.
Donald E. Lambrix, Jr. became the Company's Vice President -- Manufacturing
in December 1996 after serving as Vice President of Operations for the Company's
Forte subsidiary since 1990. Mr. Lambrix previously served as Vice President of
a multiple facility fenestration products manufacturer. Mr. Lambrix has received
industry recognition for his development of state-of-the-art welding, testing
and certification procedures.
J. Larry Powell, the Company's Vice President -- Marketing and Sales,
joined the Company in October 1996. Mr. Powell co-founded Blackhawk, a
manufacturer of steel security screens and screen doors, in 1992 and served on
its Board of Directors and as its Vice President until 1996. From 1987 to 1991,
Mr. Powell served as Vice President -- Marketing and Sales for Sugarcreek Window
& Door. Mr. Powell has been employed in the fenestration industry since the
early 1970s, principally in the marketing of residential and commercial steel
and aluminum window products and doors. In addition, Mr. Powell founded and
developed a nationwide marketing representative group that sells a full range of
fenestration products.
Jonathan K. Schoenike joined the Company in August 1997 as General Counsel
and has served as Secretary since November 1997. Prior to joining the Company,
Mr. Schoenike served for over 5 years as Assistant Counsel for The Cafaro
Company, a major domestic shopping mall developer engaged in the ownership,
operation and management of enclosed regional shopping centers.
John J. Cafaro joined the Board of Directors in December 1996. Mr. Cafaro
also serves as the Executive Vice President of The Cafaro Company, a major
domestic shopping mall developer engaged in the ownership, operation and
management of enclosed regional shopping centers. Mr. Cafaro has been a
principal officer of The Cafaro Company for the past 20 years.
William R. Jackson, Jr. has served as a director of the Company since
December 19, 1996. Mr. Jackson has also served since 1982 on the Board of
Directors of Pitt-Des Moines, Inc., a steel construction, engineering and metal
products manufacturer. Mr. Jackson was also President and Treasurer of Pitt-Des
Moines, Inc. from 1983-87.
Joseph C. Lawyer has been a member of the Board of Directors since April
30, 1998. Mr. Lawyer has served as President, Chief Executive Officer and
Director of Chatwins Group, Inc., a manufacturer of a broad range of fabricated
and machined industrial parts and products, since 1988. Prior thereto, Mr.
Lawyer served as General Manager of the Specialty Steel Products Division of USX
Corporation, where he was employed for over 17 years. Mr. Lawyer has been a
director of Respironics, Inc., a company engaged in the design, manufacture and
sale of home and hospital respiratory medical products, since November 1994.
John Masternick has been a director of the Company since June 14, 1994. Mr.
Masternick is a practicing attorney in Girard, Ohio, and is the Chairman of the
Board of Directors of Omni Manor, Inc. and Windsor
45
<PAGE> 47
House, Inc., owners and operators of skilled nursing and extended care
facilities in northeastern Ohio and western Pennsylvania.
Lawrence J. O'Dowd has been a member of the Company's Board of Directors
since April 30, 1998. Mr. O'Dowd has served as Chairman of ACI since March 1998.
Mr. O'Dowd has also held the office of Chief Executive Officer of ACI since May
1996, and from July 1995 to March 1998 he served as ACI's President. Mr. O'Dowd
was employed by the Specialty Stampings Division of MascoTech, Inc.'s automotive
group from April 1979 to July 1995 as Vice President and General Manager.
Charles E. Trebilcock has been a director of the Company since June 14,
1994. Since 1964, Mr. Trebilcock has served as Chairman of Liberty Industries,
Inc., an Ohio-based manufacturer of industrial lumber packaging products and
equipment. Mr. Trebilcock is also a partner in Kings Company, which is also a
manufacturer of industrial lumber packaging products and equipment.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued to the Company's Chief Executive Officer and the other most highly
compensated executive officers of the Company whose total annual salary and
bonus exceeded $100,000 (collectively, the "Named Executive Officers") for the
years ending December 31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND --------------------------- OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1)
- ------------------------------------------------ ---- --------- -------- ------------------
<S> <C> <C> <C> <C>
Frank J. Amedia 1997 266,807 250,000 --
President and Chief Executive Officer 1996 168,718 -- --
1995 193,000 -- --
Richard L. Kovach 1997 119,390 75,000 --
Vice President and Chief Financial Officer
J. Larry Powell 1997 114,167 25,000 --
Vice President -- Marketing and Sales
Jeffrey V. Miller 1997 90,000 25,000 --
Vice President -- Operations
</TABLE>
- ---------------
(1) Other compensation to the Named Executive Officers did not exceed $50,000 or
10% of total annual salary and bonus during any fiscal year.
No stock options previously granted to the executive officers were subject
to repricing during the fiscal year ended December 31, 1997. The Company does
not have a long term incentive plan established for the benefit of its executive
officers or directors. In February 1998, the Board of Directors rescinded stock
options to purchase 209,000 and 100,000 shares of Common Stock with per share
exercise prices of $5.63 and $6.19, respectively. These stock options were
reissued in February 1998 at the following exercise prices: (i) options to
purchase 209,000 shares of Common Stock with an exercise price of $3.56 per
share; and (ii) options to purchase 100,000 shares of Common Stock with an
exercise price of $3.92 per share.
No stock options, stock appreciation rights or restricted stock awards were
granted as compensation to any officer, director or employee of the Company or
its subsidiaries during the fiscal years ended December 31, 1995 or 1996. The
Company entered into definitive stock option agreements with Mr. Amedia and Mr.
Masternick dated December 18, 1996, memorializing the terms of stock options
granted to them in 1994 as stockholders of Forte, Inc. in connection with the
acquisition by the Company of Forte, Inc. The Company issued options to purchase
up to 424,000 shares of Common Stock to various officers, directors and
employees of the Company or its subsidiaries during the fiscal year ended
December 31, 1997. The following table sets forth certain information concerning
individual grants of stock options to each of the Named Executive Officers
during the year ended December 31, 1997.
46
<PAGE> 48
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(1)
------------------------------------------------------------- -----------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR (PER SHARE)(1) DATE 5% 10%
---- ------------ ---------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Frank J. Amedia...... 100,000 25% $6.19 2/27/02 $99,000 $287,000
Richard L. Kovach.... 25,000 6% $5.63 2/27/07 $88,250 $224,000
J. Larry Powell...... 25,000 6% $5.63 2/27/07 $88,250 $224,000
Jeffrey V. Miller.... 0 N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(1) Does not give effect to the cancellation and reissuance of these stock
options in February 1998 at exercise prices of $3.92 per share (for the
options previously priced at $6.19 per share) and $3.56 per share (for the
options previously priced at $5.63 per share).
The following table sets forth certain information concerning each exercise
of stock options during the year ended December 31, 1997 by each of the Named
Executive Officers and the aggregated fiscal year-end value of the unexercised
options of each Named Executive Officer.
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND OPTION VALUE AS OF DECEMBER 31,
1997
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
NUMBER OF OPTIONS/SARS AT FISCAL YEAR MONEY OPTIONS/SARS AT
SHARES END FISCAL YEAR END (1)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Frank J. Amedia........ 0 $0 426,244 100,000 $0 $0
Richard L. Kovach...... 0 $0 0 25,000 $0 $0
J. Larry Powell........ 0 $0 0 25,000 $0 $0
Jeffrey V. Miller...... 0 $0 0 0 $0 $0
</TABLE>
- ---------------
(1) Based on the average of reported bid and asked prices for the Common Stock
on December 31, 1997. Does not give effect to the cancellation and
reissuance of the 150,000 unexercisable stock options in February 1998 as
described in footnote (1) to the previous table.
EMPLOYMENT AGREEMENT
On November 17, 1997, the Company entered into an employment agreement with
Frank J. Amedia for services as Chief Executive Officer and President. This
agreement requires Mr. Amedia to devote his full time to the Company during
normal business hours in exchange for a base annual salary of $350,000, subject
to annual increases at the discretion of the Board of Directors. In addition,
Mr. Amedia is entitled to receive bonuses at the discretion of the Board of
Directors in accordance with the Company's bonus plans in effect from time to
time, and the Company will pay certain life and disability insurance premiums on
behalf of Mr. Amedia. The agreement has an initial three-year term and provides
that Mr. Amedia may not compete with the Company anywhere in the United States
while he is employed by the Company and for a two-year period following the
termination of Mr. Amedia's employment. In addition, the Board of Directors has
approved the payment to Mr. Amedia of a cash bonus equal to 0.39% of the total
consideration paid by the Company for each acquisition transaction consummated
during 1998.
EMPLOYEE STOCK OPTION PLANS
1992 Incentive Stock Option Plan. In May of 1992, the Board of Directors
of the Company adopted an Employee Incentive Stock Option Plan (the "Option
Plan"). Options to purchase an aggregate of up to
47
<PAGE> 49
500,000 shares of the Company's Common Stock are authorized under the Option
Plan. Options granted under the Option Plan have a maximum duration of ten (10)
years from the date of grant.
1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "1996
Plan"), which was approved by the stockholders of the Company, authorizes the
Board to grant options to directors and employees of the Company to purchase in
the aggregate an amount of shares of Common Stock equal to 10% of the shares of
Common Stock issued and outstanding from time to time, but which aggregate
amount shall in no event exceed 10,000,000 shares of Common Stock. Directors,
officers and other employees of the Company who, in the opinion of the Board of
Directors, are responsible for the continued growth and development and the
financial success of the Company are eligible to be granted options under the
1996 Plan. Options may be nonqualified options, incentive stock options, or any
combination of the foregoing. In general, options granted under the 1996 Plan
are not transferable and expire ten (10) years after the date of grant. The per
share exercise price of an incentive stock option granted under the 1996 Plan
may not be less than the fair market value of the Common Stock on the date of
grant. Incentive stock options granted to persons who have voting control over
10% or more of the Company's capital stock are granted at 110% of the fair
market value of the underlying shares on the date of grant and expire five (5)
years after the date of grant. No option may be granted after December 19, 2006.
The 1996 Plan provides the Board of Directors with the discretion to
determine when options granted thereunder will become exercisable. Generally,
such options may be exercised after a period of time specified by the Board of
Directors at any time prior to expiration, so long as the optionee remains
employed by the Company. No option granted under the 1996 Plan is transferable
by the optionee other than by will or the laws of descent and distribution, and
each option is exercisable during the lifetime of the optionee only by the
optionee.
As of May 1, 1998, options to purchase a total of 2,391,925 shares of the
Common Stock were outstanding, including options to purchase 707,655 shares of
Common Stock at an exercise price of $3.75 per share issued to AAPH on December
18, 1996, options to purchase an aggregate of 471,770 shares of Common Stock at
an exercise price of $3.75 per share issued to Mr. Amedia and Mr. Masternick in
connection with the acquisition of Forte, Inc. in June 1994, options issued
pursuant to the Company's stock option plans described above and other options
issued outside of the described stock option plans.
EMPLOYEE STOCK PURCHASE PLAN
On February 26, 1998, the Board of Directors adopted the 1998 Employee
Stock Purchase Plan (the "1998 Purchase Plan") and reserved 1,200,000 shares of
Common Stock for issuance thereunder. The Company's stockholders approved the
adoption of the 1998 Purchase Plan on April 30, 1998. In general, the 1998
Purchase Plan is designed to encourage Common Stock ownership by the Company's
employees, to provide an employee benefit, and to raise capital for the Company.
If qualified in accordance with Section 423 of the Internal Revenue Code of
1986, as amended (the "Code"), the 1998 Purchase Plan enables the Company to
sell shares of Common Stock to its employees at a price discount of up to 15% of
market price and provides favorable tax treatment to employee participants. The
discount is applied to the lower of the price of the Common Stock at the
beginning or end of the option period, so the actual price benefit can be
greater than 15%. The discount makes the Company's stock more attractive to
employees, thereby encouraging equity ownership by employees. In addition, the
1998 Purchase Plan provides an additional source of capital for the Company.
Shares of Common Stock purchased by employees pursuant to the 1998 Purchase Plan
may be subject to certain holding period requirements in order for the purchaser
to qualify for favorable tax treatment under the Code.
401(K) PLAN
Eligible employees of the Company may direct that a portion of their
compensation, up to a legally established maximum, be withheld by the Company
and contributed to a 401(k) plan. All 401(k) plan contributions are placed in a
trust fund to be invested by the 401(k) plan's trustee, except that the 401(k)
plan permits participants to direct the investment of their account balances
among mutual or investment funds available under the plan. The 401(k) plan
provides a matching contribution of 50% of a participant's
48
<PAGE> 50
contributions up to a maximum of seven percent of the participant's annual
salary. Amounts contributed to participant accounts under the 401(k) plan and
any earnings or interest accrued on the participant accounts are generally not
subject to federal income tax until distributed to the participant and may not
be withdrawn until death, retirement or termination of employment.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Audit Committee, which is comprised of William R. Jackson,
Jr., Charles E. Trebilcock and Joseph Dominijanni, is responsible for reviewing
and making recommendations regarding the Company's employment of independent
auditors, the annual audit of the Company's financial statements and the
Company's internal accounting controls, practices and policies. The Audit
Committee was established on August 28, 1997 and did not meet during 1997.
The Company's Compensation Committee was established on August 28, 1997 and
met one time during 1997. The Company's Compensation Committee is responsible
for making recommendations to the Board of Directors regarding compensation
arrangements for executive officers of the Company, including annual bonus
compensation, and consults with management of the Company regarding compensation
policies and practices. The Compensation Committee also makes recommendations
concerning the adoption of any compensation plans in which management is
eligible to participate, including the granting of stock options and other
benefits under such plans. The Compensation Committee is comprised of George S.
Hofmeister, Frank J. Amedia, and John Masternick.
DIRECTORS' TERMS AND COMPENSATION
The Company's Board of Directors is currently comprised of nine (9)
members. Each director is elected for a period of one year at the Company's
annual meeting of stockholders and serves until his or her successor is duly
elected and qualified. During the fiscal year ended December 31, 1997, the Board
of Directors of the Company met ten times. All other actions taken by the Board
of Directors during the fiscal year ended December 31, 1997 were accomplished by
means of unanimous written consent. Messrs. Cafaro, Jackson and Masternick
attended fewer than 75% of the meetings of the Board of Directors. During the
period in which they served as directors, all other directors attended 75% or
more of the meetings of the Board of Directors and of the meetings held by
committees of the Board, if any, on which they served.
During the fiscal year ended December 31, 1997, members of the Board of
Directors who were not employees of the Company or of ACH or its affiliates
("non-employee directors") received a fee of $1,000 for each meeting of the
Board of Directors attended in person and were reimbursed for expenses incurred
in connection with their attendance at meetings of the Board. Each non-employee
director serving on December 31, 1997 who attended at least four (4) of the
regularly scheduled meetings of the Board of Directors and at least 75% of all
meetings of the Board of Directors during 1997 was granted options to purchase
2,000 shares of Common Stock at an exercise price equal to the average of the
reported closing bid and asked prices on the date of grant, vesting in full upon
issuance. Such options are exercisable for a period of five (5) years following
the vesting date and were issued pursuant to the Company's 1996 Stock Option
Plan. For the fiscal year ending December 31, 1998, each non-employee director
of the Company will receive the same compensation as described above.
49
<PAGE> 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. George S. Hofmeister, Chairman of the Board of Directors of the
Company, is the controlling shareholder of the corporate parent of AAPH. In
connection with the Agreement and Plan of Reorganization between the Company and
AAPH dated October 25, 1996 (the "Reorganization Agreement"), the Company and
ETC agreed to use their best efforts to secure the release of Messrs. Amedia,
Masternick and Hofmeister from all obligations as either a co-obligor or
guarantor of Company or ETC debt. In addition, the Company agreed to indemnify,
defend and hold harmless Messrs. Amedia, Masternick and Hofmeister against any
loss, cost or expense which any of them may incur as a result of being a
co-obligor or guarantor of any Company or ETC debt. Furthermore, the Company and
AAPH agreed not to dispose of assets securing any Company or ETC debt without
the prior written consent of any person who is a co-obligor or guarantor of such
debt. As described below, Messrs. Amedia, Hofmeister and Masternick have
subsequently been released as guarantors on these obligations.
Pursuant to the Reorganization Agreement, the Company issued 1,000,000
shares of Series A Preferred Stock in exchange for all of the issued and
outstanding stock of ETC. In April 1997, AAPH converted the Series A Preferred
Stock pursuant to its terms into 7,548,633 shares of Common Stock. In addition,
the Company issued to AAPH options to purchase up to 879,834 shares of Common
Stock, of which options to purchase 172,179 shares have subsequently terminated.
Such options are identical in price and exercise terms to the previously
outstanding options and are exercisable only if and to the extent that such
previously outstanding options are exercised.
Upon consummation of the transaction contemplated by the Reorganization
Agreement, the Company agreed that AAP would pay a management fee to AAPH of
$250,000 during 1997 and to reimburse AAPH and its affiliates for out-of-pocket
expenses incurred in providing services to AAP. The management fee agreement
expired on December 31, 1997. In addition, the Company agreed to pay AAPH an
acquisition consulting fee of one percent (1%) of the transaction price of each
acquisition transaction consummated by the Company with respect to which AAPH or
its affiliates provide acquisition consulting services. For purposes of
calculating the acquisition fee, the transaction price means the aggregate
amount of consideration paid by the Company or its affiliates for the
acquisition in the form of cash, stock, stock options, warrants, debt
instruments and other assumed liabilities. The original acquisition consulting
fee agreement was scheduled to expire on December 18, 1997, except with respect
to acquisition transactions already in progress at such date, but was extended
for one year. Acquisition consulting fees in 1997 approximated $835,000. In
addition, the Company paid ACH fees of $96,000 for other transaction services
provided in 1997.
In connection with the acquisition by the Company of Binnings, Danvid,
American Glassmith and Modern in December of 1997, the Company (i) agreed to pay
ACH, the corporate parent of AAPH, a fee of $475,000 for services provided by
officers and employees of ACH in connection with such transactions, and (ii)
paid various officers of the Company (including Mr. Amedia) special bonuses in
an aggregate amount of $430,000 in connection with such transactions. Both the
success fee and special bonuses were contingent upon the successful consummation
of such acquisition transactions and were paid prior to December 31, 1997. The
success fee paid to ACH was in addition to amounts payable under the acquisition
consulting fee agreement described above.
The Company contracts for air charter services with a company affiliated
with AAPH. The Company paid approximately $450,000 to this company for air
charter services in 1997.
In November 1990, the U.S. Small Business Administration loaned $409,000 to
Forte, Inc. (the "SBA Loan"). The SBA Loan was payable in monthly installments
and the final installment was scheduled to be due on January 1, 2001. Mr. Amedia
and his wife were personally liable on the SBA Loan. As of December 31, 1997,
the balance owed on the SBA Loan was approximately $172,000. The Company repaid
this loan in January 1998.
On October 20, 1994, Forte borrowed $850,000 from The City of Youngstown,
Ohio. The final payment on this loan was scheduled to be due on February 1,
2004. Mr. Amedia and his wife were guarantors of this loan. As of September 30,
1997, the balance owed to The City of Youngstown under the loan agreement was
approximately $850,000. The Company repaid this loan on December 10, 1997.
50
<PAGE> 52
In December 1994, Mr. Amedia and Mr. Masternick and their spouses executed
guarantees in favor of the Second National Bank of Warren with respect to a loan
to Forte in the original principal amount of $647,030. The proceeds of this loan
were used to finance improvements to Forte's manufacturing facilities. This loan
was scheduled to be repaid in full by December 12, 2004. As of September 30,
1997, the balance owed on this loan was approximately $522,000. The Company
repaid this loan on December 10, 1997.
As security for certain promissory notes dated August 29, 1996 in the
original aggregate principal amount of $8.0 million (the "MascoTech Notes"),
AAPH granted MascoTech, Inc. ("MascoTech") a ten-year option to purchase up to
1,509,728 shares of Common Stock held by AAPH. As part of the Reorganization
Agreement, AAPH and the Company agreed that if the MascoTech Notes were not
repaid in full on or before December 31, 1997 and MascoTech exercised its option
with respect to any of such shares of Common Stock, the Company would issue to
AAPH, without payment therefor, a number of additional shares of Common Stock
equal to the number of shares as to which such option is exercised by MascoTech.
The Company also agreed to use its best efforts to cause all amounts owed under
the MascoTech Notes to be repaid in full on or before December 31, 1997. The
Company repaid the MascoTech Notes in full on December 10, 1997.
In connection with the acquisition of Western in March 1997, Mr. Amedia and
Mr. Hofmeister co-signed unsecured promissory notes in the aggregate original
principal amount of $453,753 payable to the former shareholders of Western and
the organization that brokered the acquisition. The final monthly installment
payment on each note was due March 15, 1998. As of September 30, 1997, the
outstanding balance on these notes was $453,753. In addition, Mr. Amedia
co-signed a promissory note to one of the former shareholders of Western in the
original principal amount of $100,000. The amount outstanding under this Note
was approximately $100,000 as of September 30, 1997. The Company repaid these
loans on December 10, 1997.
Profile Extrusion Company ("PEC") loaned the Company $92,537 on May 19,
1997 and an additional $5,203 on September 28, 1997. This combined indebtedness
had an interest rate of 15% per annum and was payable in full on or before
December 31, 1997. In connection therewith, the Company issued to PEC warrants
to purchase a total of 27,926 shares of Common Stock at an exercise price of
$3.50 per share, expiring on September 1, 1998. The Company repaid this loan on
December 10, 1997. PEC is a wholly-owned subsidiary of American Commercial
Holdings, Inc., of which Mr. Hofmeister is the controlling shareholder.
In June 1997, Mr. Amedia pledged 133,333 shares of Common Stock to secure
the repayment of a short-term debt incurred by the Company in the original
principal amount of $250,000. The Company agreed to issue shares of Common Stock
to Mr. Amedia to replace any shares as to which the lender exercises its
security interest. The Company repaid this loan on December 10, 1997.
In September 1997, William R. Jackson, Jr., a director of the Company,
loaned the Company $200,000. This indebtedness had an interest rate of 15% per
annum and was payable in full in December 1997. In connection therewith, the
Company issued to Mr. Jackson warrants to purchase a total of 57,143 shares of
Common Stock at an exercise price of $3.50 per share, expiring in September
1998. The Company repaid this loan on December 10, 1997.
In January 1998, the Company purchased substantially all of the assets of
Blackhawk. J. Larry Powell, an officer of the Company, co-founded and owned a
20% equity interest in Blackhawk at the time of this transaction.
In March 1998, the Company sold the Mallyclad division of ETC to an
affiliate of ACH for cash proceeds of $1.2 million.
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<PAGE> 53
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of February 5, 1998,
concerning the beneficial ownership of Common Stock by (i) each beneficial owner
of more than 5% of the Company's Common Stock, (ii) each director and the Named
Executive Officers of the Company, and (iii) all directors and executive
officers of the Company as a group. To the knowledge of the Company, all persons
listed below have sole voting and investment power with respect to their shares,
except to the extent that authority is shared by their respective spouses under
applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
-------------------------- NUMBER OF ----------------------
NUMBER OF SHARES BEING NUMBER
NAME AND ADDRESS(1) SHARES PERCENTAGE OFFERED OF SHARES PERCENTAGE
------------------- ----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
George S. Hofmeister(2)............... 7,579,059 56.2%
Frank J. Amedia(3).................... 3,379,326 24.3%
John Masternick(4).................... 371,680 2.8%
W.R. Jackson, Jr. (5)................. 73,287 *
Charles E. Trebilcock(6).............. 52,833 *
J. Larry Powell(7).................... 15,412 *
Richard L. Kovach(8).................. 5,000 *
Joseph Dominijanni(9)................. 27,000 *
AAP Holdings, Inc. (10)............... 7,548,633 56.1%
Amedia Family Limited Partnership..... 1,500,000 11.1%
All directors and executive officers
of the Company as a group (10
persons) (11)....................... 11,513,597 81.9%
</TABLE>
- ---------------
* Less than 1%
(1) The address of each beneficial owner is c/o American Architectural Products
Corporation, 755 Boardman-Canfield Road, South Bridge Executive Center,
Building G West, Boardman, Ohio 44512.
(2) Includes shares of Common Stock held by AAPH and 27,926 shares of Common
Stock which are subject to unexercised warrants held by Profile Extrusion
Company. George S. Hofmeister, the Chairman of the Board of Directors of
the Company, is the controlling shareholder of the corporate parent of AAP
Holdings, Inc and Profile Extrusion Company.
(3) Includes 426,244 shares of Common Stock which are subject to unexercised
options that were exercisable on February 5, 1998 or within sixty days
thereafter. Also includes 1,500,000 shares of Common Stock owned by the
Amedia Family Limited Partnership, in which Mr. Amedia and his spouse are
the general partners and each holds 48% of the partnership interests.
(4) Includes 47,526 shares of Common Stock which are subject to unexercised
options that were exercisable on February 5, 1998 or within sixty days
thereafter.
(5) Includes 57,143 shares of Common Stock which are subject to unexercised
warrants that were exercisable on February 5, 1998 or within sixty days
thereafter.
(6) Includes 25,833 shares of Common Stock owned individually and 25,000 shares
held by a custodian for the benefit of an individual retirement account of
Mr. Trebilcock. Also includes 2,000 shares of Common Stock which are
subject to unexercised options that were exercisable on February 5, 1998 or
within sixty days thereafter.
(7) Includes 5,000 shares of Common Stock which are subject to unexercised
options that were exercisable on February 5, 1998 or within sixty days
thereafter.
(8) Includes 5,000 shares of Common Stock which are subject to unexercised
options that were exercisable on February 5, 1998 or within sixty days
thereafter.
(9) Includes 25,000 shares of Common Stock which are subject to unexercised
options that were exercisable on February 5, 1998 or within sixty days
thereafter.
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<PAGE> 54
(10) Does not include 707,655 shares of Common Stock which are subject to
unexercised options that are exercisable only upon the occurrence of
certain contingencies.
(11) Includes 605,839 shares of Common Stock which are subject to unexercised
options and warrants that were exercisable on February 5, 1998 or within
sixty days thereafter as described above.
The Selling Stockholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to an aggregate of additional shares of Common Stock at
the public offering price, less the underwriting discount, as set forth on the
cover page of this Prospectus. The Underwriters may exercise such option only to
cover over-allotments in the sale of the Common Stock that the Underwriters have
agreed to purchase. The Company will not receive any proceeds from the sale of
the Common Stock by the Selling Stockholders.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is a Delaware corporation and its affairs are governed by its
Certificate of Incorporation and Bylaws and by the Delaware General Corporation
Law. The following description of the Company's capital stock is qualified in
its entirety by reference to the provisions of the Company's Certificate of
Incorporation and Bylaws. The authorized capital stock of the Company consists
of 100,000,000 shares of Common Stock, par value $.001 per share, and 20,000,000
shares of Preferred Stock, par value $.001 per share. As of May 1, 1998, there
were 13,487,354 shares of Common Stock issued and outstanding, which were held
of record by 443 stockholders, and there were no shares of Preferred Stock
issued and outstanding. In addition, as of May 1, 1998, an aggregate of
2,476,994 shares of Common Stock have been reserved for issuance by the Company
upon exercise of currently outstanding stock options and common stock purchase
warrants.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and do not have cumulative voting rights.
Subject to the rights of holders of outstanding shares of Preferred Stock, if
any, the holders of Common Stock are entitled to share ratably in dividends, if
any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. In the event of the
liquidation, dissolution, or winding up of the Company, subject to the rights of
holders of outstanding Preferred Stock, if any, the holders of Common Stock are
entitled to share ratably in all assets available for distribution to the
stockholders after payment of the Company's liabilities. The Common Stock has no
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares. All of the
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors, without any vote or action of the stockholders, has
the authority to issue up to 20,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges, qualifications,
limitations and restrictions thereof, including dividend rights, conversion and
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series. The issuance of Preferred Stock may have the effect of delaying,
deterring or preventing a change in control of the Company. Further, the
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. The Company has no present plans to issue any shares
of Preferred Stock.
OTHER SECURITIES
Options and Warrants. As of May 1, 1998, the Company had issued options to
purchase an aggregate of 2,391,925 shares of Common Stock, with exercise prices
ranging from $2.50 to $5.63 per share and various expiration dates through April
30, 2008. See "Management -- Employee Stock Option Plans." In connection with a
September 1997 financing transaction, the Company issued warrants to purchase
57,143 shares of Common Stock at an exercise price of $3.50 per share, expiring
in September 1998. Furthermore, in connection with an additional series of
financing transactions, the Company issued warrants to purchase 27,926 shares of
Common Stock at an exercise price of $3.50 per share, expiring on September 1,
1998.
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<PAGE> 55
Finally, the Company is obligated to issue to the former stockholders of
Thermetic an amount of Common Stock with a market price of $1,000,000 on January
18, 1999. Each of the foregoing options and warrants provide, among other
things, for the adjustment of the price per share and number of shares issuable
upon exercise of such options or warrants upon a merger or consolidation of the
Company, reclassification of the Company's securities, or a stock split,
subdivision or combination of the Company's securities. No warrant holder or
optionee has any stockholder rights with respect to the shares issuable upon
exercise of the warrants or options held by such holder until such warrants or
options are exercised and the purchase price is paid for the shares.
Registration Rights. Pursuant to agreements by and among the Company and
certain holders of Common Stock (the "Holders"), the Holders may request that
the Company file a registration statement under the Securities Act and, upon
such request and subject to certain conditions, the Company generally will be
required to use its best efforts to effect any such registration. In addition,
if the Company proposes to register any of its securities, either for its own
account or for the account of other stockholders, the Company is required, with
certain exceptions, to notify the Holders and, subject to certain conditions and
limitations, to include in such registration all of the shares of Common Stock
requested to be included by the Holders. Various stockholders have demand and
"piggyback" registration rights with respect to a total of 7,548,633 shares of
Common Stock, and various holders of options and warrants have "piggyback"
registration rights with respect to a total of 150,000 shares of Common Stock
underlying such options and warrants. In addition, the former stockholders of
Thermetic have demand and "piggyback" registration rights with respect to
384,000 shares of Common Stock and an aggregate number of additional shares of
Common Stock issuable in January 1999 having a fair market value of $1,000,000
at that time.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer and Trust, Inc., 1825 Lawrence Street, #444,
Denver, Colorado 80202 (telephone (303) 234-5300) is the transfer agent and
registrar for the Common Stock.
DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date that
the person became an interested stockholder unless (with certain exceptions):
(i) before such person became an interested stockholder, the board of directors
of the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (ii) upon
consummation of the transactions that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business combination
is approved by the Board of Directors of the Company and authorized at a meeting
of stockholders by the affirmative vote of the holders of two-thirds of the
outstanding voting stock of the corporation not owned by the interested
stockholder. Generally, a "business combination" includes a merger, asset or
stock sale, or other transaction resulting in a financial benefit to the
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of a corporation's outstanding voting stock. This provision may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
General. Portions of the Company's Certificate of Incorporation and Bylaws
may make more difficult the acquisition of control of the Company by various
means, such as a tender offer, open market purchases not approved by the
Company's Board of Directors, a proxy contest or otherwise. One purpose of these
provisions is to discourage transactions that involve a change of control of the
Company. These provisions also encourage persons seeking to acquire control of
the Company to consult first with the Company's Board of Directors to negotiate
the terms of any proposed business combination or offer. The provisions are
designed to reduce the
54
<PAGE> 56
vulnerability of the Company to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares of the Company or
which is otherwise unfair to stockholders of the Company. Set forth below is a
description of such provisions of the Company's Certificate of Incorporation and
Bylaws. Such description is intended as a summary only and is qualified in its
entirety by reference to the Company's Certificate of Incorporation and Bylaws,
which are included as exhibits to the Registration Statement of which this
Prospectus forms a part.
Number of Directors and Amendment. The Bylaws provide that the number of
directors shall be not less than five nor more than fifteen until changed by the
Board of Directors, who have sole authority to determine the number of directors
serving on the Board. In addition, the Bylaws provide that such provision
establishing the number of directors may be amended by the approval of the Board
of Directors or by a vote of a majority of the stockholders of the Corporation.
Special Stockholder Meetings. The Certificate of Incorporation and Bylaws
provide that special meetings of the stockholders, for any purpose or purposes,
unless required by law, may be called only by the Chairman of the Board, the
President, the Chief Executive Officer or the Board of Directors and shall be
called by the Chairman of the Board, the President, the Chief Executive Officer
or the Secretary at the request in writing of stockholders owning not less than
10% of the entire voting stock of the corporation then issued and outstanding.
Such request shall state the purpose or purposes of the proposed meeting. Such
limitation on the right of stockholders to call a special meeting could make it
more difficult for stockholders to initiate action that is opposed by the Board
of Directors. Such action on the part of stockholders could include the removal
of an incumbent director, the election of a stockholder nominee as a director or
the implementation of a rule requiring stockholder ratification of specific
defensive strategies that have been adopted by the Board of Directors with
respect to unsolicited takeover bids. In addition, the limited ability of the
stockholders to call a special meeting of stockholders may make it more
difficult to change the existing Board of Directors and management.
Preferred Stock. Shares of Preferred Stock may be issued in one or more
series and the Board of Directors of the Company has the power to fix for each
such series such voting powers, full or limited, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as the Board of
Directors shall deem appropriate, without any further vote or action by the
stockholders of the Company. Preferred Stock could be issued by the Board of
Directors with voting and conversion rights that could adversely affect the
voting power of the holders of the Common Stock. In addition, because the terms
of the Preferred Stock may be fixed by the Board of Directors of the Company
without stockholder action, the Preferred Stock could be issued quickly with
terms calculated to defeat or delay a proposed takeover of the Company, or to
make the removal of the management of the Company more difficult. Under certain
circumstances, this would have the effect of decreasing the market price of the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Of the shares of Common Stock to be outstanding upon completion
of the Offering (assuming no exercise of the over-allotment option), 7,548,633
shares (the "AAPH Shares") are owned by AAPH, an affiliate of certain directors
and officers the Company, and 2,953,082 shares (the "Amedia Shares") are owned
by Frank J. Amedia, the Company's President and Chief Executive Officer. The
AAPH Shares and the Amedia Shares may currently be sold subject to the volume
limitations and other restrictions of Rule 144 promulgated under the Securities
Act. AAPH and Mr. Amedia have agreed, however, not to sell, transfer, assign,
pledge or otherwise dispose of their shares for a 180 day period from the
effective date of this Prospectus, without the prior written consent of McDonald
& Company Securities, Inc. In addition, the other directors and executive
officers of the Company, the Selling Stockholders and certain other stockholders
of the Company determined by McDonald & Company Securities, Inc. have also
agreed not to sell, transfer, assign, pledge or otherwise dispose of their
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for any shares of Common Stock for a 180 day period from the
effective date of this Prospectus, without the prior written consent of McDonald
& Company Securities, Inc., except in certain circumstances.
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<PAGE> 57
In general, under Rule 144, a person who has beneficially owned shares for
at least one year, including an "affiliate" as that term is defined in the
Securities Act, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of Common Stock (approximately shares upon completion of the
Offering) or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information, manner and notice of sale. In
addition, affiliates of the Company must still comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirements,
in order to sell shares of Common Stock which are not restricted securities.
Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale and who has beneficially
owned restricted securities for at least two years may resell such shares
without compliance with the foregoing requirements.
Upon completion of the Offering, there will be 2,391,925 shares of Common
Stock reserved for issuance upon exercise of outstanding options and 85,069
shares of Common Stock reserved for issuance upon exercise of outstanding
warrants. The Company is also obligated to issue to the former stockholders of
Thermetic on January 18, 1999 a number of shares of Common Stock having a market
value of $1,000,000 on such date. See "Description of Capital Stock."
No predictions can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of the
Common Stock in the public market could adversely affect prevailing market
conditions and could impair the Company's future ability to raise capital
through the sale of its equity securities.
PRICE RANGE OF COMMON STOCK
Trading activity with respect to the Company's Common Stock has been
limited. A public trading market having the characteristics of depth, liquidity
and orderliness depends upon the existence of market makers as well as the
presence of willing buyers and sellers, which are circumstances over which the
Company does not have control.
The Common Stock was registered under Section 12(g) of the Exchange Act in
1995. From November 19, 1981 until April 1, 1997, the Common Stock was quoted in
the National Daily Quotation Service ("pink sheets") published daily by the
National Quotation Bureau LLC, first under the symbol "CEAS" and later under the
symbol "FCEI." Since April 2, 1997, the Common Stock has been quoted on the OTC
Bulletin Board under the symbol "AAPC." In connection with the Offering, the
Company has applied for listing on the Nasdaq National Market System under the
symbol "AAPC."
The following table sets forth the high and low per-share bid prices for
the Common Stock based on closing transactions during each specified period as
reported by the National Daily Quotation Service or the OTC Bulletin Board, as
applicable, which prices reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions:
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ------ ----- -----
<S> <C> <C>
1996
1st quarter............................................... $1.90 $0.31
2nd quarter............................................... 1.56 0.31
3rd quarter............................................... 8.75 0.66
4th quarter............................................... 5.31 0.44
1997
1st quarter............................................... $7.50 $3.43
2nd quarter............................................... 5.75 2.75
3rd quarter............................................... 3.88 2.44
4th quarter............................................... 4.13 2.50
1998
1st quarter............................................... $4.63 $2.75
2nd quarter (through May 18, 1998)........................ 5.88 3.88
</TABLE>
As of May 1, 1998, there were 443 record holders of the Company's Common
Stock. On May 18, 1998, the last reported sale price for the Common Stock was
$4.56 per share.
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<PAGE> 58
UNDERWRITING
In the Underwriting Agreement, the Underwriters, represented by McDonald &
Company Securities, Inc. and Wheat First Union, a division of Wheat First
Securities, Inc. (together, the "Representatives"), have agreed, severally,
subject to the terms and conditions therein set forth, to purchase from the
Company, and the Company has agreed to sell to them, the number of shares of
Common Stock, totaling shares, set forth opposite their respective
names below. The Underwriters are committed to take and pay for all shares if
any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
McDonald & Company Securities, Inc. ........................
Wheat First Securities, Inc. ...............................
-------
Total.............................................
=======
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus. The Underwriters may allow
to certain selected dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") a discount not exceeding $ per
share, and the Underwriters may allow, and such selected dealers may re-allow, a
discount not exceeding $ per share to other dealers who are members of
the NASD. After the Offering, the public offering price and the discount to
dealers may be changed by the Representatives.
The Selling Stockholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to an aggregate of additional shares of Common Stock at
the public offering price, less the underwriting discount, as set forth on the
cover page of this Prospectus. The Underwriters may exercise such option only to
cover over-allotments in the sale of the Common Stock that the Underwriters have
agreed to purchase. To the extent that the Underwriters exercise such option,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase the same percentage of such additional shares as the
number of shares to be purchased and offered by that Underwriter in the table
above bears to the total. The Company will not receive any proceeds from the
sale of the Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
The Company has agreed to reimburse McDonald & Company Securities, Inc. for
its out-of-pocket expenses incurred in connection with the Offering. In
addition, the Company has agreed to indemnify the Underwriters against certain
liabilities which may be incurred in connection with the Offering, including
liabilities under the Securities Act or to contribute to payments that the
Underwriters may be required to make.
The Company, its directors and executive officers, all holders of five
percent (5%) or more of the Common Stock, the Selling Stockholders and certain
other stockholders of the Company have agreed not to sell, transfer or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for shares of Common Stock without the prior written
consent of McDonald & Company Securities, Inc. for a period of 180 days from the
date of this Prospectus, except for awards of stock options or issuances of
shares upon the exercise of outstanding warrants or stock options or pursuant to
other employee benefit plans.
In connection with the Offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"). Passive market making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market makers and purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market
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<PAGE> 59
maker on each day are limited to a specified percentage of the passive market
maker's average daily trading volume in the Common Stock during a specified
prior period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the shares of Common Stock at a level
above which might otherwise prevail and, if commenced, may be discontinued at
any time.
The Representatives have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the Offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, which may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
a purchase of the Common Stock on behalf of the Underwriters for the purpose of
fixing or maintaining the price of the Common Stock. A "syndicate covering
transaction" is a bid for or a purchase of the Common Stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with the Offering. In general, purchases of a security for the
purpose of stabilization or to reduce a syndicate short position could cause the
price of the security to be higher than it might otherwise be in the absence of
such purchases. A "penalty" bid is an arrangement permitting the Representatives
to reclaim the selling concession otherwise accruing to an Underwriter or
syndicate member in connection with the Offering if the Common Stock originally
sold by such Underwriter or syndicate member is purchased by the Representatives
in a syndicate covering transaction and has therefore not been effectively
placed by such Underwriter or syndicate member. The imposition of a penalty bid
might have an effect on the price of a security to the extent that it were to
discourage resales of the security by purchasers in the Offering. The
Representatives have advised the Company that such transactions may be effected
on the Nasdaq Stock Market or otherwise and, if commenced, may be discontinued
at any time. Neither the Company nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
Prior to the Offering, there has been a limited public trading market for
the Common Stock. Consequently, the public offering price will be determined by
negotiation between the Company and the Representatives. Among the factors to be
considered in such negotiations will be the history of, and the prospects for,
the Company and the industry in which it competes, an assessment of the
Company's management, the Company's past and present operations, the prospects
for future earnings of the Company, the present state of the Company's
development, the general condition of the securities markets at the time of the
Offering and the market prices of and demand for publicly traded common stock of
comparable companies in recent periods.
The Representatives have advised the Company that they do not expect any
sales of the shares of Common Stock offered hereby to be made to discretionary
accounts controlled by the Underwriters.
At the request of the Company, the Underwriters have reserved up to five
percent (5%) of the number of shares of Common Stock offered hereby (excluding
shares of Common Stock issuable upon exercise of the Over-Allotment Option) for
sale at the initial public offering price to employees of the Company and other
persons associated with the Company.
From time to time, McDonald & Company Securities, Inc. has provided
investment banking services to the Company for which it received normal and
customary fees, including in connection with the issuance of the Senior Notes.
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<PAGE> 60
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona. Benesch,
Friedlander, Coplan & Aronoff LLP, Cleveland, Ohio, has acted as legal counsel
for the Underwriters.
EXPERTS
The financial statements and schedules included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, Semple &
Cooper, P.L.C., Clifton Gunderson, L.L.C., Fox, Byrd & Golden P.C., and Arthur
Andersen LLP, independent public accountants, to the extent and for the periods
set forth in the respective reports of such firms contained herein and in the
Registration Statement. All such financial statements and schedules have been
included herein in reliance upon such reports given upon the authority of such
firms as experts in auditing and accounting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
As reported on Form 8-K dated February 17, 1997 (the "Form 8-K"), the
Company engaged BDO Seidman, LLP as its independent auditors to replace the firm
of Semple & Cooper, P.L.C., who was dismissed at the same time. The decision to
change accountants was approved by the Board of Directors of the Company. The
reports of Semple & Cooper, P.L.C. on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1994 and 1995, and in subsequent
interim periods, there were no disagreements with Semple & Cooper, P.L.C. on any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedures which, if not resolved to the satisfaction of
Semple & Cooper, P.L.C., would have caused Semple & Cooper, P.L.C. not to
respond fully to any inquiries from BDO Seidman, LLP.
The Company requested Semple & Cooper, P.L.C. to furnish it a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the above statement. Semple & Cooper, P.L.C. furnished the Company with a
copy of a letter dated February 20, 1997 containing such a statement, which was
filed as Exhibit 1 to Amendment No. 1 to the Company's Current Report on Form
8-K dated February 17, 1997.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and the rules and regulations promulgated thereunder, and in accordance
therewith files periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as at the following regional offices: 7
World Trade Center, Suite 1300, New York, NY 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission at
its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of the fees prescribed by the Commission. The Commission maintains a web
site (http://www.sec.gov) that contains reports, proxy, and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission.
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus constitutes a part of the Registration Statement and
does not contain all of the information set forth therein and in the exhibits
thereto. For further information with respect to the Company and the Common
Stock offered hereby, reference is hereby made to such Registration Statement
and exhibits. Statements contained in this Prospectus as to the contents of any
document are not necessarily complete and in each instance are qualified in
their entirety by reference to the copy of the appropriate document filed with
the Commission. The Registration Statement, including the exhibits thereto, may
be examined without charge at the Commission's public reference facility at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, copies of any part or all of the Registration Statement, including
such exhibits thereto, may be obtained from the Commission at its principal
office in Washington, D.C., upon payment of the fees prescribed by the
Commission.
59
<PAGE> 61
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
Report of Independent Certified Public Accountants........ F-3
Consolidated Balance Sheets at December 31, 1996 and 1997,
and March 31, 1998 (unaudited)......................... F-4
Consolidated Statements of Operations for the period from
June 19, 1996 (date of inception) to December 31, 1996,
the year ended December 31, 1997, and the three months
ended March 31, 1997 and 1998 (unaudited).............. F-6
Consolidated Statements of Stockholders' Equity for the
period from June 19, 1996 (date of inception) to
December 31, 1996, the year ended December 31, 1997,
and the three months ended March 31, 1998
(unaudited)............................................ F-7
Consolidated Statements of Cash Flows for the period from
June 19, 1996 (date of inception) to December 31, 1996,
the year ended December 31, 1997, and the three months
ended March 31, 1997 and 1998 (unaudited).............. F-8
Notes to Consolidated Financial Statements................ F-9
EAGLE WINDOW AND DOOR, INC. AND SUBSIDIARIES AND TAYLOR
BUILDING PRODUCTS COMPANY
Independent Auditors' Report.............................. F-26
Combined Balance Sheets at December 31, 1995 and August
29, 1996............................................... F-27
Combined Statements of Operations and Accumulated Deficit
for the year ended December 31, 1995 and for the eight
months ended August 29, 1996........................... F-28
Combined Statements of Cash Flows for the year ended
December 31, 1995 and for the eight months ended August
29, 1996............................................... F-29
Notes to Combined Financial Statements.................... F-30
MALLYCLAD CORPORATION AND VYN-L CORPORATION
Report of Independent Certified Public Accountants........ F-36
Combined Balance Sheets at November 30, 1995 and June 30,
1996................................................... F-37
Combined Statements of Operations and Retained Earnings
for the year ended November 30, 1995 and for the seven
months ended June 30, 1996............................. F-38
Combined Statements of Cash Flows for the year ended
November 30, 1995 and for the seven months ended June
30, 1996............................................... F-39
Notes to Combined Financial Statements.................... F-40
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................. F-43
Consolidated Balance Sheets at December 31, 1995 and
September 30, 1996 (Unaudited)......................... F-44
Consolidated Statements of Operations for the year ended
December 31, 1995 and for the nine months ended
September 30, 1995 and 1996 (Unaudited)................ F-46
Consolidated Statements of Changes in Stockholders' Equity
for the period from December 31, 1994 through September
30, 1996 (Unaudited)................................... F-47
Consolidated Statements of Cash Flows for the year ended
December 31, 1995, and for the nine months ended
September 30, 1995 and 1996 (Unaudited)................ F-48
Notes to Consolidated Financial Statements................ F-51
</TABLE>
F-1
<PAGE> 62
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
WESTERN INSULATED GLASS, CO.
Independent Auditors' Report.............................. F-61
Balance Sheets at October 31, 1996 and January 31, 1997
(Unaudited)............................................ F-62
Statements of Income and Retained Earnings for the year
ended October 31, 1996, and for the three months ended
January 31, 1996 and 1997 (Unaudited).................. F-63
Statements of Cash Flows for the year ended October 31,
1996, and for the three months ended January 31, 1996
and 1997 (Unaudited)................................... F-64
Notes to Financial Statements............................. F-65
THERMETIC GLASS, INC.
Independent Auditor's Report.............................. F-68
Balance Sheet at December 31, 1996........................ F-69
Statement of Operations and Accumulated Deficit for the
year ended December 31, 1996........................... F-70
Statement of Cash Flows for the year ended December 31,
1996................................................... F-71
Notes to Financial Statements............................. F-73
Balance Sheet at June 30, 1997 (Unaudited)................ F-78
Statement of Operations and Accumulated Deficit for the
six months ended June 30, 1997 (Unaudited)............. F-79
Statement of Cash Flows for the six months ended June 30,
1997 (Unaudited)....................................... F-80
Notes to Financial Statements............................. F-81
BINNINGS BUILDING PRODUCTS, INC.
Report of Independent Public Accountants.................. F-82
Balance Sheets at December 31, 1995 and 1996, and
September 30, 1996 and 1997 (Unaudited)................ F-83
Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended
September 30, 1996 and 1997 (Unaudited)................ F-84
Statements of Stockholders' Deficit for the years ended
December 31, 1994, 1995 and 1996, and for the nine
months ended September 30, 1996 and 1997 (Unaudited)... F-85
Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended
September 30, 1996 and 1997 (Unaudited)................ F-86
Notes to Financial Statements............................. F-87
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
Report of Independent Certified Public Accountants........ F-99
Combined Balance Sheets at July 28, 1996 and July 27,
1997................................................... F-100
Combined Statements of Income and Retained Earnings for
the years ended July 28, 1996 and July 27, 1997........ F-101
Combined Statements of Cash Flows for the years ended July
28, 1996 and July 27, 1997............................. F-102
Notes to Combined Financial Statements.................... F-106
Independent Auditor's Report.............................. F-110
Combined Balance Sheet at July 31, 1995................... F-111
Combined Statement of Operations and Retained Earnings for
the year ended July 31, 1995........................... F-112
Combined Statement of Cash Flows for the year ended July
31, 1995............................................... F-113
Notes to the Combined Financial Statements................ F-115
</TABLE>
F-2
<PAGE> 63
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
American Architectural Products Corporation
We have audited the accompanying consolidated balance sheets of American
Architectural Products Corporation as of December 31, 1996 and 1997 and the
related consolidated statements of operations, stockholders' equity, and cash
flows from the date of inception (June 19, 1996) to December 31, 1996 and for
the year ended December 31, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Architectural Products Corporation as of December 31, 1996 and 1997, and the
results of its operations and its cash flows from the date of inception (June
19, 1996) to December 31, 1996 and for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Troy, Michigan
February 26, 1998
F-3
<PAGE> 64
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ------------
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................... $ 964,062 $ 40,132,238 $ 23,418,656
Accounts receivable, less allowance for
doubtful accounts of $439,000, $839,000 and
$863,000................................... 6,302,694 18,602,772 20,884,572
Advances to affiliates........................ 463,750 134,518 --
Inventories (Note 3).......................... 10,971,144 21,458,399 24,964,808
Prepaid expenses and other current assets..... 664,401 1,619,946 1,499,358
----------- ------------ ------------
TOTAL CURRENT ASSETS............................ 19,366,051 81,947,873 70,767,394
----------- ------------ ------------
PROPERTY AND EQUIPMENT (Note 6)
Land and improvements......................... 281,096 3,283,865 3,563,065
Buildings and improvements.................... 5,409,631 15,253,783 17,539,143
Machinery, tools and equipment................ 8,244,548 18,350,640 25,718,319
Computers and office equipment................ 2,524,884 4,611,234 5,474,489
----------- ------------ ------------
16,460,159 41,499,522 52,295,016
Less accumulated depreciation................. (321,315) (3,551,874) (4,598,796)
----------- ------------ ------------
NET PROPERTY AND EQUIPMENT...................... 16,138,844 37,947,648 47,696,220
----------- ------------ ------------
OTHER
Cost in excess of net assets acquired, net of
accumulated amortization of $74,000,
$464,000 and $935,000 (Note 2)............. 6,850,059 29,846,895 32,541,316
Deferred financing costs...................... 381,936 5,985,360 6,096,745
Other......................................... 7,001 2,595,933 4,050,287
----------- ------------ ------------
TOTAL OTHER ASSETS.............................. 7,238,996 38,428,188 42,688,348
----------- ------------ ------------
$42,743,891 $158,323,709 $161,151,962
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 65
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ------------
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line-of-credit (Note 4)............. $ 5,476,759 $ -- $ --
Accounts payable -- trade..................... 5,766,803 9,352,228 9,902,648
Payable to seller for purchase price
adjustment................................. 1,462,500 -- 1,971,954
Accrued Expenses
Compensation and related benefits.......... 838,717 3,521,683 5,043,421
Current portion of warranty obligations.... 1,100,000 1,991,544 1,942,507
Other...................................... 2,558,901 4,976,105 6,383,118
Current portion of capital lease obligations
(Note 6)................................... 488,984 573,161 760,832
Current maturities of long-term debt (Note
5)......................................... 1,497,653 60,848 --
----------- ------------ ------------
TOTAL CURRENT LIABILITIES....................... 19,190,317 20,475,569 26,004,480
LONG-TERM DEBT, less current maturities (Note
5)............................................ 14,478,317 125,114,401 125,000,000
LONG-TERM CAPITAL LEASE OBLIGATIONS, less
current portion (Note 6)...................... 1,067,616 769,620 470,298
ACCRUED WARRANTY OBLIGATIONS, less current
portion....................................... 3,281,079 2,834,183 2,735,379
OTHER........................................... 450,000 3,548,801 3,826,760
----------- ------------ ------------
TOTAL LIABILITIES............................... 38,467,329 152,742,574 158,036,917
----------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 8 and 9)
Preferred stock, Series A convertible, $.001
par, 20,000,000 shares authorized;
1,000,000 shares outstanding in 1996....... 1,000 -- --
Preferred stock, Series B convertible, $.01
par, 30,000 shares authorized; no shares
outstanding................................ -- -- --
Common stock, $.001 par, 100,000,000 shares
authorized; 4,860,580 shares outstanding in
1996 and 13,458,479 shares outstanding in
1997 and 1998.............................. 4,861 13,458 13,458
Additional paid-in capital.................... 3,679,612 6,310,641 6,453,641
Retained earnings (deficit)................... 591,089 (742,964) (3,352,054)
----------- ------------ ------------
TOTAL STOCKHOLDERS' EQUITY...................... 4,276,562 5,581,135 3,115,045
----------- ------------ ------------
$42,743,891 $158,323,709 $161,151,962
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 66
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FROM DATE OF
INCEPTION THREE MONTHS ENDED
(JUNE 19, 1996) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998
------------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES............................... $25,248,908 $ 94,252,582 $16,641,339 $45,608,166
COST OF SALES........................... 19,026,604 74,304,379 13,522,998 36,494,178
----------- ------------ ----------- -----------
GROSS PROFIT............................ 6,222,304 19,948,203 3,118,341 9,113,988
SELLING EXPENSE......................... 1,908,900 6,849,158 1,502,168 4,484,131
GENERAL AND ADMINISTRATIVE EXPENSES..... 2,150,968 10,329,496 1,846,532 4,918,444
----------- ------------ ----------- -----------
INCOME (LOSS) FROM OPERATIONS........... 2,162,436 2,769,549 (230,359) (288,587)
----------- ------------ ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense...................... (755,758) (3,927,924) (614,760) (3,678,452)
Interest income....................... -- -- -- 355,476
Miscellaneous......................... (5,589) 3,644 (12,587) (91,644)
----------- ------------ ----------- -----------
TOTAL OTHER INCOME (EXPENSE)............ (761,347) (3,924,280) (627,347) (3,414,620)
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM.................... 1,401,089 (1,154,731) (857,706) (3,703,207)
INCOME TAXES (BENEFIT) (NOTE 10)........ 640,000 (390,000) (343,007) (1,094,117)
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM.................................. 761,089 (764,731) (514,699) (2,609,090)
EXTRAORDINARY ITEM
Loss on extinguishment of debt, net of
income tax benefit of $282,000
(Note 5)........................... -- (494,110) -- --
----------- ------------ ----------- -----------
NET INCOME (LOSS)....................... $ 761,089 $ (1,258,841) $ (514,699) $(2,609,090)
=========== ============ =========== ===========
BASIC INCOME (LOSS) PER COMMON SHARE
(NOTE 12)
Income (loss) before extraordinary
item............................... $ .10 $ (.06) $ (.04) $ (.19)
Extraordinary item.................... -- (.04) -- --
----------- ------------ ----------- -----------
BASIC NET INCOME (LOSS) PER COMMON
SHARE.............................. $ .10 $ (.10) $ (.04) $ (.19)
=========== ============ =========== ===========
DILUTED INCOME (LOSS) PER COMMON SHARE
(NOTE 12)
Income (loss) before extraordinary
item............................... $ .09 $ (.06) $ (.04) $ (.19)
Extraordinary item.................... -- (.04) -- --
----------- ------------ ----------- -----------
DILUTED NET INCOME (LOSS) PER COMMON
SHARE.............................. $ .09 $ (.10) $ (.04) $ (.19)
=========== ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 67
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FROM DATE OF INCEPTION (JUNE 19, 1996) TO DECEMBER 31, 1996,
YEAR ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------------- --------------- -------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ------ ------ ------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital contribution in
connection with
acquisition of
Mallyclad and Vyn-L
(Note 2).............. -- $ -- -- $ -- -- $ -- $ 77,473 $ -- $ 77,473
Distribution to
stockholder of
Mallyclad............. -- -- -- -- -- -- -- (170,000) (170,000)
Issuance of common stock
for cash.............. -- -- -- -- 10 1 604,999 -- 605,000
Recapitalization (Note
2).................... 1,000,000 1,000 -- -- (10) (1) (999) -- --
Issuance of shares in
reverse acquisition
(Note 2).............. -- -- -- -- 4,860,580 4,861 2,998,139 -- 3,003,000
Net income for the
period................ -- -- -- -- -- -- -- 761,089 761,089
---------- ------- ------ ---- ---------- ------- ---------- ----------- -----------
Balance, December 31,
1996.................. 1,000,000 1,000 -- -- 4,860,580 4,861 3,679,612 591,089 4,276,562
Conversion of preferred
stock, Series A to
common stock(Note 1).. (1,000,000) (1,000) -- -- 7,548,633 7,548 (6,548) -- --
Issuance of shares to an
officer (Note 1)...... -- -- -- -- 171,842 172 (172) -- --
Issuance of preferred
stock, Series B (Note
8).................... -- -- 4,250 43 -- -- 500,169 -- 500,212
Issuance of warrants to
purchase common
stock................. -- -- -- -- -- -- 120,500 -- 120,500
Conversion of preferred
stock, Series B to
common stock (Note
8).................... -- -- (4,250) (43) 108,809 109 (66) -- --
Issuance of common stock
options in exchange
for services.......... -- -- -- -- -- -- 68,000 -- 68,000
Issuance of shares in
connection with
acquisitions (Note
2).................... -- -- -- -- 768,615 768 1,949,146 -- 1,949,914
Discount on conversion
of Series B Preferred,
treated as dividends
(Note 8).............. -- -- -- -- -- -- -- (75,212) (75,212)
Net loss for the year... -- -- -- -- -- -- -- (1,258,841) (1,258,841)
---------- ------- ------ ---- ---------- ------- ---------- ----------- -----------
Balance, December 31,
1997.................. -- -- -- -- 13,458,479 13,458 6,310,641 (742,964) 5,581,135
Issuance of common stock
options in exchange
for services.......... -- -- -- -- -- -- 143,000 -- 143,000
Net loss for the
period................ -- -- -- -- -- -- -- (2,609,090) (2,609,090)
---------- ------- ------ ---- ---------- ------- ---------- ----------- -----------
Balance, March 31,
1998.................. -- $ -- -- $ -- 13,458,479 $13,458 $6,453,641 $(3,352,054) $ 3,115,045
========== ======= ====== ==== ========== ======= ========== =========== ===========
(Unaudited)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 68
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FROM DATE OF INCEPTION THREE MONTHS ENDED
(JUNE 19, 1996) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998
---------------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss).............. $ 761,089 $ (1,258,841) $ (514,699) $(2,609,090)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities
Extraordinary loss on
extinguishment of debt.... -- 416,110 -- --
Depreciation................ 325,460 2,102,288 534,953 1,105,893
Amortization................ 117,038 578,044 97,983 470,910
Gain on sale of equipment... (29,400) (44,767) -- --
Deferred income taxes....... 311,469 (672,000) -- --
Changes in assets and
liabilities
Accounts
receivable -- trade....... 1,771,004 (1,229,121) (402,237) (1,782,119)
Advances to affiliates...... (463,750) 329,232 -- --
Inventories................. (793,164) 1,171,735 (245,364) (499,765)
Prepaid and other current
assets.................... (86,800) 100,319 168,560 (314,548)
Other assets................ (6,601) 5,143 (363,289) 249,832
Accounts payable............ 2,312,844 (1,904,306) (818,839) 332,146
Accrued expenses............ 1,031,527 1,858,017 (762,070) 1,172,883
------------ ------------ ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES........... 5,250,716 1,451,853 (2,305,002) (1,873,858)
------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from the sale of
equipment................... 98,200 130,500 -- --
Purchase of property and
equipment................... (429,048) (1,547,644) (192,252) (1,319,150)
Acquisitions of businesses, net
of cash acquired............ (12,781,372) (52,899,930) (969,556) (14,419,674)
Other, net..................... -- -- (45,247) --
Sale of business............... -- -- -- 1,186,000
------------ ------------ ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES..................... (13,112,220) (54,317,074) (1,207,055) (14,552,824)
------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net borrowings (repayments) on
revolving lines-of-credit... 5,476,759 (5,936,759) 2,414,610 --
Proceeds from long-term debt... 4,213,000 127,094,806 1,100,000 --
Payments for debt issue
costs....................... (425,102) (6,052,860) -- --
Payments on long-term debt and
capital lease obligations... (1,121,564) (23,567,590) (331,082) (286,900)
Issuance of common and
preferred stock and capital
contributions............... 682,473 495,800 -- --
------------ ------------ ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES........... 8,825,566 92,033,397 3,183,528 (286,900)
------------ ------------ ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.................... 964,062 39,168,176 (328,529) (16,713,582)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD............ -- 964,062 964,062 40,132,238
------------ ------------ ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD......................... $ 964,062 $ 40,132,238 $ 635,533 $23,418,656
============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 69
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS AND BASIS OF PRESENTATION
American Architectural Products Corporation (AAPC or the Company) is
principally engaged in the business of manufacturing residential, commercial and
architectural windows and doors through its wholly-owned subsidiaries, Eagle &
Taylor Company (formerly known as American Architectural Products, Inc. -- AAP),
Forte, Inc. (Forte), Western Insulated Glass Co. (Western), Thermetic Glass,
Inc. (Thermetic), Binnings Building Products, Inc. (Binnings), Danvid Window
Company (Danvid), Modern Window Corporation (Modern) and American Glassmith
Corporation (American Glassmith).
AAP was incorporated on June 19, 1996 and had no significant operations or
assets until it acquired Eagle Window and Door, Inc. (Eagle) and Taylor Building
Products Company (Taylor) on August 29, 1996 (see Note 2). The accounts of Eagle
and Taylor are included in the consolidated financial statements from the August
29, 1996 acquisition date. AAP subsequently changed its name to Eagle & Taylor
Company.
On June 25, 1996, AAP's ultimate controlling stockholder acquired ownership
of Mallyclad Corp. (Mallyclad) and Vyn-L Corporation (Vyn-L). On December 18,
1996, Mallyclad and Vyn-L were merged into AAP. Based on the control maintained
by this stockholder over AAP, Mallyclad and Vyn-L, the merger was considered to
be a transaction among companies under common control and was accounted for at
historical cost in a manner similar to a pooling of interests. Accordingly, the
accounts of Mallyclad and Vyn-L are included in the consolidated financial
statements from the June 25, 1996 acquisition date.
Prior to December 18, 1996, Forte Computer Easy, Inc. (FCEI) had a single
wholly-owned operating subsidiary, Forte, Inc. (Forte), based in Youngstown,
Ohio. Forte manufactures large contract commercial aluminum windows and security
screen windows and doors.
On December 18, 1996, pursuant to an Agreement and Plan of Reorganization
dated October 25, 1996 between FCEI and AAP Holdings, Inc. (the Agreement), FCEI
acquired all of the issued and outstanding shares of capital stock of AAP in
exchange for 1,000,000 shares of Series A Convertible Preferred Stock of FCEI
(the Series A Preferred). Under the terms of the Agreement and the Series A
Preferred, AAP Holdings, Inc. obtained 60 percent of the voting control of FCEI.
Although FCEI is the parent of AAP following the transaction, the transaction
was accounted for as a recapitalization of AAP and a purchase by AAP of FCEI
because the stockholders of AAP obtained a majority of the voting rights in FCEI
as a result of the transaction (see Note 2). The 1996 consolidated financial
statements include the accounts of AAP for the period from its inception (June
19, 1996), and the accounts of FCEI from December 18, 1996, the effective date
of the acquisition.
At a special stockholders' meeting held on April 1, 1997, FCEI stockholders
approved the reincorporation of FCEI in Delaware. Consequences of the
reincorporation plan included the change of FCEI's name to American
Architectural Products Corporation; an increase in the authorized common stock
of the Company to 100,000,000 shares; a 1 for 10 reverse stock split of the
Company's common stock; the conversion of 1,000,000 shares of Series A Preferred
held by AAP Holdings, Inc. into 7,548,633 shares of common stock; and the
issuance of 171,842 shares of common stock to an officer to satisfy a commitment
of the Company. The reincorporation did not result in any substantive change to
the Company's business, assets, liabilities, net worth or operations, nor did it
result in any change in the ownership interest of any stockholder of the
Company. The number of shares and per share amounts give retroactive recognition
to the changes in capital structure for all periods presented.
F-9
<PAGE> 70
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of AAPC and its
wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
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.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of accounts receivable, payables 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.
REVENUE RECOGNITION
The Company operates in two industry segments, the residential and
specialty commercial window and door products segment and the large commercial
contract window and door products segment (see Note 13). Revenues from the
residential and specialty commercial products segment are recorded upon the
shipment of product to the customer. Revenues from the large commercial contract
segment are recognized using the percentage-of-completion method of accounting
in the proportion that costs bear to total estimated costs at completion.
Revisions of estimated costs or potential contract losses are recognized in the
period in which they are determined. Costs in excess of billings, billings in
excess of costs and retainages recorded were not material as of December 31,
1996 and 1997 and as of March 31, 1998 (unaudited).
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with original maturity of
three months or less.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable.
The Company maintains cash and cash equivalents with various major
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions and limits the amount of exposure
with any institution. At December 31, 1997 and March 31, 1998, deposits and
highly liquid investments totalling approximately $38 million and $23 million
(unaudited), respectively, were on deposit at two financial institutions.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across many
geographic areas. However, the Company is principally engaged in the business of
manufacturing residential and commercial windows and doors. Therefore, its
customer base is concentrated in the construction business.
F-10
<PAGE> 71
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Buildings and improvements.................................. 20-25
Machinery and equipment..................................... 7-10
Computers and office equipment.............................. 3-7
Tools, dies and fixtures.................................... 3-7
</TABLE>
Expenditures for renewals and betterments are capitalized. Expenditures for
maintenance and repairs are charged against income as incurred.
LONG-LIVED ASSETS
The Company reviews the carrying values of its long-lived assets for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is being amortized over 25 years
using the straight-line method. The Company periodically evaluates the
recoverability of the cost in excess of net assets acquired by allocating the
cost in excess of net assets acquired to the assets being tested for
recoverability and by comparing anticipated undiscounted future cash flows from
operating activities with the carrying amounts of the related assets. The
factors considered by management in performing this assessment include current
operating results, business prospects, market trends, competitive activities and
other economic factors.
DEFERRED FINANCING COSTS
Costs to obtain financing have been capitalized and are being amortized
using the straight-line method over the term of the underlying debt.
WARRANTY OBLIGATIONS
Certain of the Company's subsidiaries sell their products with limited
warranties of two to 25 years. Accrued warranty obligations are estimated based
on claims experience and levels of production. Warranty obligations estimated to
be satisfied within one year are classified as current liabilities in the
accompanying consolidated balance sheets.
INCOME TAXES
The income tax provision is computed using the liability method. Deferred
taxes are recorded for the expected future tax consequences of temporary
differences between the financial reporting and the tax bases of the Company's
assets and liabilities.
The income tax provision for interim reporting purposes is based upon the
Company's estimate of the effective tax rate expected to be applicable for the
full fiscal year.
F-11
<PAGE> 72
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
AAP filed its income tax return on a consolidated basis with its former
parent company until December 18, 1996, the date of reorganization with FCEI.
ADVERTISING
The cost of advertising is charged against income as incurred. Advertising
expense was $263,000 for the period from inception to December 31, 1996 and
$948,000 for the year ended December 31, 1997, respectively.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim consolidated financial statements for the three
months ended March 31, 1997 and 1998 include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the consolidated results of operations for the period presented.
The interim period results are not necessarily indicative of the results of
operations for a full fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 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. On January 1, 1998, the Company adopted SFAS 130.
For the three months ended March 31, 1998, comprehensive income (loss) for the
Company does not differ from net income (loss).
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. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Management has not fully evaluated the impact, if
any, SFAS 131 may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by implementation
of this standard.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
(SFAS 132), which revises employers' disclosures about pension and other
postretirement benefit plans. SFAS 132 does not change the measurement or
recognition of those plans and is effective for fiscal years beginning after
December 15, 1997.
F-12
<PAGE> 73
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS:
RECAPITALIZATION AND ACQUISITION OF FCEI
Effective December 18, 1996, FCEI acquired the stock of AAP in a reverse
acquisition in which AAP's stockholders acquired voting control of FCEI. The
acquisition was accomplished through an exchange of stock in which FCEI
exchanged 1,000,000 shares of Series A Preferred and options to purchase 879,834
shares of FCEI common stock for 100% of the outstanding stock of AAP. Upon
completing the transaction, the stockholders of AAP controlled 60% of the voting
rights of the combined Company.
For financial reporting purposes, AAP is deemed to be the acquiring entity.
The merger has been reflected in the accompanying consolidated financial
statements as (a) the recapitalization of AAP (whereby the issued and
outstanding stock of AAP was converted into 1,000,000 shares of Series A
Preferred and options to purchase 879,834 shares of common stock -- see Note 9)
and (b) the issuance of the securities discussed in the following paragraph by
AAP in exchange for all of the outstanding equity securities of FCEI.
In the merger, AAP is deemed to have issued 4,860,580 shares of common
stock, committed itself to issue an additional 171,842 shares of common stock
and to have issued 586,556 stock options to FCEI stockholders (see Note 9). The
estimated fair value assigned to the securities issued was $3,003,000, which was
determined based on the estimated fair value of the securities of AAP which were
obtained by the FCEI stockholders in the reverse acquisition, an assessment of
the trading prices of FCEI stock preceding the reverse acquisition, and the
appraised value of the FCEI assets acquired.
The acquisition was recorded using the purchase method of accounting.
Accordingly, the consideration of $3,100,000, including transaction costs, was
allocated to the FCEI net assets acquired based on estimated fair values
including current assets of $1,871,000, property and equipment of $7,516,000,
long-term debt of $4,030,000 and current liabilities of $2,257,000. The results
of FCEI's operations are included in the accompanying consolidated financial
statements from the date of acquisition.
ACQUISITION OF EAGLE AND TAYLOR
On August 29, 1996, AAP acquired the stock and certain assets and
liabilities of Eagle and Taylor. Eagle is based in Dubuque, Iowa and
manufactures and distributes aluminum clad and all wood windows and doors.
Taylor is based in West Branch, Michigan and manufactures entry and garage
doors. The acquisition was accounted for as a purchase. The purchase price
approximated $22,202,000 and was allocated to the net assets acquired based on
estimated fair values including current assets of $17,123,000, property and
equipment of $6,805,000, accrued warranty obligations of $4,600,000, and current
and other liabilities of $4,362,000. Cost in excess of net assets acquired of
$7,236,000 was recorded and is being amortized over 25 years. Subordinated notes
payable to the seller totalling $8,000,000 were used to finance a portion of the
acquisitions (see Note 5). The results of Eagle and Taylor operations are
included in the accompanying consolidated financial statements from the August
29, 1996 acquisition date.
ACQUISITION OF MALLYCLAD AND VYN-L
The June 25, 1996 acquisition of Mallyclad and Vyn-L was accounted for as a
purchase. Mallyclad and Vyn-L are based in Madison Heights, Michigan and process
and manufacture vinyl clad steel and aluminum coils and cut-to-length sheets.
The purchase price approximated $1,009,000 and was allocated to net assets
acquired based on estimated fair values including current assets of $900,000,
property and equipment of $205,000, other assets of $170,000, and current
liabilities of $266,000. The accounts of Mallyclad and Vyn-L are included in the
accompanying consolidated financial statements from the June 25, 1996
acquisition date.
On March 1, 1998, the Company sold its Mallyclad division to a related
party for $1.2 million and recognized no gain or loss on the sale.
F-13
<PAGE> 74
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS: (CONTINUED)
ACQUISITION OF WESTERN
On March 14, 1997, the Company acquired all of the stock of Western.
Western is based in Phoenix, Arizona and manufactures custom residential
aluminum windows and doors. The acquisition was accounted for as a purchase. The
purchase price approximated $2,400,000 and was allocated to net assets acquired
based on estimated fair values including current assets of $1,976,000, property
and equipment of $961,000, and current liabilities of $537,000. Notes to sellers
approximating $779,000 were used to finance a portion of the acquisition.
Additionally, Western was financed with a revolving line-of-credit and term
notes with a bank totalling approximately $1,400,000. The accounts of Western
are included in the accompanying consolidated financial statements from the
March 14, 1997 acquisition date.
ACQUISITION OF THERMETIC
On July 18, 1997, the Company acquired all of the stock of Thermetic, a
Toluca, Illinois manufacturer of residential vinyl windows. The acquisition was
accounted for as a purchase. The purchase price approximated $4,500,000 and was
allocated to net assets acquired based on estimated fair values including
current assets of $1,700,000, property and equipment of $2,300,000, current
liabilities of $1,400,000 and long-term liabilities of $2,100,000. Costs in
excess of net assets acquired of $4,000,000 was recorded and is being amortized
over 25 years.
The Thermetic acquisition was financed through the issuance of $2,500,000
in convertible secured debentures to the seller, the issuance of 384,000 shares
of the Company's common stock and a commitment to issue an aggregate number of
additional shares of the Company's common stock eighteen months after closing
having a market value of $1,000,000 when issued. The accounts of Thermetic are
included in the accompanying consolidated financial statements from the July 18,
1997 acquisition date.
ACQUISITIONS OF BINNINGS, DANVID, AMERICAN GLASSMITH AND MODERN
On December 10, 1997, the Company acquired all of the outstanding stock of
Binnings Building Products, Inc. (Binnings), and substantially all of the assets
of Danvid Company, Inc. and Danvid Window Company (collectively Danvid),
American Glassmith, Inc. (American Glassmith), and Modern Window Corporation
(Modern), collectively the "Acquisitions". Binnings, located in Lexington, North
Carolina, manufactures residential vinyl windows and aluminum windows and storm
doors. Danvid, located in Carrollton, Texas, manufacturers and installs
residential aluminum windows and doors and vinyl windows. American Glassmith,
located in Columbus, Ohio, manufactures decorative glass lites and laminated
glass. Modern, located in Oak Park, Michigan, manufactures residential vinyl
windows and doors. Each of these
F-14
<PAGE> 75
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS: (CONTINUED)
acquisitions was accounted for as a purchase. The purchase prices and allocation
of these purchase prices are as follows:
<TABLE>
<CAPTION>
MODERN &
AMERICAN
BINNINGS DANVID GLASSMITH
----------- ----------- -----------
<S> <C> <C> <C>
PURCHASE PRICE...................................... $26,987,000 $19,374,000 $ 5,704,000
=========== =========== ===========
ALLOCATION
Current assets.................................... $13,281,000 $ 5,343,000 $ 2,526,000
Property and equipment............................ 14,667,000 1,876,000 2,785,000
Other assets...................................... 157,000 2,151,000 50,000
Current liabilities............................... 4,521,000 3,048,000 907,000
Long-term liabilities............................. 1,323,000 2,151,000 342,000
----------- ----------- -----------
NET ASSETS ACQUIRED................................. $22,261,000 $ 4,171,000 $ 4,112,000
=========== =========== ===========
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET
ASSETS ACQUIRED................................... $ 4,726,000 $15,203,000 $ 1,592,000
=========== =========== ===========
</TABLE>
The accounts of the Acquisitions were included in the Company's
consolidated financial statements from the December 10, 1997 acquisition date.
The Acquisitions were financed primarily with a portion of the proceeds from the
issuance of $125,000,000 of 11 3/4% Senior Notes due on December 1, 2007 (see
Note 5).
ACQUISITION OF VINYLSOURCE
On January 23, 1998, the Company acquired substantially all of the assets
of the vinyl division of Easco, Inc., an Austintown, Ohio manufacturer of vinyl
extrusions for the fenestration industry, and operates the facility through its
wholly-owned subsidiary VinylSource. The purchase price approximated $13,475,000
and was allocated to net assets acquired based on estimated fair market values
including current assets of $4,654,000, property and equipment and other
noncurrent assets of $9,929,000 and current liabilities of $1,108,000. The
Company used cash to finance the acquisition. The accounts of the acquired
business are included in the Company's consolidated financial statements from
the January 23, 1998 acquisition date.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma information for the year ended December 31, 1996
has been prepared assuming that the offering of $125,000,000 of 11 3/4% Senior
Notes due December 1, 2007 (the Offering) and the acquisitions of FCEI, Eagle &
Taylor, Mallyclad and Vyn-L, Western, Thermetic, Binnings, Danvid, American
Glassmith and Modern had occurred on January 1, 1996. The following pro forma
information for the year ended December 31, 1997 has been prepared assuming that
the Offering and the acquisitions of Western, Thermetic, Binnings, Danvid,
American Glassmith and Modern had occurred on January 1, 1997. The acquisition
of VinylSource in 1998 was not a material business combination for the Company,
and accordingly, no pro forma effect is given to this acquisition. The pro forma
information includes adjustments for interest expense for the Senior Notes,
adjustments to selling, general and administrative expenses for decreases in
compensation expense for certain officers and members of Board of Directors of
the Acquisitions, adjustments to depreciation expense based on the estimated
fair market value of the property and equipment
F-15
<PAGE> 76
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RECAPITALIZATION AND ACQUISITIONS: (CONTINUED)
acquired, amortization of cost in excess of net assets acquired arising from the
acquisitions, and adjustments for income taxes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales................................................... $176,000 $192,000
Net loss.................................................... (7,000) (5,600)
Basic and diluted net loss per common share................. (.53) (.42)
</TABLE>
LETTER OF INTENT
In February 1998, the Company signed a Letter of Intent with
Louisiana-Pacific to purchase its Weather-Seal division. This division consists
of six manufacturing facilities throughout Ohio producing aluminum and vinyl
extrusions, and wood and vinyl windows. The Letter of Intent obligated the
Company to make a $1 million deposit into an escrow account and which will be
applied toward the purchase price. The deposit will be considered a termination
fee payable to Louisiana-Pacific in the event the transaction does not close
because the Company abandons or otherwise fails to consummate the transaction
unless because of the discovery or occurrence of any material or adverse
condition.
3. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................... $ 7,664,000 $12,980,000 $12,632,000
Work-in-process............................. 1,266,000 3,071,000 3,506,000
Finished goods.............................. 2,041,000 5,407,000 8,827,000
----------- ----------- -----------
$10,971,000 $21,458,000 $24,965,000
=========== =========== ===========
</TABLE>
4. REVOLVING LINE-OF-CREDIT:
At December 31, 1996, the Company had $5,477,000 outstanding under a
subsidiary's revolving line-of-credit facility whereby the subsidiary could
borrow or issue letters-of-credit of up to $13,000,000 based on available
collateral. Borrowings accrue interest at 1.5% above the prime rate and interest
was payable monthly. The outstanding borrowings were paid in full in 1997 with a
portion of the proceeds of the Notes (see Note 5).
F-16
<PAGE> 77
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
11 3/4% senior notes, due 2007............ $ -- $125,000,000 $125,000,000
Term notes payable to bank, due August
2001, payable in monthly installments of
$55,407 plus interest at the prime rate
plus 1.5%............................... 3,113,000 -- --
Subordinated notes payable, due August
1999, with interest payable monthly at
the rate of 10%......................... 8,000,000 -- --
Term note payable to bank, due January
2001, payable in monthly installments of
$30,000 including interest at the prime
rate plus 2.0%, secured by substantially
all of the assets of a subsidiary....... 2,625,000 -- --
Other..................................... 2,238,000 175,000 --
----------- ------------ ------------
15,976,000 125,175,000 125,000,000
Less current portion...................... 1,498,000 61,000 --
----------- ------------ ------------
$14,478,000 $125,114,000 $125,000,000
=========== ============ ============
</TABLE>
In December 1997, the Company issued $125,000,000 of 11 3/4% Senior Notes
(the "Notes"). The Notes are senior unsecured obligations of the Company and
will mature on December 1, 2007. Interest on the Notes is payable semi-annually
on June 1 and December 1 of each year, commencing June 1, 1998. The Notes are
unconditionally guaranteed by each of the Company's subsidiaries and by each
subsidiary acquired thereafter.
Of the approximately $118.5 million in net proceeds received by the Company
from the issuance of the Notes, approximately $47.8 million was used to fund the
cash portion of the purchase price of the Acquisitions (including the repayment
of the assumed debt) and approximately $33.8 million was used to repay
substantially all of the existing indebtedness of the Company. The remaining
proceeds are intended to be used by the Company for additional acquisitions,
working capital and general corporate purposes.
Except as set forth below, the Company may not redeem the Notes prior to
December 1, 2002. On or after December 1, 2002, the Company may redeem the
Notes, in whole or in part, at any time, at redemption prices ranging from 105%
of the principal amount in 2002 to 100% of the principal amount in 2005 and
thereafter, together with accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time prior to December 1, 2000, the Company may,
subject to certain requirements, redeem up to 35% of the aggregate principal
amount of the Notes with the cash proceeds of one or more public equity
offerings at a redemption price equal to 110% of the principal amount to be
redeemed, together with accrued and unpaid interest.
The provisions of the Notes limit the Company and its subsidiaries from
incurring additional indebtedness unless the Company meets certain consolidated
coverage ratios as defined in the Notes. Notwithstanding this restriction, the
Company is permitted to incur secured indebtedness of up to $25 million. Other
covenants of the Notes include, but are not limited to, limitations on
restricted payments, as defined, such as payment of dividends, repurchase of the
Company's capital stock, redemption of subordinated obligations, certain
investments, in addition to limitations on sale/leaseback transactions,
affiliate transactions and mergers or consolidations.
F-17
<PAGE> 78
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT: (CONTINUED)
The approximate maturities of long-term debt as of December 31, 1997 are as
follows: 1998 -- $61,000; 1999 -- $54,000; 2000 -- $58,000; 2001 -- $2,000;
2002 -- $-0-; and thereafter -$125,000,000.
In connection with the repayment of existing indebtedness from the proceeds
of the Notes, the Company recognized as expense deferred financing costs related
to the existing indebtedness and incurred a prepayment penalty resulting in an
extraordinary loss of $494,000 ($.04 per share), net of related income tax
benefits of $282,000.
6. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
Certain leased assets are capitalized and consist of computer equipment and
delivery equipment with a cost of $1,578,000 and $1,931,000 at December 31, 1996
and 1997, respectively. Accumulated depreciation related to these leased assets
was $-0- and $388,000 at December 31, 1996 and 1997, respectively. The Company
also leases buildings and equipment under operating leases.
At December 31, 1997, the future minimum lease payments under operating and
capital leases are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
<S> <C> <C>
1998.................................................... $2,412,000 $ 654,000
1999.................................................... 1,863,000 734,000
2000.................................................... 1,260,000 51,000
2001.................................................... 1,017,000 38,000
2002.................................................... 746,000 8,000
Thereafter.............................................. 1,248,000 --
---------- ----------
Total......................................... $8,546,000 1,485,000
==========
Less amount representing interest....................... 142,000
----------
Net present value....................................... 1,343,000
Less current portion.................................... 573,000
----------
Long-Term Capital Lease Obligations..................... $ 770,000
==========
</TABLE>
Rental expense incurred for operating leases was $217,000 and $844,000,
from the period from inception to December 31, 1996 and for the year ended
December 31, 1997, respectively.
LITIGATION
At December 31, 1997, the Company is a defendant in several lawsuits. The
Company 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 Company's insurance. In the opinion of management, such liabilities, if
any, would not have a material effect on the consolidated financial statements
of the Company.
7. BENEFIT PLANS:
All eligible nonunion employees of the Company participate in 401(k) plans
which include provisions for Company matching contributions. Additionally, union
employees at a subsidiary participate in a multiemployer pension plan into which
that subsidiary contributes $0.22 per hour worked. Expenses incurred relating to
these plans were $89,000 and $399,000 from inception to December 31, 1996 and
for the year ended December 31, 1997.
F-18
<PAGE> 79
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY:
SERIES A PREFERRED STOCK
The Series A Preferred is voting preferred stock and has the same number of
votes as the number of shares of common stock into which the Series A Preferred
would be convertible if converted in full on the record date.
No dividends may be paid with respect to the common stock unless a dividend
is paid to the holders of the Series A Preferred. Any dividends paid are
required to be allocated pro rata among the holders of the common stock and
Series A Preferred as though the Series A Preferred had been converted in full
to common stock on the dividend payment date.
The Series A Preferred has a liquidation preference over the common stock
in the amount of $.10 per share. Any amounts remaining will be allocated to the
common stock and Series A Preferred holders as if the Series A Preferred had
been converted in full upon such liquidation.
SERIES B PREFERRED STOCK
In 1997, the Company received proceeds of $425,000 from the private
placement of 4,250 shares of Series B Cumulative Redeemable Convertible
Preferred Stock (the Series B Preferred). The Series B Preferred accrues
cumulative dividends at the annual rate of $8.00 per share commencing July 1,
1998, payable either in cash or common stock at the election of the Company.
Each share of Series B Preferred is convertible, at the option of the holder,
into shares of common stock. The redemption price of $100 per share of Series B
Preferred plus any cumulative unpaid dividends can be used to purchase shares of
common stock at market value. However, a discount from the quoted market price
of common stock was applicable for holders exercising conversion rights prior to
August 31, 1997 and the discounts are accounted for as dividends to the holders.
As of December 31, 1997, all of the Series B preferred shares issued have been
converted to common stock.
The Series B Preferred is voting preferred stock and each share of Series B
Preferred Stock entitles the holder to one vote. The Series B Preferred will be
entitled to vote as a separate class with respect to all matters that would
adversely affect the powers, preferences or rights of Series B Preferred Stock.
STOCK WARRANTS
In April and June 1997, the Company issued promissory notes with detachable
stock warrants to accredited investors for proceeds totalling $450,000. The
warrants, which expire in one year, grant the note holders the right to purchase
128,571 shares of the Company's common stock at $3.50 per share. The fair value
attributable to these warrants has been recognized as additional paid in capital
and the resulting discount was amortized over the term of the notes which ended
in December 1997. Furthermore, in connection with an additional series of
financing transactions, the Company issued warrants to purchase 27,926 shares of
common stock at an exercise price of $3.50 per share, expiring on September 1,
1998.
9. STOCK OPTIONS:
As part of the consideration paid in the acquisition of FCEI in December
1996, the Company is deemed to have issued to certain FCEI stockholders options
to purchase an aggregate of 586,556 shares of the Company's common stock at
prices ranging from $2.50 to $5.00 per share ("FCEI Options"). The FCEI Options
were deemed to have been issued in exchange for previously outstanding options
granted under the FCEI Employee Incentive Stock Option Plan.
As part of the recapitalization of AAP that occurred in connection with the
acquisition of FCEI (see Note 2), AAP Holdings, Inc. received options to
purchase 879,834 shares of common stock of the Company
F-19
<PAGE> 80
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS: (CONTINUED)
("AAPH Options"). The AAPH Options are equivalent to 1.5 times the number of
shares of the Company's common stock subject to the 586,556 FCEI Options. The
AAPH Options are identical in price and exercise terms to the FCEI Options and
are exercisable only to the extent that the FCEI Options are exercised.
At December 31, 1997, 471,770 FCEI Options and 707,655 AAPH Options remain
outstanding. These exercisable options have an option price of $3.75 and expire
in 1998.
In 1996, the Company adopted the American Architectural Products
Corporation Stock Option Plan (the "Plan") whereby 10,000,000 shares of the
Company's common stock have been authorized for issuance under the Plan. Shares
of common stock have been made available for grant to directors, officers, key
employees and non-employees at the discretion of the Board of Directors. The
exercise price of stock options granted to employees and non-employee directors
equals the market price or 110% of the market price of the Company's common
stock at the date of grant. The stock options issued to employees have a ten
year term and vest in 20% increments over five years. Stock options issued to
non-employee directors have a ten year term and vest within one year.
Certain options have been granted to non-employees based on negotiated
terms. Stock options issued to non-employees are recorded at fair value with a
related charge against income.
The Company applies the intrinsic value method in accounting for its stock
options issued to employees. Accordingly, no compensation cost has been
recognized for stock options issued to employees. The following table sets forth
the Company's net income (loss) and net income (loss) available per common share
on a pro forma basis had compensation expense for the Company's stock options
issued to employees been determined based on the fair value at the grant dates:
<TABLE>
<CAPTION>
FROM DATE OF INCEPTION
(JUNE 19, 1996) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
---------------------- -----------------
<S> <C> <C>
NET INCOME (LOSS)
As reported................................... $761,000 $(1,259,000)
Pro forma..................................... $761,000 $(1,329,000)
BASIC NET INCOME (LOSS) PER COMMON SHARE
As reported................................... $ .10 $ (.10)
Pro forma..................................... $ .10 $ (.10)
DILUTED NET INCOME (LOSS) PER COMMON SHARE
As reported................................... $ .09 $ (.10)
Pro forma..................................... $ .09 $ (.10)
</TABLE>
The fair value for the these stock options was estimated at the dates of
grant using a Black-Scholes option pricing model with the following
weighted -- average assumptions: a risk-free interest rate of 6.5%, a dividend
yield percentage of 0%, common stock volatility of .35 and an expected life of
the options of 5 years.
F-20
<PAGE> 81
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTIONS: (CONTINUED)
A summary of activity related to stock options for the Company's plan from
the date of inception to December 31, 1996 and for the year ended December 31,
1997 is as follows.
<TABLE>
<CAPTION>
1996 1997
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of the period......... -- $ -- 6,000 $4.69
Granted...................................... 6,000 4.69 534,000 5.31
Exercised.................................... -- -- -- --
Forfeited.................................... -- -- -- --
----- ----- ------- -----
Outstanding, end of the period............... 6,000 $4.69 540,000 $5.30
===== ===== ======= =====
</TABLE>
The weighted average fair value of the options granted during the periods
ended December 31, 1996 and 1997 were $1.97 and $1.87, respectively.
The following is a summary of stock options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE (YEARS) PRICE NUMBER PRICE
- ----------- ------ ------------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
$3.88 -- $4.69................. 131,000 8.38 $4.02 41,000 $4.32
$5.43 -- $6.19................. 409,000 7.98 5.72 104,000 5.44
------- ---- ----- ------- -----
540,000 8.08 $5.30 145,000 $5.12
======= ==== ===== ======= =====
</TABLE>
In February 1998, the Board of Directors rescinded 209,000 and 100,000
stock options with an exercise price of $5.63 and $6.19, respectively. These
stock options were reissued in February 1998 at the following prices: 209,000
options -- $3.56; and 100,000 options -- $3.92.
10. INCOME TAXES:
The provision for income taxes (income tax benefit) for the period from the
date of inception to December 31, 1996 and for the year ended December 31, 1997
consist of the following:
<TABLE>
<CAPTION>
FROM DATE
OF
INCEPTION TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
CURRENT
Federal.................................................. $269,000 $ --
State.................................................... 60,000 --
-------- ---------
329,000 --
DEFERRED................................................... 311,000 (390,000)
-------- ---------
$640,000 $(390,000)
======== =========
</TABLE>
F-21
<PAGE> 82
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES: (CONTINUED)
Significant components of deferred tax assets and liabilities as of
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
DEFERRED TAX ASSETS
Net operating loss carryforwards.......................... $ 850,000 $3,940,000
Allowance for doubtful accounts........................... 150,000 280,000
Accrued warranty obligations.............................. 1,520,000 1,660,000
Accrued postretirement benefits........................... 150,000 150,000
Other accruals............................................ 250,000 730,000
Other..................................................... 60,000 170,000
---------- ----------
2,980,000 6,930,000
---------- ----------
DEFERRED TAX LIABILITIES
Depreciation.............................................. 2,090,000 6,220,000
Other..................................................... 180,000 480,000
---------- ----------
2,270,000 6,700,000
---------- ----------
NET DEFERRED TAX ASSETS..................................... 710,000 230,000
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS................. (710,000) (230,000)
---------- ----------
NET DEFERRED TAXES.......................................... $ -- $ --
========== ==========
</TABLE>
In recording certain acquisitions, the Company established a valuation
allowance against the entire net deferred tax assets acquired, based on
uncertainties surrounding the expected realization of these assets. In 1996 and
1997, the Company reversed the valuation allowances by $311,000 and $685,000,
respectively, and accordingly reduced cost in excess of net assets acquired.
The actual income tax expense (income tax benefit) attributable to earnings
(loss) for the period from inception to December 31, 1996 and for the year ended
December 31, 1997 differed from the amounts computed by applying the U.S.
federal tax rate of 34 percent to pretax earnings as a result of the following:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Tax at U.S. federal statutory rate.......................... $470,000 $(390,000)
Expenses not deductible for tax purposes.................... 40,000 240,000
Valuation allowance adjustment.............................. 100,000 (240,000)
State income taxes, net of federal income tax benefit....... 40,000 --
Other....................................................... (10,000) --
-------- ---------
PROVISION FOR INCOME TAXES.................................. $640,000 $(390,000)
======== =========
</TABLE>
At December 31, 1997, the Company and its subsidiaries had net operating
loss carryforwards of approximately $15,600,000 for income tax purposes which
expire between 1999 and 2012. Due to changes in ownership, utilization of
approximately $14,300,000 of the net operating loss carryforwards is limited to
approximately $550,000 per year. The remaining $1,300,000 may be utilized
without limitation.
F-22
<PAGE> 83
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RELATED PARTY TRANSACTIONS:
The Company paid management fees to its majority stockholder of
approximately $120,000 and $250,000 for the period from inception to December
31, 1996 and for the year ended December 31, 1997. Additionally, the Company
paid $835,000 for acquisition services and $571,000 for other transaction
services in 1997 to its majority stockholder. In 1997, the Company paid $450,000
to a Company affiliated with AAPH Holdings, Inc. for air charter services.
12. NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share amounts have been computed in accordance
with Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128). Basic net income (loss) per common share amounts were computed by
dividing net income (loss) less preferred stock dividends by the weighted
average number of common shares outstanding. Diluted income (loss) per share
amounts give effect to dilutive common stock equivalents outstanding.
A summary of the basic and diluted earnings (loss) per share computations
follow.
<TABLE>
<CAPTION>
DATE OF INCEPTION (JUNE 16, 1996)
TO DECEMBER 31, 1996
------------------------------------
PER SHARE
INCOME SHARES AMOUNT
--------- ---------- ---------
<S> <C> <C> <C>
Income before extraordinary item................. $ 761,000
Preferred stock dividends........................ --
---------
BASIC INCOME PER COMMON SHARE
Income available to common stockholders........ 761,000 7,884,000 $ .10
=====
EFFECT OF DILUTIVE SECURITIES
Common Stock Options........................... 276,000
--------- ---------- -----
DILUTIVE EARNINGS PER COMMON SHARE............... $ 761,000 8,160,000 $ .09
========= ========== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
PER SHARE
LOSS SHARES AMOUNT
--------- ---------- ---------
<S> <C> <C> <C>
Loss before extraordinary item................... $(765,000)
Preferred stock dividends........................ (75,000)
---------
BASIC LOSS PER COMMON SHARE
Loss available to common stockholders.......... (840,000) 12,982,000 $(.06)
=====
EFFECT OF DILUTIVE SECURITIES
Common Stock Options........................... --
--------- ---------- -----
DILUTIVE LOSS PER COMMON SHARE................... $(840,000) 12,982,000 $(.06)
========= ========== =====
</TABLE>
F-23
<PAGE> 84
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. NET INCOME (LOSS) PER COMMON SHARE: (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
------------------------------------
PER SHARE
LOSS SHARES AMOUNT
--------- ---------- ---------
<S> <C> <C> <C>
Loss before extraordinary item................... $(515,000)
Preferred stock dividends........................ --
---------
BASIC LOSS PER COMMON SHARE
Loss available to common stockholders.......... (515,000) 12,581,054 $(.04)
=====
EFFECT OF DILUTIVE SECURITIES
Common Stock Options........................... --
--------- ---------- -----
DILUTIVE LOSS PER COMMON SHARE................... $(515,000) 12,581,054 $(.04)
========= ========== =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------
(UNAUDITED)
PER SHARE
LOSS SHARES AMOUNT
----------- ---------- ---------
<S> <C> <C> <C>
Loss before extraordinary item.................. $(2,609,000)
Preferred stock dividend........................ --
-----------
BASIC LOSS PER COMMON SHARE
Loss available to common stockholders......... (2,609,000) 13,458,479 $(.19)
=====
EFFECT OF DILUTIVE SECURITIES
Common Stock Options.......................... --
----------- ---------- -----
DILUTIVE LOSS PER COMMON SHARE.................. $(2,609,000) 13,458,479 $(.19)
=========== ========== =====
</TABLE>
The weighted average number of common shares outstanding for 1996 and the
three months ended March 31, 1997 includes the 7,548,633 common shares issued
upon the conversion of all of the Series A Preferred (which based on its terms,
the Company believed was common stock in substance) and the 171,842 shares
issued by the Company in 1997 to fulfill an obligation to an officer.
The weighted average number of common shares outstanding for the year ended
December 31, 1997 includes approximately 300,000 additional common shares
issuable in January 1999 in connection with the Thermetic acquisition based on
the average market price.
13. SEGMENT INFORMATION:
The Company operates in two separate segments. The first includes the
manufacturing and distribution of residential and specialty commercial
fenestration products. The product lines within this segment include aluminum,
wood and vinyl windows, doors, and other fenestration products such as storm
windows and doors, and decorative glass. The second classification is large
contract commercial fenestration products including aluminum windows, security
windows, screens and doors used primarily in commercial buildings such as
schools and dormitories, office and governmental buildings, and low-income
housing.
F-24
<PAGE> 85
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SEGMENT INFORMATION: (CONTINUED)
INFORMATION BY SEGMENT -- 1997
<TABLE>
<CAPTION>
RESIDENTIAL
AND SPECIALTY CONTRACT
COMMERCIAL COMMERCIAL
FENESTRATION FENESTRATION
PRODUCTS PRODUCTS
------------- ------------
<S> <C> <C>
Net sales................................................ $ 91,695,000 $ 2,558,000
Operating income (loss).................................. 7,255,000 (1,554,000)
Assets employed at year-end.............................. 105,223,000 10,694,000
Depreciation and amortization............................ 1,980,000 700,000
Capital expenditures..................................... 1,499,000 --
</TABLE>
The segment information does not include the identifiable assets and
operating expenses of corporate administration.
Segment information for 1996 is not presented because the Company's
operations were primarily in the residential and specialty commercial
fenestration products segment. The contract commercial fenestration products
segment was acquired in December 1996 and its results of operations from the
date of acquisition were not significant.
14. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FROM DATE OF INCEPTION
(JUNE 19, 1996) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
---------------------- ------------
<S> <C> <C>
CASH PAID DURING THE PERIOD FOR
Interest........................................... $ 620,000 $ 3,017,000
Income taxes....................................... 70,000 228,000
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock and debt issued and liabilities
assumed in acquisitions.......................... $27,981,000 $22,465,000
Capital lease obligations.......................... 1,578,000 --
Distribution to stockholder........................ 170,000 --
</TABLE>
F-25
<PAGE> 86
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Eagle Window & Door, Inc. and Subsidiaries and
Taylor Building Products Company (Wholly-Owned Subsidiaries)
We have audited the accompanying combined balance sheets of Eagle Window &
Door, Inc. and Subsidiaries and Taylor Building Products Company (Wholly-Owned
Subsidiaries), as of December 31, 1995 and August 29, 1996, and the related
combined statements of operations and accumulated deficit, and cash flows for
the year ended December 31, 1995 and the eight months ended August 29, 1996.
These combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
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 audits 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 combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Eagle
Window & Door, Inc. and Subsidiaries and Taylor Building Products Company
(Wholly-Owned Subsidiaries) as of December 31, 1995 and August 29, 1996, and the
results of their combined operations and cash flows for the year ended December
31, 1995 and the eight months ended August 29, 1996 in conformity with generally
accepted accounting principles.
SEMPLE & COOPER, P.L.C.
Phoenix, Arizona
January 31, 1997
F-26
<PAGE> 87
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 29,
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash (Note 2)............................................. $ 750,361 $ 395,859
Accounts receivable, net (Note 1)......................... 6,954,830 7,736,517
Inventory (Notes 1 and 3)................................. 8,330,593 8,483,224
Prepaids and other........................................ 448,426 314,240
------------ ------------
Total Current Assets................................... 16,484,210 16,929,840
------------ ------------
Property, Plant and Equipment, Net (Notes 1 and 4).......... 8,760,799 6,966,340
------------ ------------
Deposits and Other Assets................................... 55,370 93,376
------------ ------------
Total Assets........................................... $ 25,300,379 $ 23,989,556
============ ============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities:
Accounts payable.......................................... $ 2,859,256 $ 2,429,053
Accrued wages and payroll taxes........................... 371,510 453,459
Payable to affiliates (Note 10)........................... 20,482,654 19,441,656
Other accrued expenses.................................... 1,527,296 2,346,756
Accrued warranty reserve--short-term portion (Note 9)..... 1,566,000 1,479,000
------------ ------------
Total Current Liabilities.............................. 26,806,716 26,149,924
------------ ------------
Long-Term Liabilities:
Accrued warranty reserve--long-term portion (Note 9)...... 3,258,800 3,148,412
------------ ------------
Commitments and Contingencies: (Note 5)..................... -- --
Stockholder's Deficit: (Note 6)
Common stock.............................................. 211,851 211,851
Additional paid-in capital................................ 26,081,937 27,224,456
Accumulated deficit....................................... (31,058,925) (32,745,087)
------------ ------------
Total Stockholder's Deficit............................ (4,765,137) (5,308,780)
------------ ------------
Total Liabilities and Stockholder's Deficit............ $ 25,300,379 $ 23,989,556
============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-27
<PAGE> 88
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR EIGHT MONTHS
ENDED ENDED
DECEMBER 31, AUGUST 29,
1995 1996
---- ----
<S> <C> <C>
Sales....................................................... $ 72,962,690 $ 39,971,058
Cost of Sales............................................... 67,642,530 33,832,799
------------ ------------
Gross Profit................................................ 5,320,160 6,138,259
Selling Expense............................................. 6,619,136 3,948,778
General and Administrative Expenses......................... 5,714,966 3,141,852
Restructuring Charge (Note 7)............................... 840,042 --
------------ ------------
Loss from Operations........................................ (7,853,984) (952,371)
------------ ------------
Other Income (Expense):
Interest expense (Note 10)................................ (1,755,177) (1,142,519)
Gain (Loss) on sale of assets............................. (375,325) (773,866)
Other..................................................... 38,984 274,661
------------ ------------
(2,091,518) (1,641,724)
------------ ------------
Loss before Income Tax Benefit.............................. (9,945,502) (2,594,095)
Income Tax Benefit (Note 1)................................. 3,557,425 907,933
------------ ------------
Net Loss.................................................... (6,388,077) (1,686,162)
Accumulated Deficit, Beginning of Year...................... (24,670,848) (31,058,925)
------------ ------------
Accumulated Deficit, End of Year............................ $(31,058,925) $(32,745,087)
============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-28
<PAGE> 89
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR EIGHT MONTHS
ENDED ENDED
DECEMBER 31, AUGUST 29,
1995 1996
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Cash received from customers.............................. $ 73,112,175 $ 39,462,693
Cash paid to suppliers and employees...................... (70,132,913) (38,177,166)
Interest paid............................................. (3,686) --
Interest received......................................... 4,504 1,340
Restructuring costs....................................... (423,909) --
------------ ------------
Net cash provided by operating activities.............. 2,556,171 1,286,867
------------ ------------
Cash Flows from Investing Activities:
Cash received from sale of equipment...................... 558,265 37,289
Purchase of equipment..................................... (2,576,407) (1,678,658)
------------ ------------
Net cash used by investing activities.................. (2,018,142) (1,641,369)
------------ ------------
Cash Flows from Financing Activities:
Repayment of debt...................................... -- --
------------ ------------
Net cash used by financing activities.................. -- --
------------ ------------
Net increase (decrease) in cash............................. 538,029 (354,502)
Cash at beginning of year................................... 212,332 750,361
------------ ------------
Cash at end of year......................................... $ 750,361 $ 395,859
============ ============
Reconciliation of Net Loss to Net Cash Provided by Operating
Activities:
Net Loss.................................................... $ (6,388,077) $ (1,686,162)
------------ ------------
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operating Activities:
Depreciation.............................................. 3,310,040 2,661,961
(Gain) Loss on sale of assets............................. 375,325 773,866
Abandonment of fixed assets in restructuring.............. 416,131 --
Interest expense contributed to capital by Parent
Company................................................ -- 1,142,519
Changes in Assets and Liabilities:
Accounts receivable....................................... 946,420 (781,687)
Inventory................................................. 9,903,590 (152,631)
Prepaids and other........................................ 120,959 134,186
Deposits and other........................................ 76,899 (38,005)
Accounts payable.......................................... (483,538) (430,203)
Accrued wages and payroll taxes........................... (195,608) 72,539
Other accrued expenses.................................... (255,986) 828,870
Payable to affiliates..................................... (4,944,984) (1,040,998)
Accrued warranty reserve.................................. (325,000) (197,388)
------------ ------------
8,944,248 2,973,029
------------ ------------
Net cash provided by operating activities.............. $ 2,556,171 $ 1,286,867
============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-29
<PAGE> 90
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES:
BASIS OF PRESENTATION:
The combined financial statements include the financial position, results
of operations and cash flows of Eagle Window & Door, Inc. and Subsidiaries and
Taylor Building Products Company (the Companies). All material intercompany
transactions, accounts and balances have been eliminated.
Each Company is a wholly-owned subsidiary of MascoTech, Inc. Because of
these relationships, the financial statements of the Companies have been
prepared on a combined format as if they were a single entity. In addition,
MascoTech, Inc. performed the Companies' treasury function, and allocated
expenses for various services it provided (See Note 10).
Eagle Window & Door, Inc. and Subsidiaries (Eagle) are engaged in the
manufacture of aluminum clad and all wood windows and doors. Eagle's primary
market is the construction industry. Products are marketed through various
distributors located throughout the United States and Pacific Rim. Eagle's
wholly-owned subsidiaries, Eagle Window & Door of Bellevue, Inc. and Eagle
Service Company are engaged in the sale and distribution of windows and doors
throughout the United States.
The accompanying combined financial statements include the consolidated
accounts of Eagle Window & Door, Inc. and its wholly-owned subsidiaries, Eagle
Window & Door of Bellevue, Inc. and Eagle Service Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Taylor Building Products Company (Taylor) is engaged in the manufacture of
entry and garage doors. The Company markets entry doors under the brand names of
Perma Door and Taylor Door. The Perma Door brand is primarily marketed through
millwork distributors and the Taylor Door brand is primarily marketed through
installing dealers. The Company markets garage doors under the Taylor Door brand
name throughout the United States.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE:
Historical earnings per share data has not been presented in the
accompanying financial statements due to the subsequent acquisition of the two
Companies by American Architectural Products, Inc. and its reverse merger with a
public reporting company (See Note 13).
ACCOUNTS RECEIVABLE:
As of December 31, 1995 and August 29, 1996, allowances have been
established for potentially uncollectible accounts receivable in the amounts of
$445,418 and $791,521, respectively.
INVENTORY:
Inventory is stated at the lower of cost (first-in, first-out method) or
market. Inventories are reviewed periodically for obsolescence, and an allowance
established to record potentially obsolete inventory at net realizable value
(See Note 3).
F-30
<PAGE> 91
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES: (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation is provided
for using the straight-line method over the estimated useful lives of the
assets. Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as incurred.
Betterments or renewals are capitalized when incurred. Depreciation expense for
the year ended December 31, 1995 and the eight months ended August 29, 1996, was
$3,310,040 and $2,661,961, respectively. Assets are being depreciated over their
estimated useful lives, as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.................................. 40
Machinery and equipment..................................... 6-15
Computer and office equipment............................... 10
Tools, dies and fixtures.................................... 3
</TABLE>
INCOME TAXES:
The Companies file their income tax returns on a consolidated basis with
their parent company. All provisions for federal and state income taxes,
including provisions for deferred income taxes, are provided for through the
intercompany accounts.
ADVERTISING:
The cost of advertising is expensed as incurred. Advertising expense was
$1,192,915 and $479,300, respectively, for the year ended December 31, 1995 and
the eight months ended August 29, 1996.
2. CONCENTRATION OF CREDIT RISK:
The combined Companies maintain cash balances at various financial
institutions. At December 31, 1994 and 1995 and at August 29, 1996, the combined
Companies have uninsured cash in the approximate amounts of $734,000, $670,000
and $230,000, respectively.
3. INVENTORY:
As of December 31, 1995 and as of August 29, 1996, inventory consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 29,
1995 1996
---- ----
<S> <C> <C>
Raw materials..................................... $ 7,106,775 $6,118,026
Work in process................................... 1,215,724 1,366,212
Finished goods.................................... 1,631,594 1,473,501
----------- ----------
9,954,093 8,957,739
Less: provision for obsolete inventory............ (1,623,500) (474,515)
----------- ----------
$ 8,330,593 $8,483,224
=========== ==========
</TABLE>
Included in the allowance for obsolete inventory as of December 31, 1995 is
approximately $1,260,000 for future losses from Taylor Building Products
Company's restructuring plan (See Note 7).
F-31
<PAGE> 92
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT:
As of December 31, 1995 and August 29, 1996, property, plant and equipment
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 29,
1995 1996
---- ----
<S> <C> <C>
Land and improvements.................................. $ 407,523 $ 408,934
Buildings and improvements............................. 7,996,419 7,698,252
Machinery and equipment................................ 10,807,526 11,276,992
Computer and office equipment.......................... 3,238,291 2,223,089
Tools, dies and fixtures............................... 1,962,048 3,698,385
------------ ------------
24,411,807 25,305,652
Less: accumulated depreciation......................... (15,651,008) (18,339,312)
------------ ------------
$ 8,760,799 $ 6,966,340
============ ============
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS:
The Companies are currently leasing certain office and manufacturing space
in Dubuque, Iowa and West Branch, Michigan under non-cancellable operating lease
agreements which expire through July, 1997. The terms of the leases provide for
combined monthly payments totalling approximately $12,000. The lease terms also
require the Companies to pay common area maintenance, taxes, insurance and other
costs. The Companies are also leasing equipment under various non-cancellable
operating lease agreements which expire through July, 2000. Rent expense under
the operating lease agreements was $817,418 and $477,761, respectively, for the
year ended December 31, 1995 and the eight months ended August 29, 1996.
A schedule of future minimum lease payments due under the non-cancellable
operating lease agreements, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
- ------------ ------
<S> <C> <C>
1996............................................................. $ 595,370
1997............................................................. 330,465
1998............................................................. 221,577
1999............................................................. 88,472
2000............................................................. 4,729
----------
$1,240,613
==========
</TABLE>
CONTINGENCIES:
Environmental Issue:
Based on an evaluation of Eagle's operating facility, asbestos-containing
materials were located in various sections of the facility. No provision or
accrual has been made to provide for any potential future costs for abatement
because, in management's opinion, they should not have a material adverse effect
upon the combined financial position of the Companies. In connection with the
sale of the Companies to American Architectural Products, Inc. (See Note 13),
the former parent of the Companies agreed to bear certain abatement costs
relating to this matter.
F-32
<PAGE> 93
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Litigation:
At December 31, 1995 and August 29, 1996, the Companies are a party to
several lawsuits. The Companies believe that the lawsuits are without merit and
intend to vigorously defend their position. Provision for a lawsuit that was
settled subsequent to December 31, 1995 for approximately $165,000 has been
charged to operations in the accompanying financial statements for the year
ended December 31, 1995. A provision has been charged to operations in the
accompanying financial statements for the eight months ended August 29, 1996 for
approximately $100,000 for a lawsuit involving product performance issues.
6. STOCKHOLDERS' EQUITY:
The stock of Taylor Building Products Company consists of 1,000 shares of
$1 par value common stock authorized, issued and outstanding. The stock of Eagle
Window & Door, Inc. consists of 500,000 shares of $1 par value common stock
authorized, 210,851 shares issued and outstanding.
7. RESTRUCTURING CHARGE:
In September, 1995, Taylor's management adopted a restructuring plan to
address recurring operating losses. The goal of the plan was to reduce overhead
through a plan of business consolidation and simplification. The major
components to the plan were: (1) closure of its satellite locations in Florida
and Texas; (2) elimination of its "non-core" product lines; and (3) improve the
proficiency of its entry and garage door lines. As a result of the restructuring
plan, the Company incurred costs for liquidation of inventory, loss on the sale
and abandonment of fixed assets, severance pay, and other related costs. The
restructuring plan was completed during the first quarter of 1996.
The restructuring charge for the year ended December 31, 1995, consisted of
the following:
<TABLE>
<S> <C>
Loss on sale and abandonment of fixed assets................ $416,131
Severance pay............................................... 281,012
Other....................................................... 142,899
--------
$840,042
========
</TABLE>
8. STATEMENTS OF CASH FLOWS:
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1995, the Companies recognized an
investing activity that affected equity, but did not result in cash receipts or
payments. This non-cash activity consisted of the write off notes receivable
deemed uncollectible in the amount of $344,473.
9. WARRANTY RESERVE:
The Companies sell the majority of their products with limited warranties
of two to 25 years. At December 31, 1995 and at August 29, 1996, the
accompanying financial statements include a reserve of $4,824,800 and
$4,627,412, respectively, for estimated warranty claims based on the Companies'
historical claims experience.
10. RELATED PARTY TRANSACTIONS:
As of December 31, 1995 and August 29, 1996, the Companies had amounts
payable to affiliates of $20,482,654 and, $19,441,656, respectively. These
affiliates represent primarily the parent company and
F-33
<PAGE> 94
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS: (CONTINUED)
subsidiaries of the parent company. Various shared expenses were charged to the
Companies through the payable to affiliate account. These expenses included
items such as general insurance, health insurance, and workers compensation
insurance, which were charged based on specific identification of the expense.
For the year ended December 31, 1995 and the eight months ended August 29, 1996,
total expenses charged to the Companies through specific identification were
$3,588,020 and $1,613,407, respectively.
In addition, MascoTech, Inc., the parent company, charged the Companies a
management fee based on budgeted sales for the various operating subsidiaries.
For the year ended December 31, 1995 and the eight months ended August 29, 1996,
total management fees charged to the Companies were $1,314,700 and $951,000,
respectively.
MascoTech, Inc. also provided cash management services for the Companies.
For the year ended December 31, 1995 and the eight months ended August 29, 1996,
the Companies had recorded interest expense relating to the amounts payable to
affiliates of $1,755,177 and $1,142,519, respectively. Interest expense for the
eight month period ended August 29, 1996 was treated as contributed to capital
by the Parent Company.
11. BENEFIT PLANS:
401(K) PROFIT SHARING PLAN AND PENSION PLAN:
The Companies' former parent sponsored the MascoTech, Inc. Salaried Savings
Plan. All salaried employees of the Company with three months of service, were
eligible to participate in the Plan. The Plan operated as a 401(k) Savings Plan.
The Plan did not provide for a discretionary matching or profit sharing
contribution. As such, no expense has been recorded for contributions in the
accompanying financial statements.
The Companies' former parent sponsored the MascoTech, Inc. Master Hourly
Employees' Pension Plan. All hourly employees of the Companies were eligible to
participate in the Plan with participation commencing on the date of hire.
Benefits in the Plan were vested and based on the number of years of credited
service.
Pursuant to the pending sale of the Companies to American Architectural
Products, Inc., in August, 1996, and in accordance with the Stock Purchase
Agreement, coverage under these plans ceased. The seller agreed to fully vest
all participants and pay benefits in the normal course of the plans. As such, no
liability has been reported in the accompanying combined financial statements
for any potential unfunded liabilities.
POST-RETIREMENT BENEFITS:
Taylor Building Products Company sponsors a post-retirement health benefit
program pursuant to its collective bargaining contract. Under the principal
terms of the contract, the Company will pay a retired employee with a minimum of
ten years service, a benefit of $100 per month after retirement at age 62. As of
the date of the financial statements, no material post-retirement benefit
obligation has been incurred.
LABOR FORCE:
Most of the hourly employees of Taylor Building Products Company,
comprising approximately 85 percent of the Taylor labor force, are covered under
a collective bargaining agreement. The contract expired in February, 1997, and
was renegotiated for an additional five years.
F-34
<PAGE> 95
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES AND
TAYLOR BUILDING PRODUCTS COMPANY (WHOLLY-OWNED SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. ECONOMIC DEPENDENCY:
For the year ended December 31, 1995, Eagle Window & Door, Inc. purchased
approximately 38 percent of their materials from two suppliers. For the eight
month period ended August 29, 1996, Eagle purchased approximately 15 percent of
their materials from one supplier. At December 31, 1995 and at August 29, 1996,
amounts due to the suppliers were $254,584 and $332,179, respectively.
For the year ended December 31, 1995, and for the eight month period ended
August 29, 1996, Taylor Building Products Company purchased approximately 16
percent and 20 percent, respectively, of their materials from one supplier. At
December 31, 1995, and at August 29, 1996, amounts due to the supplier were
approximately $452,000 and $362,000, respectively.
13. SUBSEQUENT EVENT:
ACQUISITION:
Effective August 29, 1996, the Companies were acquired by American
Architectural Products, Inc. (AAP). On December 18, 1996, American Architectural
Products Holdings, Inc. (AAPH, parent of AAP) consummated transactions
contemplated under an Agreement and Plan of Reorganization dated October 25,
1996. Under terms of this Agreement, all of the capital stock of AAP was
exchanged by AAPH for a 60 percent interest in Forte Computer Easy, Inc. The
financial statements do not give effect to these transactions.
F-35
<PAGE> 96
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Mallyclad Corporation and Vyn-L Corporation
We have audited the accompanying combined balance sheets of Mallyclad
Corporation and Vyn-L Corporation as of November 30, 1995 and June 30, 1996, and
the related combined statements of operations and retained earnings, and cash
flows for the year ended November 30, 1995 and the seven months ended June 30,
1996. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined 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 combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Mallyclad
Corporation and Vyn-L Corporation as of November 30, 1995 and June 30, 1996, and
the results of their combined operations and their combined cash flows for the
year ended November 30, 1995 and the seven months ended June 30, 1996 in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Troy, Michigan
April 28, 1997
F-36
<PAGE> 97
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
1995 JUNE 30, 1996
---- -------------
<S> <C> <C>
ASSETS (Note 3)
CURRENT ASSETS
Cash and equivalents...................................... $ 110,599 $ 229,615
Accounts receivable, less allowance for doubtful accounts
of $7,000 in 1996...................................... 530,410 358,731
Refundable income taxes................................... 26,160 26,160
Inventories (Note 2)...................................... 430,902 285,635
Prepaid expenses.......................................... 22,853 18,736
----------- -----------
TOTAL CURRENT ASSETS........................................ 1,120,924 918,877
----------- -----------
PROPERTY AND EQUIPMENT
Leasehold improvements.................................... 128,391 128,391
Machinery and equipment................................... 2,203,868 2,205,604
Computers and office equipment............................ 85,184 87,420
----------- -----------
2,417,443 2,421,415
Less accumulated depreciation............................. (2,268,378) (2,304,178)
----------- -----------
NET PROPERTY AND EQUIPMENT.................................. 149,065 117,237
----------- -----------
OTHER ASSETS................................................ 59,481 32,896
----------- -----------
$ 1,329,470 $ 1,069,010
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving line of credit (Note 3)......................... $ 100,000 $ --
Accounts payable.......................................... 280,737 158,039
Accruals
Product claims......................................... 59,556 46,101
Commissions............................................ 28,181 20,150
Compensation........................................... 12,185 8,647
Other.................................................. 53,170 52,103
----------- -----------
TOTAL CURRENT LIABILITIES................................... 533,829 285,040
----------- -----------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY
Common stock, $1 par, authorized 50,000 shares;
outstanding 50,000 shares--Mallyclad Corporation....... 50,000 50,000
Common stock, $1 par, authorized 50,000 shares;
outstanding 38,000 shares--Vyn-L Corporation........... 38,000 38,000
Retained earnings......................................... 707,641 695,970
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. 795,641 783,970
----------- -----------
$ 1,329,470 $ 1,069,010
=========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-37
<PAGE> 98
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
SEVEN
YEAR ENDED MONTHS
NOVEMBER 30, ENDED
1995 JUNE 30, 1996
---- -------------
<S> <C> <C>
Net Sales................................................... $3,991,882 $1,915,620
Cost of Goods Sold.......................................... 3,520,971 1,596,753
---------- ----------
Gross Profit................................................ 470,911 318,867
Selling, General and Administrative Expenses................ 648,990 349,671
---------- ----------
Loss from Operations........................................ (178,079) (30,804)
Other Income--Net........................................... 37,133 19,133
---------- ----------
Loss Before Taxes on Income................................. (140,946) (11,671)
Tax Benefits (Note 6)....................................... 20,686 --
---------- ----------
Net Loss.................................................... (120,260) (11,671)
Retained Earnings, beginning of period...................... 828,901 707,641
Dividends................................................... (1,000) --
---------- ----------
Retained Earnings, end of period............................ $ 707,641 $ 695,970
========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-38
<PAGE> 99
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN
YEAR ENDED MONTHS
NOVEMBER 30, ENDED
1995 JUNE 30, 1996
---- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(120,260) $ (11,671)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 81,884 35,800
Changes in operating assets and liabilities:
Receivables.......................................... 117,057 171,679
Inventories.......................................... 96,573 145,267
Prepaid expenses..................................... (2,005) 4,117
Other assets......................................... 4,561 26,585
Accounts payable..................................... (179,635) (122,698)
Accruals............................................. (16,911) (26,091)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES......... (18,736) 222,988
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Additions to property and equipment....................... (45,325) (3,972)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under line of credit
arrangements........................................... 100,000 (100,000)
Dividends paid............................................ (1,000) --
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 99,000 (100,000)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............. 34,939 119,016
CASH AND EQUIVALENTS, at beginning of period................ 75,660 110,599
--------- ---------
CASH AND EQUIVALENTS, at end of period...................... $ 110,599 $ 229,615
========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-39
<PAGE> 100
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
Mallyclad Corporation (Mallyclad) manufactures vinyl clad steel and
aluminum cut to length sheets, primarily for the construction, appliance and
automotive industries. Vyn-L Corporation (Vyn-L) is a steel and aluminum
processor, performing shearing and forming functions for its customers.
Mallyclad and Vyn-L ("the Companies") were under common control and because
of these relationships, the financial statements of the Companies have been
prepared on a combined basis as if they were a single entity. All material
intercompany transactions, accounts and balances 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
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of receivables, payables and accrued expenses
approximate fair value because of the short maturity of these items.
CASH EQUIVALENTS
Cash equivalents are short-term, highly liquid investments consisting of
money market funds.
INVENTORIES
Inventories are stated at the lower of cost or market value determined on
the first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided for
using accelerated methods over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements...................................... 7-31
Machinery and equipment..................................... 7-15
Computers and office equipment.............................. 5-7
</TABLE>
Depreciation expense for the year ended November 30, 1995 and for the seven
months ended June 30, 1996, was $81,884 and $35,800, respectively.
Expenditures for renewals and betterments are capitalized. Expenditures for
maintenance and repairs are charged against income as incurred.
REVENUE RECOGNITION
Revenues from sales and the corresponding receivables are recorded upon the
shipment of product to the customer.
F-40
<PAGE> 101
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The income tax provision is computed using the liability method. Deferred
taxes are recorded for the expected future tax consequences of temporary
differences between the financial reporting and the tax bases of the Companies'
assets and liabilities.
2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
NOVEMBER 30
1995 JUNE 30, 1996
---- -------------
<S> <C> <C>
Raw materials..................................... $355,670 $198,605
Finished goods.................................... 75,232 87,030
-------- --------
$430,902 $285,635
======== ========
</TABLE>
3. REVOLVING LINE OF CREDIT
Mallyclad had a $400,000 revolving line of credit secured by substantially
all of the assets of Mallyclad. The outstanding borrowings on the line were
$100,000 and $-0-, respectively, as of November 30, 1995, and June 30, 1996. The
interest rate on the line was prime plus 1/2 percent. Interest expense was
$5,086 and $2,110, respectively, for the periods ended November 30, 1995 and
June 30, 1996. The revolving line of credit was terminated in connection with
the acquisition of the Company's common stock (see Note 9).
4. RETIREMENT PLAN
Mallyclad sponsors a defined contribution retirement plan for salaried
employees. Employees are eligible to participate in the Plan one year after
employment. Company contributions are required in the amount of 4.3 percent of
the participant's total compensation plus 4.3 percent of the participant's
compensation in excess of $30,000. Contributions were $30,974 and $17,500,
respectively, for the periods ended November 30, 1995, and June 30, 1996.
5. COMMITMENTS
The Companies leased their facilities from a related party under
non-cancellable operating lease agreements which commenced January 1, 1994. The
operating lease agreements are for a term of five years and provide for total
monthly payments of $16,168. Rent expense under the operating lease agreements
for the periods ended November 30, 1995, and June 30, 1996 was $163,000 and
$95,000, respectively.
6. TAXES ON INCOME
The benefits (expenses) for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEVEN MONTHS
NOVEMBER 30, ENDED
1995 JUNE 30, 1996
---- -------------
<S> <C> <C>
Current federal................................... $20,686 $ --
Deferred.......................................... -- --
------- -------
Total............................................. $20,686 $ --
======= =======
</TABLE>
F-41
<PAGE> 102
MALLYCLAD CORPORATION
AND VYN-L CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. TAXES ON INCOME (CONTINUED)
Significant components of deferred taxes consist of deferred tax assets
arising from accrued expenses, allowance for doubtful accounts and depreciation.
Management has recorded a full valuation allowance against these deferred tax
assets at November 30, 1995 and at June 30, 1996.
7. MAJOR CUSTOMERS
Two customers, each individually accounting for at least 10% of combined
net sales, accounted for 23% of net sales in 1995.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest approximated interest expense.
Cash paid for taxes on income for the periods ended November 30, 1995 and
June 30, 1996 totaled $33,014 and $-0-, respectively.
9. SUBSEQUENT EVENT
On June 25, 1996, all of the outstanding stock of the Companies was
purchased by an individual. On December 18, 1996 Mallyclad and Vyn-L were merged
into American Architectural Products, Inc. (AAP), a Company controlled by this
same individual. These financial statements do not give effect to these
transactions.
F-42
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Forte Computer Easy, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Forte
Computer Easy, Inc. and Subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presents fairly, in all material respects, the consolidated financial position
of Forte Computer Easy, Inc. and Subsidiaries as of December 31, 1995, and the
consolidated results of its operations, changes in stockholders' equity, and
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
SEMPLE & COOPER, P.L.C.
Phoenix, Arizona
May 28, 1996
F-43
<PAGE> 104
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash...................................................... $ 143,254 $ 255,549
Accounts receivable, less allowance for doubtful accounts
and returns of $299,939 and $0, respectively........... 437,160 198,394
Inventory................................................. 1,666,832 1,782,078
Prepaid expenses.......................................... 31,474 15,002
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 246,472 43,574
----------- -----------
Total Current Assets................................... 2,525,192 2,294,597
----------- -----------
Property, Plant and Equipment:
Land...................................................... 74,969 74,969
Buildings and improvements................................ 2,957,795 2,968,203
Equipment, machinery and tooling.......................... 2,099,581 1,839,282
Office furniture and equipment............................ 122,709 85,423
Vehicles.................................................. 140,787 171,725
Airplane.................................................. 207,600 --
----------- -----------
5,603,441 5,139,602
Less: accumulated depreciation............................ (1,196,182) (1,118,303)
----------- -----------
4,407,259 4,021,299
----------- -----------
Other Assets:
Net assets of discontinued operations..................... 74,000 --
Goodwill, net............................................. 360,533 318,926
Other intangible costs, net............................... 27,170 29,598
Deposits and other........................................ 3,467 2,913
----------- -----------
465,170 351,437
----------- -----------
$ 7,397,621 $ 6,667,333
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-44
<PAGE> 105
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
(UNAUDITED)
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt......................... $ 243,438 $ 242,000
Revolving line of credit.................................. 107,906 107,906
Amount due officer........................................ 18,013 18,013
Accounts payable.......................................... 596,369 353,673
Accrued liabilities....................................... 457,170 53,455
Net liabilities of discontinued operations................ -- 209,945
Accrued costs of discontinued operations.................. 277,619 --
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 371,778 17,408
----------- -----------
Total Current Liabilities.............................. 2,072,293 1,002,400
----------- -----------
Long-Term Debt, Net of Current Portion...................... 4,021,664 4,429,684
Lease Deposit............................................... 9,575 9,575
Deferred Tax Liability...................................... 160,573 92,273
----------- -----------
4,191,812 4,531,532
----------- -----------
Commitments................................................. -- --
Stockholders' Equity:
Preferred stock -- $.01 par value; 20,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common stock -- $.01 par value; 50,000,000 shares
authorized; 48,460,111 shares issued and outstanding;
1,718,422 shares subscribed............................ 484,601 484,601
Paid-in capital........................................... 2,669,485 2,413,902
Common stock subscribed................................... 79,143 79,143
Accumulated deficit....................................... (1,727,609) (1,840,724)
----------- -----------
1,505,620 1,136,922
Less: Treasury stock, 456,317 shares at cost.............. (372,104) (3,521)
----------- -----------
1,133,516 1,133,401
----------- -----------
$ 7,397,621 $ 6,667,333
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-45
<PAGE> 106
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------ ------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Net Revenues........................................ $ 5,426,260 $ 4,361,288 $ 2,635,113
Cost of Revenues.................................... 4,540,722 3,541,366 2,087,032
----------- ----------- -----------
Gross Profit........................................ 885,538 819,922 548,081
Selling, General and Administrative................. 747,659 532,900 497,196
----------- ----------- -----------
Income Loss......................................... 137,879 287,022 50,885
Other Income (Expense):
Gain on sale of assets............................ -- -- 123,439
Other income (expense)............................ 22,086 37,018 12,841
Rental income..................................... 86,929 67,596 71,905
Interest expense.................................. (352,403) (254,879) (285,646)
Amortization of intangibles....................... -- (44,699) (49,932)
----------- ----------- -----------
Income (Loss) from Continuing Operations before
Provision for Income Taxes........................ (105,509) 92,058 (76,508)
Provision for Income Tax Benefit (Expense).......... 54,971 (34,900) 29,000
----------- ----------- -----------
Loss from Continuing Operations..................... (50,538) (57,158) (47,508)
Discontinued Operations:
Loss from operations of software division and disk
fulfillment division........................... (1,149,518) (560,990) (35,454)
Loss on disposal of disk fulfillment division....... (245,419) -- (30,153)
----------- ----------- -----------
Net Loss............................................ $(1,445,475) $ (503,832) $ (113,115)
=========== =========== ===========
Earnings per Share Income (loss) from continuing
operations........................................ -- -- --
Loss of discontinued operations and operations to
be disposed of................................. (.03) (.01) --
Income (loss) from disposal of disk and
fulfillment division........................... -- -- --
----------- ----------- -----------
Net Income (Loss)................................... $ (.01) $ (.01) $ --
=========== =========== ===========
Weighted Average Shares Outstanding................. 50,000,000 49,630,799 49,813,420
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-46
<PAGE> 107
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM DECEMBER 31, 1994 THROUGH SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMMON
SHARES PAID-IN STOCK TREASURY ACCUMULATED TOTAL
PREFERRED OF COMMON COMMON CAPITAL SUBSCRIBED STOCK DEFICIT EQUITY
--------- ---------- -------- ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994...................... -- 48,460,111 $484,601 $2,669,485 $79,143 -- $ (282,134) $ 2,951,095
Acquisition of 456,317
shares of treasury stock,
at cost................... -- -- -- -- -- $(372,104) -- (372,104)
Net loss.................... -- -- -- -- -- -- (1,445,475) (1,445,475)
--------- ---------- -------- ---------- ------- --------- ----------- -----------
Balance, December 31,
1995...................... -- 48,460,111 484,601 2,669,485 79,143 (372,104) (1,727,609) 1,133,516
Sale of Treasury Shares
(unaudited)............... -- -- -- (255,583) -- 368,583 -- 113,000
Net loss (unaudited)........ -- -- -- -- -- -- (113,115) (113,115)
--------- ---------- -------- ---------- ------- --------- ----------- -----------
Balance, September 30, 1996
(unaudited)............... $ -- 48,460,111 $484,601 $2,413,902 $79,143 $ (3,521) $(1,840,724) $ 1,133,401
========= ========== ======== ========== ======= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-47
<PAGE> 108
FORTE COMPUTER EASY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------ ------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss.......................................... $(1,445,475) $ (503,832) $ (113,115)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization.................. 378,886 281,977 227,451
Amortization of software development costs..... 109,899 141,247 --
Amortization of intangibles.................... 76,078 65,201 49,932
Decrease in provision for returns and doubtful
accounts..................................... (180,468) (71,947) --
Gain on sale of assets......................... -- (77,601) (123,439)
Decrease in provision for inventory
obsolescence................................. (284,540) -- --
Impairment of intangible assets of discontinued
operations................................... 246,083 -- --
Cash received from purchase of subsidiary...... -- -- --
Changes in Assets and Liabilities:
(Increase) Decrease in Assets:
Accounts receivable............................ 1,272,684 591,626 174,660
Inventory...................................... 908,156 416,386 (115,246)
Prepaid expenses............................... 80,204 68,031 16,472
Costs and estimated earnings in excess of
billings on uncompleted contracts............ 72,848 (44,541) 202,898
Deposits and intangibles....................... 5,433 5,641 (10,199)
Increase (Decrease) in Liabilities:
Accounts payable............................... (1,692,059) (385,410) (242,696)
Accrued liabilities............................ (12,103) 25,055 (371,904)
Amount due officer............................. 713 -- --
Accrued costs of discontinued operations....... 277,619 -- (207,827)
Net liabilities of discontinued operations..... -- -- 303,945
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 231,618 124,025 (354,370)
Net deferred tax liability..................... (154,828) (308,700) (68,300)
----------- ----------- -----------
Net cash provided by (used by) operating
activities.............................. $ (109,252) $ 327,158 $ (631,738)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-48
<PAGE> 109
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Investing Activities:
Capital expenditures............................... $(153,285) $(121,943) $ (97,376)
Computer software development costs................ (30,102) (30,102) --
Proceeds from the sale of assets................... 686,250 50,000 250,000
--------- --------- -----------
Net cash provided by (used by) investing
activities............................... 502,863 (102,045) 152,624
--------- --------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of treasury stock............... 75,000 -- 113,000
Proceeds from debt................................. 337,971 337,971 2,942,000
Principal payments on debt......................... (785,959) (661,085) (2,463,591)
Payments on amount due officers, net............... -- (20,164) --
--------- --------- -----------
Net cash provided by (used by) financing
activities............................... (372,988) (343,278) 591,409
--------- --------- -----------
Net Increase (Decrease) in Cash...................... 20,623 (118,165) 112,295
Cash, Beginning of Year.............................. 122,631 122,631 143,254
--------- --------- -----------
Cash, End of Year.................................... $ 143,254 $ 4,466 $ 255,549
========= ========= ===========
</TABLE>
F-49
<PAGE> 110
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Payment of accrued liability with equity in a
building........................................... $ -- $ -- $ 31,811
======== ======== ========
Negotiated accounts payable settlement reductions of
discontinued operations............................ $124,744 $ -- $ --
======== ======== ========
Purchase of treasury stock through the reduction of
accounts receivable and accrual of expenses........ $372,104 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
F-50
<PAGE> 111
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS:
Forte Computer Easy, Inc. is a Corporation which was duly formed and
organized under the laws of the State of Utah. Through June 8, 1994, the
acquisition date of Forte, Inc. and Arizona Disk Fulfillment, Inc., the Company
was principally engaged in the business of software publishing. Based upon the
aforementioned acquisitions, the Company expanded its operations through the
acquired subsidiaries into manufacturing of commercial and architectural
fenestration products, and into computer disk duplication and fulfillment
services for software publishers and technology based industries throughout the
United States.
In late 1995, the Company decided to discontinue its operations in the
software publishing and computer disk duplication and fulfillment divisions, as
disclosed in Note 10, Discontinued Operations.
ACQUISITION OF SUBSIDIARIES:
Effective June 8, 1994, the Company finalized the acquisition of all of the
outstanding stock of Forte, Inc. and Subsidiary, an Ohio corporation and Arizona
Disk Fulfillment, Inc., an Arizona corporation.
The acquisition of Forte, Inc. was effected through the exchange of
32,479,290 (unaudited) shares, of which 1,718,422 (unaudited) shares are
subscribed of the Company's common stock for all of the outstanding shares of
Forte, Inc. under a tax-free reorganization within the meaning of Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. The acquisition
was accounted for financial statement purposes as a reverse acquisition, with
Forte, Inc. as the acquiring company.
The acquisition of Arizona Disk Fulfillment, Inc. was completed through the
payment of $150,000 (unaudited) and the issuance of 1,900,000 (unaudited) shares
of the Company's common stock for all of the outstanding shares of Arizona Disk
Fulfillment, Inc. This transaction was also completed as a tax-free
reorganization.
For financial accounting purposes, the acquisitions are accounted for as
purchases in accordance with Accounting Principles Board Opinion No. 16. For tax
reporting purposes, these acquisitions were structured as tax-free
reorganizations.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Forte
Computer Easy, Inc. and its wholly-owned subsidiaries, Forte, Inc. and Arizona
Disk Fulfillment, Inc. All significant inter-company balances and transactions
have been eliminated in consolidation.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL STATEMENTS:
The unaudited interim consolidated financial statements include all
adjustments for normal recurring accruals considered necessary to present fairly
the Company's consolidated statements for the periods presented. Operating
results for the nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
F-51
<PAGE> 112
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION:
Computer Software:
The Company recognizes its computer software sales revenue in accordance
with the American Institute of Certified Public Accountants Statement of
Position 91-1 regarding software revenue recognition. Product revenue is
recognized, net of an allowance for estimated returns, upon product shipment.
The Company has established a program which enables distributors to return
products for credit against future purchases.
CONTRACTING REVENUES:
The Company recognizes contract manufacturing income from fixed-price and
modified-fixed price contracts on the percentage-of-completion method of
accounting. Direct labor is allocated on a standard cost basis, based on the
estimated time to manufacture each type of production unit, and manufacturing
overhead is allocated by manufacturing labor hours. Installation labor is
allocated by contract as incurred. Contract material costs are accumulated on a
standard cost basis based upon the type of production unit manufactured under
contract. The amount recorded as the percentage complete for each individual
contract is based upon the units of production method. The cost of materials
purchased but not utilized in completion of the manufacturing process are not
considered in determining the progress toward completion.
Incurred contract costs include all direct material utilized, labor costs,
installation costs and those indirect costs related to contract performance,
such as indirect labor, supplies, tools, repairs, factory costs, and
depreciation. Selling, general and administrative costs are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job performance,
job conditions and estimated profitability, including those arising from final
contract settlements, may result in revisions to cost and revenue and are
recognized in the period in which the revisions are determined.
The asset, "Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts" represents revenues recognized in excess of amounts
billed, and the liability "Billings in Excess of Costs and Estimated Earnings on
Uncompleted Contracts" represents revenues recorded in excess of recognized
costs and estimated earnings.
CONCENTRATIONS OF RISK:
The Company sells its software inventory on credit primarily to software
distributors and national retailers who market the Company's products and other
software products principally in the United States. The majority of the
Company's consolidated accounts receivable balance as of December 31, 1995 is
due from six major customers.
In addition, the Company currently has two major contracts in process from
its fenestration operations, which together represent approximately 54 percent
of the total contracts in process at December 31, 1995. These two contracts were
substantially completed at December 31, 1995.
ACCOUNTS RECEIVABLE:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable, based on a review of the individual accounts
outstanding and the Company's prior history of uncollectible accounts
receivable.
F-52
<PAGE> 113
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES:
Inventories are stated at the lower of cost or market. Cost is determined
on the weighted average basis for software product inventory, and the first-in,
first-out basis for all other inventory.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation is computed
by the straight-line method over the estimated useful lives of the related
assets for financial reporting purposes and on an accelerated method for tax
purposes. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings............................................ 31.5-40 years
Leasehold improvements............................... 5-7 years
Office furniture and fixtures........................ 7-10 years
Equipment............................................ 5-15 years
</TABLE>
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to operations as incurred.
Betterments or renewals are capitalized when incurred. For the year ended
December 31, 1995, depreciation expense was $378,886. For the nine months ended
September 30, 1995 and 1996, depreciation expense was $281,977 and $277,451
(unaudited), respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS:
The Company capitalizes software development costs in accordance with
Financial Accounting Standards Board Statement No. 86. Software development
costs not qualifying for capitalization are expensed as research and development
costs, as incurred. These costs totaled approximately $175,708 for the year
ended December 31, 1995.
Capitalized costs are amortized on a product-by-product basis using
straight-line amortization with useful lives of three to five years. The Company
evaluates the estimated net realizable value of each software product at each
balance sheet date and records write-downs to net realizable value for any
products for which net book value is in excess of net realizable value. During
the year ended December 31, 1995, amortization of capitalized software
development costs charged to cost of revenues totaled $109,899. Based upon
management's decision to phase-out the software division in 1995, all
capitalized software development costs were written off.
GOODWILL:
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the date of acquisition and is being amortized
on the straight-line method over eight to 25 years. Amortization expense charged
to operations for the years ended December 31, 1995 amounted to $47,567.
Amortization expense charged to operations for the nine months ended September
30, 1995 and 1996 was $39,447 and $41,602 (unaudited), respectively. The Company
evaluates the estimated net realizable value of its goodwill at each balance
sheet date, and records writedowns if the carrying value exceeds the expected
future net operating cash flows from the related operations. If the expected
future net operating cash flows are less than the carrying value, the Company
recognizes an impairment loss equal to the amount by which the carrying value
exceeds the discounted expected future net operating cash flows from the related
operations. During the current year the Company recognized an impairment of
intangible assets of discontinued operations in the approximate amount of
$246,083.
F-53
<PAGE> 114
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER INTANGIBLE COSTS:
Other intangible costs are comprised primarily of deferred loan costs,
which are amortized over the term of the related loan on a straight-line basis.
Amortization for the year ended December 31, 1995 amounted to $28,511. For the
nine months ended September 30, 1995 and 1996, amortization of other intangible
costs was $5,252 and $8,325, respectively.
INCOME TAXES:
Effective January 1, 1993, the Company implemented Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires an
asset and liability approach to financial accounting and reporting for income
taxes. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income, and tax net operating loss
and credit carryforwards. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
in deferred tax assets and liabilities during the period.
2. SEGMENT REPORTING:
The following table presents the total assets of Forte Computer Easy, Inc.
and Subsidiaries at December 31, 1995, and the net revenues and net loss of
Forte Computer Easy, Inc. and Subsidiaries for the year ended December 31, 1995,
are as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Total Assets:
Forte Computer Easy, Inc.................................. $ 150,198
Forte, Inc................................................ 7,260,315
Arizona Disk Fulfillment, Inc............................. (12,892)
-----------
Total..................................................... $ 7,397,621
===========
Net Revenues:
Forte Computer Easy, Inc.................................. $ 1,010,242
Forte, Inc................................................ 5,426,260
Arizona Disk Fulfillment, Inc............................. 1,541,650
Less: amount included in discontinued operations.......... (2,551,892)
-----------
Total..................................................... $ 5,426,260
===========
Net Loss:
Forte Computer Easy, Inc.................................. $(1,026,029)
Forte, Inc................................................ (50,538)
Arizona Disk Fulfillment, Inc............................. (368,908)
-----------
Total..................................................... $(1,445,475)
===========
</TABLE>
F-54
<PAGE> 115
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACTS IN PROGRESS:
Costs and estimated earnings in excess of billings and billings in excess
of costs and estimated earnings on uncompleted contracts consist of the
following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
<S> <C> <C>
Costs incurred on uncompleted contracts.................... $4,466,544 $ 882,983
Profit earned to date...................................... 1,623,862 415,165
---------- ----------
6,090,406 1,298,148
Less: billings to date..................................... 6,215,712 1,271,982
---------- ----------
$ (125,306) $ 26,166
========== ==========
</TABLE>
Presentation in the accompanying balance sheets, is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 246,472 $ 43,574
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (371,778) (17,408)
--------- --------
$(125,306) $ 26,166
========= ========
</TABLE>
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
<S> <C> <C>
Raw materials.............................................. $1,761,561 $1,669,078
Finished goods............................................. 110,188 185,000
Work in process............................................ 44,185 38,000
Packaging materials and components......................... 10,898 --
Less: amounts included in net assets of discontinued
operations............................................... (260,000) (110,000)
---------- ----------
$1,666,832 $1,782,078
========== ==========
</TABLE>
5. REVOLVING CREDIT LINE:
The Company had an operating agreement for a line of credit under which it
could borrow $300,000 or 80% of the eligible accounts receivable of Computer
Easy International, Inc. at a monthly rate of 3%. The credit line was terminated
on August 31, 1995, as the Company is in default.
6. RELATED PARTY TRANSACTIONS:
The Company sells fenestration products to a contractor, whose owner is
related to an officer of the Company. Sales for the year ended December 31, 1995
totaled $43,459 and revenue for the nine months ended September 30, 1996 was $0.
No amount is owed the Company at December 31, 1995 and September 30, 1996.
F-55
<PAGE> 116
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company performs management services for various rental properties
owned by an officer of the Company. Management services billed during the year
ended December 31, 1995 and during the nine months ended September 30, 1996
amounted to $49,804 and $37,724, respectively. Amounts included in accounts
receivable at December 31, 1995 and September 30, 1996 totaled $14,109 and
$44,802, respectively, and in the opinion of management, are expected to be
collected.
7. INCOME TAXES:
For financial accounting and tax reporting purposes, the Company reports
income and expenses on the accrual basis of accounting. For the year ended
December 31, 1995, the Company made provisions for net federal and state income
tax benefits in the approximate amounts of $69,100 and $155,000, respectively.
This tax benefit was due to the net increase of the deferred tax asset arising
from the net operating loss carryforwards.
At December 31, 1995, there are federal and state net operating loss
carryforwards available to offset future federal and state taxable income,
expiring as follows:
<TABLE>
<CAPTION>
FEDERAL NET STATE NET
EXPIRATION OPERATING LOSS EXPIRATION OPERATING LOSS
DECEMBER 31, CARRYFORWARD DECEMBER 31, CARRYFORWARD
- ------------------------ -------------- ------------------------ --------------
<S> <C> <C> <C>
2002.................. $ 86,238 1997.................... $ 74,152
2005.................. 74,252 1998.................... 608,297
2008.................. 608,297 1999.................... 564,044
2009.................. 564,044 2000.................... 1,014,207
----------
2010.................. 1,014,207
----------
$2,347,038 $2,260,700
========== ==========
</TABLE>
Federal net operating losses are further limited due to ownership changes
to approximately $300,000 per year.
Deferred income taxes arise from timing differences resulting from revenues
and costs reported for financial accounting and tax reporting purposes in
different periods. Deferred income taxes represent the tax liability or asset
based on different depreciation methods used for financial accounting and tax
reporting purposes, research and development costs which are expended as period
costs for tax reporting purposes, contract accounting under the percentage of
completion method for financial reporting and completed contract basis for tax
purposes, and differences in asset basis for financial reporting and tax
purposes due to the purchase method of accounting used in the business
acquisitions.
Components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
<S> <C> <C>
Deferred Tax Asset:
Estimated benefit from federal and state net operating
loss carryforwards.................................... $ 704,111 $ 758,800
Deferred Income Taxes Payable:
Depreciation differences................................. (510,450) (521,000)
Contract accounting differences.......................... (354,234) (330,073)
--------- ---------
Net deferred tax liability................................. $(160,573) $ (92,273)
========= =========
</TABLE>
F-56
<PAGE> 117
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
---- ----
<S> <C> <C>
Borrowings under loan agreements with a bank............... $2,796,125 $3,254,707
Lines of credit with a bank................................ 495,000 250,000
Borrowings under other loan agreements..................... 1,050,977 1,166,977
---------- ----------
4,342,102 4,671,684
Less: amount included in net assets of discontinued
operations .......................................... (77,000) --
---------- ----------
Total long-term debt....................................... 4,265,102 4,671,684
Less: current portion of long-term debt.................... (243,438) (242,000)
---------- ----------
Long-term debt............................................. $4,021,664 $4,429,684
========== ==========
</TABLE>
Borrowings under loan agreements and lines of credit with a bank are
collateralized by equipment, inventory, accounts receivable, assignment of a
$400,000 life insurance policy on an officer of the Company, and an assignment
of rents on an operating lease. The loan agreements have interest rates varying
from 8.25 percent per annum to variable rates of prime plus 2.25 percent per
annum. The prime rate at December 31, 1995 and September 30, 1996 was 8.5
percent and 8.25 percent, respectively.
Borrowings under other loan agreements are collateralized by equipment and
real estate and have interest rates varying from 3 percent to 10 percent per
annum.
On January 30, 1996, Forte, Inc. restructured its long-term debt with a
bank. The debt restructure consolidated nine existing loans, and provides for a
15 year amortization, with a five year call. The gross proceeds of the debt
restructure amounted to $2,675,000, with an interest rate of two points over the
bank's prime rate. The initial rate of interest is 10.5 percent. The loan
agreement calls for monthly payments, including principal and interest, of
$25,000 for the period February, 1996 through July, 1996, and thereafter monthly
payments, including principal and interest, of $30,000. The note is secured by a
first mortgage assignment of rents on property leased by the Company; a blanket
assignment of life insurance on an officer, in the amount of $1,650,000, and all
inventory, accounts, contract rights, equipment, fixtures and general
intangibles.
At December 31, 1995, the approximate aggregate maturities of debt for the
succeeding five years, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
- ------------------------------------------ ------
<S> <C>
1996.................................... $ 243,438
1997.................................... 266,386
1998.................................... 259,495
1999.................................... 279,841
2000.................................... 293,443
Subsequent................................ 2,922,499
----------
$4,265,102
==========
</TABLE>
9. INCENTIVE STOCK OPTION PLANS AND STOCK OPTIONS:
In May, 1992, the Board of Directors adopted an Employee Incentive Stock
Option Plan which was approved by the shareholders in May, 1992. The plan calls
for reservation of 5,000,000 shares of the
F-57
<PAGE> 118
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCENTIVE STOCK OPTION PLANS AND STOCK OPTIONS (CONTINUED)
Company's common stock. The plan also provides for the issuance of options to
purchase the Company's common stock at 100% of the fair market value at the date
of grant. Options have a maximum duration of ten years after the date of grant.
As part of the Plan and Agreement of Reorganization with Forte, Inc., stock
options were granted to the former stockholders of Forte, Inc. for 4,717,698
shares at $.375 per share and are exercisable through June 8, 1998. The Plan
also provides for the Company to enter into separate Stock Option Agreements
dated June 7, 1994, whereby the Company has the right, for a period of one year
from June 8, 1994, to purchase 30 percent of the shares owned by certain major
stockholders at the rate of $.50 per share. The number of shares which can be
redeemed by the Company under this agreement is 1,940,202. The Company did not
exercise any of its options to repurchase any of the returned shares.
Outstanding options would be adjusted in the event of any forward or
reverse stock split or similar activity.
Stock option activity is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 OPTION PRICE
---- ---- ------------
<S> <C> <C> <C>
Outstanding, beginning of period............. $6,815,548 $5,815,548 $.25 - $.50
Granted during the period.................... -- -- .375
Exercised during the period.................. -- -- .00
Cancelled during the period.................. 1,000,000 -- .00
---------- ---------- -----------
$5,815,548 $5,815,548 $.25 - $.50
========== ========== ===========
</TABLE>
In addition, during the year ended December 31, 1995, the Company sold
150,000 shares of common stock, at $.50 per share, subject to put options. The
put options provide the purchasers the right to put the shares to the Company
one year after the date of issuance of the common stock at $.625 per share or
two years after the date of issuance at $.75 per share. As of the balance sheet
date at December 31, 1995 and September 30, 1996, an accrual for the put option,
in the amount of $75,000, has been made.
10. DISCONTINUED OPERATIONS:
SOFTWARE DIVISION
On September 6, 1995, Forte Computer Easy, Inc. sold its rights to the
Floor Plan Plus(TM) and 3D Design(TM) lines for $691,889, together with a
$200,000 contingent payment based upon future performance goals of the acquiring
company, International Microcomputer Software, Inc. (NASDAQ:IMSI). These product
lines represent a significant portion of the historical sales of the software
operating division. The Company determined that it was in the best long-range
interest of the Company to phase-out the software division. Proceeds from the
sale were utilized for debt reduction of this division.
The software division's operating loss for the year ended December 31, 1995
of $1,026,029 (net of income tax benefit of $16,500), is shown separately in the
accompanying statements of operations for the year ended December 31, 1995 and
for the nine months ended September 30, 1996 and 1995.
A provision of $50,000 for expected operating losses during the final
phase-out period in 1996 has been made at December 31, 1995.
F-58
<PAGE> 119
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. DISCONTINUED OPERATIONS (CONTINUED)
Net revenue for the software division for 1995 was $1,010,242. This revenue
is not included in net revenue in the accompanying statement of operations.
ARIZONA DISK FULFILLMENT, INC.
The disk and fulfillment division operating loss for the year ended
December 31, 1995 of $368,908 (net of income tax benefit of $18,500), is shown
separately in the accompanying statement of operations.
Estimated losses on the disposal of the disk and fulfillment division of
$227,619, which includes $80,000 for expected operating losses for the period
January 1, 1996 to August 31, 1996, have been provided for at December 31, 1995.
Net revenue for the disk fulfillment division for 1995 was $1,541,650. This
revenue is not included in net revenue in the accompanying statement of
operations.
On August 5, 1996, the Company entered into a Stock Purchase Agreement
pursuant to which it agreed to sell 100 percent of the issued and outstanding
common stock of Arizona Disk Fulfillment, Inc. to Beverly and James W. Schmidt.
Mr. Schmidt has served as president of Arizona Disk Fulfillment, Inc. since
1993. The sale of Arizona Disk Fulfillment, Inc. by the Company was fully
consummated in August, 1996.
11. ASSETS AND LIABILITIES TO BE DISPOSED OF:
Assets and liabilities of the following operating divisions to be disposed
of consisted of the following at December 31, 1995 and September 30, 1996:
(unaudited)
<TABLE>
<CAPTION>
DISK AND
SOFTWARE FULFILLMENT
DECEMBER 31, 1995: DIVISION DIVISION TOTAL
- ------------------ -------- ----------- --------
<S> <C> <C> <C>
Accounts receivable........................ $ -- $ 60,000 $ 60,000
Inventory.................................. -- 260,000 260,000
Equipment and property..................... 110,000 262,000 372,000
Deposits................................... -- 16,000 16,000
-------- -------- --------
Total assets..................... 110,000 598,000 708,000
-------- -------- --------
Current portion of long-term debt.......... 70,000 -- 70,000
Accounts payable and current accrued
liabilities.............................. -- 557,000 557,000
Long-term debt............................. -- 7,000 7,000
-------- -------- --------
70,000 564,000 634,000
-------- -------- --------
Net Assets to be Disposed of............... $ 40,000 $ 34,000 $ 74,000
======== ======== ========
</TABLE>
F-59
<PAGE> 120
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ASSETS AND LIABILITIES TO BE DISPOSED OF (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996: (UNAUDITED)
- -------------------------------
<S> <C>
Software Division:
Inventory................................................... $110,000
Miscellaneous assets........................................ 9,080
--------
Total assets...................................... 119,080
--------
Accounts payable............................................ 85,989
Accrued liabilities......................................... 243,036
--------
329,025
--------
Net liabilities of discontinued operations.................. $209,945
========
</TABLE>
Assets and liabilities are shown at their expected net realizable value,
and have been separately classified in the accompanying balance sheets.
12. LITIGATION:
The Company is a defendant in a lawsuit filed by an individual for
non-compliance and other claims related to an employment agreement. The lawsuit
seeks actual and punitive damages in excess of $129,000. The Company's legal
counsel believes that the lawsuit is without merit. Therefore, as of December
31, 1995, and September 30, 1996 no accrual has been made for a loss contingency
related to the subject litigation claim. Management intends to vigorously defend
its position.
The Company is a defendant in a lawsuit filed by a corporation for claims
relating to a contractual agreement. The plaintiff has proposed a settlement in
the amount of $11,000. Counsel anticipates this matter to be resolved in the
near future.
13. SUBSEQUENT EVENT:
Subsequent to the balance sheet date of December 31, 1995, the Company
entered into an agreement with a former shareholder to purchase all of the
outstanding common stock owned by the shareholder. The common stock was acquired
in exchange for the relief of debt owing the Company and discounted future
services to be provided by the Company, in the aggregate amount of $372,000. The
financial statements at December 31, 1995 give retroactive effect to this
transaction. In addition, the Company believes that it has a claim for
additional shares of common stock controlled by the shareholder, in the amount
of approximately 260,000 shares.
F-60
<PAGE> 121
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors of
Western Insulated Glass, Co.
We have audited the accompanying balance sheet of Western Insulated Glass,
Co. as of October 31, 1996, and the related statements 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 our audit of the financial statements provides 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 Western Insulated Glass, Co.
as of October 31, 1996, in conformity with generally accepted accounting
principles.
SEMPLE & COOPER, L.L.P.
Phoenix, Arizona
June 3, 1997
F-61
<PAGE> 122
WESTERN INSULATED GLASS, CO.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
OCTOBER 31, JANUARY 31,
1996 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 296,387 $ 265,150
Accounts receivable....................................... 664,163 579,818
Inventory................................................. 865,392 824,402
Prepaid expenses and other current assets................. 18,112 13,585
----------- -----------
Total Current Assets................................... 1,844,054 1,682,955
NONCURRENT ASSETS:
Deposits and other noncurrent assets...................... 12,171 16,920
Cash surrender value of life insurance, net............... 23,819 24,711
Property, plant & equipment, net.......................... 204,483 211,207
----------- -----------
Total Noncurrent Assets................................ 240,473 252,838
----------- -----------
Total Assets................................................ $ 2,084,527 $ 1,935,793
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable-related parties............................. $ 1,245,707 $ 1,245,707
Accounts payable.......................................... 259,194 221,594
Accrued expenses.......................................... 25,797 1,800
Accrued payroll........................................... 230,207 55,804
Interest payable.......................................... 339,857 340,857
Income taxes payable...................................... 20,584 47,166
----------- -----------
Total Current Liabilities.............................. 2,121,346 1,912,928
STOCKHOLDER'S EQUITY (DEFICIT):
Preferred stock, no par value; 2,000,000 shares
authorized, 1,620,000 shares issued, none
outstanding............................................ 426,099 426,099
Common stock, no par value; 1,000,000 shares authorized,
180,000 shares issued and 90,000 shares outstanding.... 47,344 47,344
Retained earnings......................................... 1,199,738 1,259,422
----------- -----------
1,673,181 1,732,865
Less: Treasury stock at cost.............................. (1,710,000) (1,710,000)
----------- -----------
Total Stockholder's Equity (Deficit)................... (36,819) 22,865
----------- -----------
Total Liabilities & Stockholder's Equity (Deficit).......... $ 2,084,527 $ 1,935,793
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE> 123
WESTERN INSULATED GLASS, CO.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ------------------------
1996 1996 1997
---- ---- ----
<S> <C> <C> <C>
Sales................................................ $5,820,726 $1,259,184 $1,331,549
Cost of Sales........................................ 3,867,411 899,839 950,287
---------- ---------- ----------
Gross Profit....................................... 1,953,315 359,345 381,262
Selling, General and Administrative Expenses......... 1,304,102 290,099 283,281
---------- ---------- ----------
Income from Operations............................. 649,213 69,246 97,981
Other Income (Expense):
Interest Income (Expense), net..................... -- (4,088) 1,119
Other Expense...................................... (8,114) (6,827) (5,843)
---------- ---------- ----------
(8,114) (10,915) (4,724)
---------- ---------- ----------
Income Before Income Taxes......................... 641,099 58,331 93,257
Provision for Income Taxes........................... 228,584 20,999 33,573
---------- ---------- ----------
Net Income......................................... 412,515 37,332 59,684
Retained earnings, beginning......................... 787,223 787,223 1,199,738
---------- ---------- ----------
Retained earnings, ending............................ $1,199,738 $ 824,555 $1,259,422
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE> 124
WESTERN INSULATED GLASS, CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
YEAR ENDED JANUARY 31,
OCTOBER 31, ----------------------
1996 1996 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 412,515 $ 37,332 $ 59,684
Adjustment to reconcile net income to cash from
operating activities--Depreciation............... 68,933 11,892 17,674
Changes in operating assets and liabilities:
Accounts receivable, net......................... (110,325) 50,999 84,345
Inventories...................................... (40,237) (31,693) 40,990
Prepaid expenses and other current assets........ (3,526) 0 4,527
Accounts payable................................. (34,055) (49,508) (36,600)
Accrued expenses................................. 176,748 (16,869) (198,400)
Income taxes payable............................. 20,584 20,995 26,582
Other............................................ 0 14,614 (5,641)
--------- --------- ---------
Net cash provided by (used in) operating
activities..................................... 490,637 37,762 (6,839)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................. (106,821) (16,095) (24,398)
--------- --------- ---------
Net cash used in investing activities............ (106,821) (16,095) (24,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable-related parties.......... (222,338) 0 0
--------- --------- ---------
Net cash used in financing activities............ (222,338) 0 0
Net Increase (Decrease) in Cash....................... 161,478 21,667 (31,237)
Cash, Beginning Balance............................... 134,909 154,680 296,387
--------- --------- ---------
Cash, Ending Balance.................................. $ 296,387 $ 176,347 $ 265,150
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-64
<PAGE> 125
WESTERN INSULATED GLASS, CO.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES:
OPERATIONS:
Western Insulated Glass, Co. (the Company) is a Corporation duly formed and
organized under the laws of Arizona. The Company is engaged in the manufacturing
and retail sales of luxury residential and light commercial windows.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY:
Inventory is stated at the lower of cost or market. Inventory costs are
stated at last invoice cost, which approximates cost using the first-in,
first-out method and consisted of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
OCTOBER 31 JANUARY 31,
1996 1997
---- ----
<S> <C> <C>
Raw materials........................................ $ 744,073 $ 708,821
Work in process...................................... 61,411 58,533
Finished goods....................................... 59,908 57,048
----------- -----------
$ 865,392 $ 824,402
=========== ===========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Depreciation is
provided for using the accelerated and straight-line methods over the estimated
useful lives of the assets. Maintenance and repairs that neither materially add
to the value of the property nor appreciably prolong its life are charged to
expense as incurred. Betterments or renewals are capitalized when incurred.
INCOME TAXES:
For financial accounting and tax reporting purposes, the Company reports
revenues and costs on the accrual basis of accounting. The financial reporting
basis of the Company's assets and liabilities approximates the tax basis.
Accordingly, no deferred taxes are recorded for the future tax consequences of
differences in bases, and income tax expense is computed by applying statutory
rates to pretax earnings.
INTERIM FINANCIAL INFORMATION:
The accompanying unaudited interim financial statements include the
accounts of Western Insulated Glass, Co. In the opinion of management, all
adjustments (consisting only of recurring adjustments) necessary for a fair
presentation of financial position and results of operations have been made.
Operating results for the period ended January 31, 1997 are not necessarily
indicative of the results for a full fiscal year. These unaudited interim
financial statements should be read in conjunction with the financial statements
and notes thereto of the Company for the fiscal year ended October 31, 1996.
F-65
<PAGE> 126
WESTERN INSULATED GLASS, CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. CONCENTRATION OF CREDIT RISK:
The Company maintains cash at three financial institutions. Deposits not to
exceed $100,000 at each financial institution are insured by the Federal Deposit
Insurance Corporation. At October 31, 1996, the Company had uninsured cash in
the amount of $254,171.
3. RELATED PARTY TRANSACTIONS:
NOTES PAYABLE--RELATED PARTIES:
At October 31, 1996, notes payable-related parties consist of the
following:
<TABLE>
<S> <C>
10% note payable to the stockholder, due on demand; secured
by treasury stock......................................... $1,215,707
Two 6% notes payable to an officer of the Company, with
interest only payments due quarterly, principal due
October, 1997............................................. 30,000
----------
$1,245,707
==========
</TABLE>
At October 31, 1996, accrued interest payable of $339,857 relates to the
aforementioned notes payable-related parties.
LEASE COMMITMENT:
The Company is currently leasing its manufacturing facility in Phoenix,
Arizona from an officer of the Company under a non-cancellable operating lease.
Rent expense under the lease agreement for the year ended October 31, 1996, was
$192,000.
A schedule of future minimum lease payments due under the non-cancellable
operating lease agreement at October 31, 1996, is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997........................................................ $ 192,000
1998........................................................ 192,000
1999........................................................ 192,000
2000........................................................ 192,000
2001........................................................ 192,000
Subsequent.................................................. 80,000
----------
$1,040,000
==========
</TABLE>
4. TREASURY STOCK:
Treasury stock is shown at cost and consists of 1,620,000 shares of
preferred stock, and 90,000 shares of common stock.
5. CASH SURRENDER VALUE OF LIFE INSURANCE:
The Company is a beneficiary of insurance policies on the life of a
corporate officer. The cash surrender value at October 31, 1996 is net of 8%
notes payable in the amount of $50,000, which were collateralized by the cash
value of the policies.
6. ECONOMIC DEPENDENCY:
The Company purchases a substantial portion of its product from three
suppliers. During the year ended October 31, 1996, purchases from these
suppliers approximated 70 percent of total purchases. At October 31, 1996,
amounts due to the suppliers included in accounts payable were $161,554.
F-66
<PAGE> 127
WESTERN INSULATED GLASS, CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. ECONOMIC DEPENDENCY: (CONTINUED)
During the year ended October 31, 1996, sales to a single customer were
approximately 10 percent of total sales. At October 31, 1996, the amount due
from the customer, included in accounts receivable was $94,234.
7. COMMITMENTS AND CONTINGENCIES:
LEASES:
The Company leases various pieces of equipment under non-cancellable
operating lease agreements expiring through June, 2000. Rent expense under the
operating lease agreements for the year ended October 31, 1996 was $18,270.
As of October 31, 1996, a schedule of future minimum lease payments due
under the non-cancellable operating lease agreements, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31, AMOUNT
- ----------- ------
<S> <C> <C>
1997................................................................ $16,608
1998................................................................ 15,696
1999................................................................ 12,960
2000................................................................ 7,940
-------
$53,204
=======
</TABLE>
EMPLOYMENT CONTRACT:
The Company has entered into an employment contract with its president
through March, 2000 that provides for a minimum annual salary and incentives
based on the Company's attainment of specified levels of earnings. In connection
with the acquisition of the Company by American Architectural Products
Corporation (See Note 9), this agreement was revised so that as of October 31,
1996, the total future commitment, excluding incentives, was $285,000.
8. EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(K) plan for all eligible employees, which
includes provisions for Company matching contributions. Expense relating to the
Company matching contributions was $10,538 for the year ended October 31, 1996.
9. SUBSEQUENT EVENTS:
On March 14, 1997, 100 percent of the Company's outstanding stock was
acquired by American Architectural Products Corporation, in exchange for cash
and the assumption of certain liabilities, in the approximate amount of
$2,400,000. The financial statements do not give effect to this transaction.
F-67
<PAGE> 128
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Thermetic Glass Inc.
We have audited the accompanying balance sheet of Thermetic Glass Inc. as
of December 31, 1996, and the related statement of operations and accumulated
deficit 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 financial statements referred to above present fairly,
in all material respects, the financial position of Thermetic Glass Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Clifton Gunderson L.L.C.
Peoria, Illinois
October 3, 1997
F-68
<PAGE> 129
THERMETIC GLASS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
----
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 4,948
Accounts and notes receivable, net of allowance of
$116,000............................................... 594,025
Inventory................................................. 846,008
Prepaid expenses and other current assets................. 67,143
-----------
Total Current Assets................................... 1,512,124
NONCURRENT ASSETS:
Deposits and other noncurrent assets...................... 107,585
Property, plant & equipment, net.......................... 1,670,287
-----------
Total Noncurrent Assets................................ 1,777,872
-----------
Total Assets................................................ $ 3,289,996
===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable--current, including capital lease
obligations............................................ $ 1,046,573
Accounts payable and accrued expenses..................... 305,554
-----------
Total Current Liabilities.............................. 1,352,127
LONG-TERM LIABILITIES:
Notes payable--long-term, including capital lease
obligations............................................ 1,866,747
-----------
Total Long-Term Liabilities............................ 1,866,747
-----------
Total Liabilities........................................... 3,218,874
STOCKHOLDERS' EQUITY:
Common stock of no par value; authorized 500,000 shares;
issued and outstanding 1,000 shares.................... 1,000
Additional paid in capital................................ 2,300,000
Accumulated deficit....................................... (2,229,878)
-----------
Total Stockholders' Equity............................. 71,122
-----------
Total Liabilities & Stockholders' Equity.................... $ 3,289,996
===========
</TABLE>
The accompanying summary of significant accounting policies and notes are
an integral part of the financial statements.
F-69
<PAGE> 130
THERMETIC GLASS, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
----
<S> <C>
Sales....................................................... $ 4,966,666
Cost of Sales............................................... 4,190,384
-----------
Gross Profit.............................................. 776,282
Selling, General and Administrative Expenses................ 822,785
-----------
Loss from Operations...................................... (46,503)
Other Income (Expense):
Interest Expense, net..................................... (235,062)
Other Income.............................................. 16,350
-----------
(218,712)
-----------
Loss Before Income Taxes.................................. (265,215)
Provision for Income Taxes.................................. 677,124
-----------
Net loss.................................................. (942,339)
Accumulated Deficit, beginning.............................. (1,287,539)
-----------
Accumulated Deficit, ending................................. $(2,229,878)
===========
</TABLE>
The accompanying summary of significant accounting policies and notes
are an integral part of the financial statements.
F-70
<PAGE> 131
THERMETIC GLASS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................. $(942,339)
Adjustment to reconcile net loss to cash used in operating
activities--
Depreciation and amortization.......................... 204,517
Changes in operating assets and liabilities:
Accounts receivable, net............................... (22,379)
Inventories............................................ (119,684)
Prepaid expenses and other current assets.............. (3,299)
Accounts payable and accrued expenses.................. 104,731
Deferred tax asset..................................... 677,124
---------
Net cash used in operating activities.................. (101,329)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (97,933)
---------
Net cash used in investing activities.................. (97,933)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 750,000
Principal payments on notes payable....................... (390,000)
Proceeds from issuance of long-term debt.................. 30,000
Principal payments on long-term debt...................... (191,464)
Principal payments on obligations under capital leases.... (3,938)
---------
Net cash from financing activities..................... 194,598
Net Decrease in Cash........................................ (4,664)
Cash, Beginning Balance..................................... 9,612
---------
Cash, Ending Balance........................................ $ 4,948
=========
ADDITIONAL CASH FLOW INFORMATION
Cash paid during the year for interest.................... $ 227,259
=========
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred when the Company
entered into leases for new trucks..................... $ 109,894
=========
</TABLE>
The accompanying summary of significant accounting policies and notes
are an integral part of the financial statements.
F-71
<PAGE> 132
THERMETIC GLASS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1996
DESCRIPTION OF BUSINESS
Thermetic Glass Inc. is a manufacturer of vinyl windows and doors with
sales concentrated mainly in the Midwest and is dependent upon the Midwest
economy. The Company's products are readily available, and the Company is not
dependent on a single supplier or only a few suppliers.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation on plant
and equipment is calculated using straight-line or accelerated methods over the
estimated useful lives of the assets. Equipment held under capital leases is
amortized straight line over the shorter of the lease term or estimated useful
life of the asset. Accumulated depreciation was $1,086,926 at December 31, 1996.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are reduced by a
valuation allowance if it is deemed more likely than not that some or all of the
deferred tax assets will not be realized.
PATENT AND TRADEMARK
These assets are amortized over the estimated useful lives of the
respective assets using the straight-line method.
F-72
<PAGE> 133
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--PROPERTY, PLANT, AND EQUIPMENT
A summary of property, plant, and equipment at December 31, 1996 follows:
<TABLE>
<S> <C>
Land........................................................ $ 10,800
Buildings................................................... 1,030,516
Machinery and equipment..................................... 1,407,256
Vehicles.................................................... 243,533
Furniture and fixtures...................................... 65,108
----------
$2,757,213
==========
</TABLE>
Depreciation expense for the year ended December 31, 1996 was $202,297.
Certain property and equipment is pledged as collateral on notes payable
and long-term debt as described in Notes 2 and 5 to the financial statements.
NOTE 2--NOTES PAYABLE TO BANK--CURRENT
Notes payable to bank at December 31, 1996:
<TABLE>
<S> <C>
9 percent, $200,000 limit, due September 20, 1997; secured
by $90,000 certificate of deposit of major shareholder and
$110,000 personal guarantee of major shareholder.......... $200,000
Prime plus 1 percent, $100,000 limit, due April 3, 1997;
secured by accounts receivable, machinery and equipment,
and inventories........................................... 100,000
Prime plus 1 percent, $250,000 limit, due August 9, 1997;
secured by accounts receivable, machinery and equipment,
and inventories........................................... 160,000
--------
460,000
--------
</TABLE>
Unsecured notes payable to shareholders at December 31, 1996:
<TABLE>
<S> <C>
10 percent, due on demand................................... 100,000
8.5 percent, due on demand.................................. 100,000
8.5 percent, due on demand.................................. 50,000
8.5 percent, due on demand.................................. 50,000
8.5 percent, due on demand.................................. 50,000
--------
350,000
--------
</TABLE>
Other unsecured notes payable to employees and others at December 31, 1996:
<TABLE>
<S> <C>
8 percent, due on demand.................................... 6,000
8 percent, due on demand.................................... 20,000
8 percent, due on demand.................................... 20,000
7 percent, due on demand.................................... 20,000
--------
66,000
--------
$876,000
========
</TABLE>
F-73
<PAGE> 134
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Note payable to major shareholder, secured by substantially
all assets of the Company, is due as follows:
June 1, 2024 at 8.5 percent, payable in monthly
installments of $12,920, including interest............ $1,644,154
8.0 percent note payable to bank, due in monthly
installments of $3,393, including interest, through
January, 1997; secured by accounts receivable, machinery
and equipment, and inventories............................ 3,353
7.5 percent note payable to bank, due in monthly
installments of $2,302, including interest, through March,
1997; secured by accounts receivable, machinery and
equipment, and inventories................................ 6,841
6.5 percent note payable to bank, due in monthly
installments of $651, including interest, through
November, 1997; secured by a van.......................... 6,936
7.5 percent note payable to bank, due in monthly
installments of $1,377, including interest, through
January, 1998; secured by accounts receivable, machinery
and equipment, and inventories............................ 17,125
8.25 percent note payable to bank, due in monthly
installments of $1,229, including interest, through June,
1998; secured by accounts receivable, machinery and
equipment, and inventories................................ 20,774
7.5 percent note payable to bank, due in monthly
installments of $1,607, including interest, through
September, 1998; secured by accounts receivable, machinery
and equipment, and inventories............................ 31,520
8.25 percent note payable to bank, due in monthly
installments of $945, including interest, through
September 1999; secured by accounts receivable, machinery
and equipment, and inventories............................ 27,775
Prime plus 1 percent note payable to bank, due in monthly
installments of $6,614, including interest, through July,
1999; secured by accounts receivable, machinery and
equipment, and inventories................................ 172,886
----------
Total long-term debt........................................ 1,931,364
Less current installments................................... 157,026
----------
Long-Term Debt, excluding current installments.............. $1,774,338
==========
</TABLE>
The aggregate maturities of long-term debt for each of the years subsequent
to December 31, 1996 are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997................................................... $ 157,026
1998................................................... 122,045
1999................................................... 59,449
2000................................................... 20,212
2001................................................... 21,999
2002-2024.............................................. 1,550,633
----------
$1,931,364
==========
</TABLE>
F-74
<PAGE> 135
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4--INCOME TAXES
Income tax expense amounted to $677,124 for 1996. The actual expense for
1996 differs from the "expected" tax expense (computed by applying the
applicable U.S. federal corporate income tax rate of 34 percent to loss before
income taxes) as follows:
<TABLE>
<S> <C>
Computed "expected" tax benefit............................. $(90,173)
Surtax...................................................... 3,489
State income taxes, net of federal benefit.................. 67,851
Nondeductible expenses...................................... 5,091
Prior year underaccrual..................................... 59,894
Change in beginning of the year balance of the valuation
allowance for deferred tax assets allocated to income tax
expense................................................... 634,058
Other, net.................................................. (3,086)
--------
$677,124
========
</TABLE>
The components of income tax expense for 1996 are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Federal.................................... $ -- $574,320 $574,320
State...................................... -- 102,804 102,804
-------- -------- --------
$ -- $677,124 $677,124
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1996 are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 841,153
Vacation accrual.......................................... 7,243
Accounts receivable, due to allowance for doubtful
accounts............................................... 46,400
Interest not currently deductible......................... 11,678
Inventories, due to additional costs inventoried for tax
purposes............................................... 15,493
Depreciation.............................................. 14,855
----------
Total gross deferred tax assets........................ 936,822
Less valuation allowance.................................. (935,087)
----------
Net deferred tax assets................................ 1,735
Deferred tax liabilities:
Capital leases............................................ (1,735)
----------
Net Deferred Tax Assets..................................... $ --
==========
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 was
$97,320. The net change in the valuation allowance for the year ended December
31, 1996 was an increase of $837,767.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable income
of approximately $2,400,000. The Company has recorded a valuation allowance to
reflect the estimated amount of deferred tax
F-75
<PAGE> 136
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4--INCOME TAXES (CONTINUED)
assets which may not be realized due to the expiration of net operating loss
carryforwards and other deferred assets that may not be realized.
At December 31, 1996, the Company has the following net operating loss and
investment tax credit carryforwards for income tax purposes:
<TABLE>
<CAPTION>
NET OPERATING INVESTMENT
YEAR OF EXPIRATION LOSSES TAX CREDITS
------------------ ------ -----------
<S> <C> <C>
1998.......................................... $ -- $1,430
1999.......................................... -- 195
2000.......................................... 175,160 --
2001.......................................... 52,793 --
2002.......................................... 811,470 --
2003.......................................... 450,222 --
2004.......................................... 204,743 --
2006.......................................... 1,513 --
2010.......................................... 174,295 --
2011.......................................... 232,687 --
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
The Company is obligated to repurchase outstanding common stock from its
minority shareholders in the event of death or other termination of employment
with the Company. The terms of the agreement indicate the repurchase price per
share to be the greater of $1.00 per share or the book value per share ($71 at
December 31, 1996). (The minority shareholders own 180 shares of the outstanding
common stock.) In the event the Company cannot finance the repurchase, the
Company's major shareholder is obligated to purchase the minority shareholder's
common stock.
NOTE 6--CAPITAL LEASES
In May and November of 1996, the Company entered into two capital leases
for vehicles that expire in May 2002 and November 2001, respectively. At
December 31, 1996, the gross amounts recorded under the capital leases were as
follows:
<TABLE>
<S> <C>
Vehicles.................................................... $151,113
Less accumulated amortization............................... 49,495
--------
$101,618
========
</TABLE>
Amortization for the year ended December 31, 1996 was $8,276 and is
included in depreciation expense.
F-76
<PAGE> 137
THERMETIC GLASS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6--CAPITAL LEASES (CONTINUED)
The present value of future minimum capital lease payments, exclusive of
certain assessments which are also payable by the Company, as of December 31,
1996 is:
<TABLE>
<S> <C>
1997........................................................ $ 31,920
1998........................................................ 31,920
1999........................................................ 31,920
2000........................................................ 31,920
2001........................................................ 30,572
2002........................................................ 6,560
--------
Total minimum lease payments.............................. 164,812
Less amount representing interest........................... 58,856
--------
Present value of net minimum capital lease payments....... 105,956
Less current installments of obligations under capital
leases.................................................... 13,547
--------
Obligations under Capital Leases, Excluding Current
Installments.............................................. $ 92,409
========
</TABLE>
NOTE 7--BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are located in the Midwest. The Company had
no customers that accounted for more than 10 percent of the Company's sales in
1996. The Company had thirty-four customers in 1996, each of whom had an
accounts receivable balance which exceeded 5 percent of the Company's total
stockholders' equity at December 31, 1996. Accounts receivable from these
customers totaled approximately $564,000 at December 31, 1996.
NOTE 8--401(k) PLAN
In 1996, the Company adopted a 401(k) plan covering all employees who have
completed one year of service by January 1 and attained age 21. The Company
matches 25 percent of the employees' contributions up to 6 percent of their
income. The expense for 1996 was $10,317.
NOTE 9--SUBSEQUENT EVENT
On July 18, 1997, all of the stock of Thermetic Glass Inc. was acquired by
American Architectural Products Corporation (AAPC) in exchange for cash, AAPC
common stock, convertible secured debentures payable to the seller, and the
assumption of certain liabilities. The accompanying financial statements do not
give effect to this transaction.
F-77
<PAGE> 138
THERMETIC GLASS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997
----
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 0
Accounts receivable....................................... 697,358
Inventory................................................. 1,013,359
Prepaid expenses and other current assets................. 54,817
-----------
Total Current Assets................................... 1,765,534
NONCURRENT ASSETS:
Deposits and other noncurrent assets...................... 110,445
Property, plant & equipment, net.......................... 1,557,892
-----------
Total Noncurrent Assets................................ 1,668,337
-----------
Total Assets................................................ $ 3,433,871
===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable--current, including capital lease
obligations............................................ $ 1,442,761
Accounts payable and accrued expenses..................... 380,368
-----------
Total Current Liabilities.............................. 1,823,129
LONG-TERM LIABILITIES:
Notes payable--long-term, including capital lease
obligations............................................ 1,636,482
Other liabilities......................................... 6,074
-----------
Total Long-Term Liabilities............................ 1,642,556
-----------
Total Liabilities........................................... 3,465,685
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock of no par value; authorized 500,000 shares;
issued and outstanding 1,000 shares.................... 1,000
Additional paid in capital................................ 2,300,000
Accumulated deficit....................................... (2,332,814)
-----------
Total Stockholders' Equity (Deficit)................... (31,814)
-----------
Total Liabilities & Stockholders' Equity.................... $ 3,433,871
===========
</TABLE>
The accompanying summary of significant accounting policies and notes are
an integral part of the financial statements.
F-78
<PAGE> 139
THERMETIC GLASS, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1996 1997
---- ----
<S> <C> <C>
Sales....................................................... $ 1,888,909 $ 2,305,029
Cost of Sales............................................... 1,664,490 1,936,713
----------- -----------
Gross Profit.............................................. 224,419 368,316
Selling, General and Administrative Expenses................ 376,189 340,583
----------- -----------
Loss from Operations...................................... (151,770) 27,733
Other Income (Expense):
Interest Expense, net..................................... (116,484) (126,315)
Other Expense............................................. 22,448 (4,354)
----------- -----------
(94,036) (130,669)
----------- -----------
Loss Before Income Taxes.................................. (245,806) (102,936)
Provision for Income Taxes.................................. 0 0
----------- -----------
Net loss.................................................. (245,806) (102,936)
Accumulated Deficit, beginning.............................. (1,287,539) (2,229,878)
----------- -----------
Accumulated Deficit, ending................................. $(1,533,345) $(2,332,814)
=========== ===========
</TABLE>
The accompanying summary of significant accounting policies and notes
are an integral part of the financial statements.
F-79
<PAGE> 140
THERMETIC GLASS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................. $(102,936) $(245,806)
Adjustment to reconcile net loss to cash from operating
activities--
Depreciation and amortization.......................... 115,860 109,364
Changes in operating assets and liabilities:
Accounts receivable, net............................... (103,333) (38,903)
Inventories............................................ (167,351) 12,832
Prepaid expenses and other current assets.............. 12,326 22,904
Accounts payable and accrued expenses.................. 74,814 23,117
Deferred tax asset..................................... 0 0
Other.................................................. 3,214 4,785
--------- ---------
Net cash used in operating activities.................. (167,406) (111,707)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (3,465) (111,755)
--------- ---------
Net cash used in investing activities.................. (3,465) (111,755)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... -- --
Principal payments on notes payable....................... -- --
Proceeds from issuance of long-term debt.................. 165,923 213,850
Principal payments on long-term debt...................... -- --
Principal payments on obligations under capital leases.... -- --
--------- ---------
Net cash from financing activities..................... 165,923 213,850
Net Decrease in Cash........................................ (4,948) (9,612)
Cash, Beginning Balance..................................... 4,948 9,612
--------- ---------
Cash, Ending Balance........................................ $ 0 $ 0
========= =========
ADDITIONAL CASH FLOW INFORMATION
Cash paid during the year for interest.................... -- --
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease obligations incurred when the Company
entered into leases for new trucks..................... -- --
========= =========
</TABLE>
The accompanying summary of significant accounting policies and notes
are an integral part of the financial statements.
F-80
<PAGE> 141
THERMETIC GLASS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Thermetic Glass Inc. is a manufacturer of vinyl windows and doors with
sales concentrated mainly in the Midwest and is dependent upon the Midwest
economy. The Company's products are readily available, and the Company is not
dependent on a single supplier or only a few suppliers.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation on plant
and equipment is calculated using straight-line or accelerated methods over the
estimated useful lives of the assets. Equipment held under capital leases is
amortized straight line over the shorter of the lease term or estimated useful
life of the asset. Accumulated depreciation was $1,213,000 at June 30, 1997.
INTERIM FINANCIAL INFORMATION
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements include the
accounts of Thermetic Glass, Inc. In the opinion of management, all adjustments
(consisting only of recurring adjustments) necessary for a fair presentation of
financial position and results of operations have been made. Operating results
for the period ended June 30, 1997 are not necessarily indicative of the results
for a full year. These unaudited interim financial statements should be read in
conjunction with the financial statements and notes thereto of the Company for
the year ended December 31, 1996.
INVENTORIES
At June 30, 1997, inventory consisted of the following:
<TABLE>
<S> <C>
Raw materials............................................... $ 904,929
Work in process............................................. 0
Finished goods.............................................. 108,430
----------
$1,013,359
==========
</TABLE>
This information is an integral part of the accompanying financial statements.
F-81
<PAGE> 142
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, 1995 and 1996, 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, 1995 and 1996, 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).
F-82
<PAGE> 143
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, at cost:
Land...................................................... 2,189,000 2,189,000 2,189,000 2,189,000
Buildings................................................. 8,825,000 8,829,000 8,825,000 8,865,000
Machinery and equipment................................... 6,828,000 7,249,000 7,159,000 7,648,000
----------- ----------- ----------- -----------
17,842,000 18,267,000 18,173,000 18,702,000
Less -- Accumulated depreciation.......................... (7,779,000) (8,461,000) (8,318,000) (8,772,000)
----------- ----------- ----------- -----------
10,063,000 9,806,000 9,855,000 9,930,000
----------- ----------- ----------- -----------
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
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ------------------------------------------------------------
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.
F-83
<PAGE> 144
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.
F-84
<PAGE> 145
BINNINGS BUILDING PRODUCTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON
PREFERRED PREFERRED STOCK CAPITAL 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.
F-85
<PAGE> 146
BINNINGS BUILDING PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
-------------------------------------- -----------------------------
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.
F-86
<PAGE> 147
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.
F-87
<PAGE> 148
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (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.
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.
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
F-88
<PAGE> 149
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
F-89
<PAGE> 150
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
F-90
<PAGE> 151
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
converted to principal and will be repaid under similar terms as the
corresponding debt obligations. The 9.25% 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
F-91
<PAGE> 152
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT: (CONTINUED)
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 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
Environmen-
F-92
<PAGE> 153
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
tal 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,
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
F-93
<PAGE> 154
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' DEFICIT: (CONTINUED)
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.
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
F-94
<PAGE> 155
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. BENEFIT PLANS: (CONTINUED)
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 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>
F-95
<PAGE> 156
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: (CONTINUED)
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>
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>
F-96
<PAGE> 157
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES: (CONTINUED)
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.
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
F-97
<PAGE> 158
BINNINGS BUILDING PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-98
<PAGE> 159
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
F-99
<PAGE> 160
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.
F-100
<PAGE> 161
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.
F-101
<PAGE> 162
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.
F-102
<PAGE> 163
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.
F-103
<PAGE> 164
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.
F-104
<PAGE> 165
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.
F-105
<PAGE> 166
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>
F-106
<PAGE> 167
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>
F-107
<PAGE> 168
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.
F-108
<PAGE> 169
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES: (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 per 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.
F-109
<PAGE> 170
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
F-110
<PAGE> 171
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.
F-111
<PAGE> 172
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.
F-112
<PAGE> 173
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.
F-113
<PAGE> 174
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JULY 31, 1995
<TABLE>
<S> <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.
F-114
<PAGE> 175
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.
F-115
<PAGE> 176
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>
F-116
<PAGE> 177
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>
F-117
<PAGE> 178
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.
F-118
<PAGE> 179
FINANCIAL STATEMENT SCHEDULES
<PAGE> 180
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
American Architectural Products Corporation
The audits referred to in our report dated February 26, 1998 relating to
the consolidated financial statements of American Architectural Products
Corporation, which is contained in the Prospectus constituting part of this
Registration Statement included the audits of the financial statement schedule
listed under Item 16(b) for the period from the date of inception (June 19,
1996) through December 31, 1996 and the year ended December 31, 1997. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
Troy, Michigan
February 26, 1998
S-2
<PAGE> 181
AMERICAN ARCHITECTURAL PRODUCTS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FROM DATE OF INCEPTION (JUNE 19, 1996) TO DECEMBER 31, 1996
AND YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE, CHARGED TO CHARGED BALANCE,
AT BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ------------ ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
From date of inception (June 19,
1996) to December 31, 1996..... $ -- $ 12,546 $ 914,552(1) $ 487,894(2) $ 439,204
Year ended December 31, 1997..... 439,204 (17,102) 491,864(1) 74,825(2) 839,141
ACCRUED WARRANTY OBLIGATIONS
From date of inception (June 19,
1996) to December 31, 1996..... -- 369,324 4,627,412(1) 615,657 4,381,079
Year ended December 31, 1997..... 4,381,079 1,470,320 491,544(1) 1,517,216 4,825,727
</TABLE>
- ---------------
(1) Purchased in business acquisitions
(2) Accounts deemed to be uncollectible
S-3
<PAGE> 182
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To the Shareholders and Board of Directors of
Eagle Window & Door, Inc. and Subsidiaries and
Taylor Building Products Company (Wholly-Owned Subsidiaries)
We have audited in accordance with generally accepted auditing standards,
the August 29, 1996, December 31, 1995 and 1994 financial statements included in
this registration statement, and have issued our reports thereon dated January
31, 1997. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. Schedule II is presented for purposes of complying
with the Securities and Exchange Commission's rules and is the responsibility of
the company's management. It is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
SEMPLE & COOPER, L.L.P.
Phoenix, Arizona
June 23, 1997
S-4
<PAGE> 183
EAGLE WINDOW & DOOR, INC. AND SUBSIDIARIES
AND TAYLOR BUILDING PRODUCTS COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
PERIOD ENDED DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
August 29, 1996......... Allowance for $ 445,418 $ 425,595 $-- $ 79,492 $ 791,521
doubtful accounts
December 31, 1995....... Allowance for $ 648,385 $ 570,709 $-- $ 773,676 $ 445,418
doubtful accounts
December 31, 1994....... Allowance for $ 690,184 $ 836,609 $-- $ 878,408 $ 648,385
doubtful accounts
August 29, 1996......... Provision for $1,623,500 $ 70,000 $-- $1,218,985 $ 474,515
obsolete inventory
December 31, 1995....... Provision for $1,555,000 $ 462,905 $-- $ 394,405 $1,623,500
obsolete inventory
December 31, 1994....... Provision for $ 250,000 $1,305,000 $-- $ -- $1,555,000
obsolete inventory
August 29, 1996......... Accrued warranty $4,824,800 $ 801,073 $-- $ 998,461 $4,627,412
obligations
December 31, 1995....... Accrued warranty $5,149,800 $1,710,750 $-- $2,035,750 $4,824,800
obligations
December 31, 1994....... Accrued warranty $5,101,663 $2,702,133 $-- $2,653,996 $5,149,800
obligations
</TABLE>
S-5
<PAGE> 184
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To the Shareholders and Board of Directors of
Forte Computer Easy, Inc. and Subsidiaries
We have audited in accordance with generally accepted auditing standards,
the December 31, 1995 financial statements included in this registration
statement, and have issued our report thereon dated May 28, 1996. Our audit was
made for the purpose of forming an opinion on those statements taken as a whole.
Schedule II is presented for purposes of complying with the Securities and
Exchange Commission's rules and is the responsibility of the company's
management. It is not part of the basic financial statements. The schedule has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Semple & Cooper, L.L.P.
Phoenix, Arizona
January 13, 1998
S-6
<PAGE> 185
FORTE COMPUTER EASY, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
12/31/95
Allowance for doubtful accounts...... $277,275 $37,758 $ -- $ 15,094 $299,939
9/30/96
Allowance for doubtful accounts...... $299,939 $ -- $ -- $299,939 $ --
</TABLE>
S-7
<PAGE> 186
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To the Shareholders and Board of Directors of
Western Insulated Glass, Co.
We have audited in accordance with generally accepted auditing standards,
the October 31, 1996 financial statements included in this registration
statement, and have issued our report thereon dated June 3, 1997. Our audit was
made for the purpose of forming an opinion on those statements taken as a whole.
Schedule II is presented for purposes of complying with the Securities and
Exchange Commission's rules and is the responsibility of the company's
management. It is not part of the basic financial statements. The schedule has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Semple & Cooper, P.L.C.
Phoenix, Arizona
January 13, 1998
S-8
<PAGE> 187
WESTERN INSULATED GLASS, CO.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts.... $8,000 $1,179 $-- $7,074 $2,105
</TABLE>
S-9
<PAGE> 188
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Thermetic Glass, Inc.
Under date of October 3, 1997, we reported on the balance sheet of
Thermetic Glass, Inc. as of December 31, 1996, and the related statements of
operations and cash flows for the year then ended, which are included in the
Form S-1. In connection with our audit of the aforementioned financial
statements, we also audited the related financial statement schedule in the
registration statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
Clifton Gunderson L.L.C.
Peoria, Illinois
January 13, 1998
S-10
<PAGE> 189
THERMETIC GLASS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------ ---------- ------------------------ ---------- ---------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES Accounts (A) PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts......... $84,841 $37,000 $-- $5,841 $116,000
======= ======= == ====== ========
</TABLE>
- ---------------
(a) Represents write-offs, net of recoveries of $616.
S-11
<PAGE> 190
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Danvid Company, Inc. and Danvid Window Company
Carrollton, Texas
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Danvid Company, Inc. and Danvid Window Company
included in the American Architectural Products Corporation Form S-1
Registration Statement, and have issued our report thereon dated October 13,
1995. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule is the responsibility of the Company's
management and is not part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
FOX, BYRD & GOLDEN
Dallas, Texas
October 13, 1995
S-12
<PAGE> 191
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
SCHEDULE II
ANALYSIS OF VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED JULY 31, 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND (1) END OF
OF PERIOD EXPENSES DEDUCTIONS OTHER PERIOD
--------- ---------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
Year Ended July 31, 1995:
Allowance for doubtful accounts....... 11,000 313,000 92,000 -- 232,000
====== ======= ====== == =======
</TABLE>
- ---------------
(1) Deductions are for the purpose for which the reserve was created.
S-13
<PAGE> 192
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Danvid Company, Inc. and Danvid Window Company
The audits referred to in our report dated October 20, 1997, relating to
the combined financial statements of Danvid Company, Inc. and Danvid Window
Company, which is contained in the Prospectus constituting part of this
Registration Statement, included the audits of the financial statement schedules
listed under Item 16(b) for the years ended July 28, 1996 and July 27, 1997.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based upon our audits.
In our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein.
BDO SEIDMAN, LLP
Dallas, Texas
October 20, 1997
S-14
<PAGE> 193
DANVID COMPANY, INC. AND DANVID WINDOW COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD
----------- ------------ ---------- ------------- ---------
<S> <C> <C> <C> <C>
Year Ended July 28, 1996
Allowance for doubtful accounts........... $232,400 $393,000 $272,000 $353,400
Year Ended July 27, 1997
Allowance for doubtful accounts........... $353,400 $101,000 $328,800 $125,600
</TABLE>
- ---------------
(1) Accounts deemed to be uncollectible.
S-15
<PAGE> 194
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Binnings Building Products, Inc.:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Binnings Building Products, Inc. included in the
American Architectural Products Corporation Form S-1 Registration Statement, and
have issued our report thereon dated March 21, 1997 (except with respect to the
matters discussed in Note 10 as to which the date is December 10, 1997). Our
audit was made for the purpose of forming an opinion on those statements taken
as a whole. The schedule is the responsibility of the Company's management and
is not part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
March 21, 1997.
S-16
<PAGE> 195
BINNINGS BUILDING PRODUCTS, INC.
SCHEDULE II
ANALYSIS OF VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996, AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COST AND (1) END
OF PERIOD EXPENSES DEDUCTIONS OTHER OF PERIOD
--------- ---------- ---------- ----- ---------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1994:
Reserve deducted from assets to which
it applies-
Allowance for doubtful accounts............ $347,000 $205,000 $199,000 $0 $353,000
======== ======== ======== == ========
For the Year Ended December 31, 1995:
Reserve deducted from assets to which
it applies-
Allowance for doubtful accounts............ $353,000 $ 15,000 $230,000 $0 $138,000
======== ======== ======== == ========
For the Year Ended December 31, 1996:
Reserve deducted from assets to which
it applies-
Allowance for doubtful accounts............ $138,000 $161,000 $ 76,000 $0 $223,000
======== ======== ======== == ========
For the Nine Months Ended
September 30, 1996 (unaudited):
Reserve deducted from assets to which
it applies-
Allowance for doubtful accounts............ $138,000 $122,000 $ 57,000 $0 $203,000
======== ======== ======== == ========
For the Nine Months Ended
September 30, 1997 (unaudited):
Reserve deducted from assets to which
it applies-
Allowance for doubtful accounts............ $223,000 $172,000 $ 17,000 $0 $378,000
======== ======== ======== == ========
</TABLE>
- ---------------
(1) Deductions are for the purpose for which the reserve was created.
S-17
<PAGE> 196
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Company History................................. 14
Use of Proceeds................................. 16
Dividend Policy................................. 16
Dilution........................................ 17
Capitalization.................................. 18
Unaudited Pro Forma Condensed Consolidated
Financial Statements.......................... 19
Selected Financial Data......................... 22
Management's Discussion and Analysis of
Financial
Condition and Results of Operations......... 24
Fenestration Industry Overview.................. 32
Business........................................ 34
Management...................................... 44
Certain Relationships and Related
Transactions.................................. 50
Principal and Selling Stockholders.............. 52
Description of Capital Stock.................... 53
Shares Eligible for Future Sale................. 55
Price Range Of Common Stock..................... 56
Underwriting.................................... 57
Legal Matters................................... 59
Experts......................................... 59
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........... 59
Available Information........................... 59
Index to Financial Statements................... F-1
</TABLE>
============================================================
============================================================
SHARES
AMERICAN
ARCHITECTURAL
PRODUCTS
CORPORATION
AMERICAN ARCHITECTURAL LOGO
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MCDONALD & COMPANY
SECURITIES, INC.
WHEAT FIRST UNION
, 1998
============================================================
<PAGE> 197
PART II TO FORM S-1
INFORMATION NOT REQUIRED IN THE PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Company does not limit the
indemnification provisions provided by Delaware law. In addition, Section 11 of
the Company's Certificate of Incorporation provides as follows:
"11. No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that nothing
contained herein shall eliminate or limit the liability of a director
of the Corporation to the extent provided by applicable laws (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) for
authorizing the payment of a dividend or repurchase of stock, or (iv)
for any transaction from which the director derived an improper
personal benefit. The limitation of liability provided herein shall
continue after a director has ceased to occupy such position as to
acts or omissions occurring during such director's term or terms of
office."
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses of the
Company in connection with the Offering other than underwriting discounts.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 7,434
NASD Filing Fee............................................. 3,020
Nasdaq Listing Fee..........................................
Legal Fees and Expenses.....................................
Accounting Fees and Expenses................................
Printing and Engraving Expenses.............................
Blue Sky Fees and Expenses..................................
Miscellaneous...............................................
-------
Total.................................................. $
=======
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
Within the past three (3) years, the Company has made sales of securities
as described below. In each instance there were no underwriters and the
securities were sold as part of private placements pursuant to the exemption
from registration provided under Rule 506 of Regulation D under the Securities
Act of 1933, as amended, and pursuant to exemptions from registration or
qualification available under applicable state securities laws. To the best of
the Company's knowledge, in each instance each purchaser was an accredited
investor, as defined by Regulation D under the Securities Act of 1933, as
amended, and each purchaser was acquiring the shares for purposes of investment
only.
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
---- ----- ------
<S> <C> <C>
March 31, 1994 Common 190,000 to nine (9) former stockholders of
ADF in exchange for all the issued and
outstanding shares of ADF, valued at
approximately $742,000.
June 8, 1994 Series A Preferred 1,000,000 sold to Forte at $.25 per share,
for which the Company received $250,000;
Forte resold 675,677 shares to seven (7)
individual investors at $.37 per share. All
of these shares were converted to Common
Stock effective as of December 8, 1994.
</TABLE>
II-1
<PAGE> 198
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
---- ----- ------
<S> <C> <C>
June 8, 1994 Common 3,247,929 shares to two (2) individuals in
exchange for all shares of Forte, of which
3,076,087 were issued to the stockholders of
Forte, together with options to acquire
471,770 shares at $3.75 per share. The
consideration received by the Company was
valued at approximately $3.6 million. The
remaining 171,842 shares were issued to Frank
J. Amedia on April 1, 1997.
June 14, 1994 Common 33,750 shares sold to three (3) investors at
$4.00 per share, for the total consideration
paid to the Company of $135,000.
June 25, 1994 Common 10,000 shares at $5.00 per share sold to one
(1) investor, 10,000 at $6.00 per share sold
to three (3) investors, 9,727 shares at $5.50
per share to one (1) investor and 3,000
shares at $5.50 per share sold to one (1)
investor. The total consideration received by
the Company was $126,500 in cash and
cancellation of $53,500 in indebtedness.
October 11, 1994 Common 80,000 shares issued to debenture holders of
Forte in exchange for $300,000 of principal
amount of Debentures.
December 8, 1994 Common 100,000 shares issued to Forte and seven (7)
other investors pursuant to conversion of
1,000,000 shares of the Company's Series A
Preferred Stock.
December 29, 1994 Common 833 shares sold to one investor for $5,000
and 15,766 shares issued to a creditor in
exchange for cancellation of indebtedness in
the amount of $86,713.
May 19, 1995 Common 10,000 shares sold to one (1) investor for
$50,000, subject to "put" options which allow
the purchaser to sell the shares back to the
Company for $6.25 per share on May 19, 1996
and $7.50 per share on May 19, 1997.
May 23, 1995 Common 26,667 shares issued to debenture holders of
Forte in exchange for $100,000 principal
amount of Debentures.
June 14, 1995 Common 5,000 shares sold to one (1) investor for
$25,000, subject to "put" options which allow
the purchaser to sell the shares back to the
Company for $6.25 per share on June 14, 1996
and $7.50 per share on June 14, 1997.
September 24, 1996 Common 45,200 shares sold to two (2) investors for
$2.50 per share. The total consideration
received by the Company was $113,000.
</TABLE>
II-2
<PAGE> 199
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
---- ----- ------
<S> <C> <C>
December 18, 1996 Series A Preferred 1,000,000 shares issued to AAP Holdings, Inc.
in exchange for all issued and outstanding
stock of Eagle & Taylor Company. The fair
market value of the consideration received by
the Company was $1,242,000.
April 1, 1997 Common 7,548,633 shares issued to AAP Holdings, Inc.
upon conversion of 1,000,000 shares of Series
A Preferred Stock that were issued on
December 18, 1996.
April 1, 1997 Common 171,842 shares issued to Frank J. Amedia in
connection with the transaction that occurred
on June 8, 1994.
April 3 -- July 24, Series B Preferred 4,250 shares sold to six accredited investors
1997 for $100 per share.
May 1997 Options Options to purchase 100,000 shares of Common
Stock at $5.43 per share issued to The Miller
Group, the Company's investor relations firm.
June 4, 1997 Warrants Warrants to purchase 71,428 shares of Common
Stock at an exercise price of $3.50 per
share, expiring in June 1998, issued to
Stephen McConnell in connection with a loan
from Mr. McConnell to the Company.
September 1997 Warrants Warrants to purchase 57,143 shares of Common
Stock at an exercise price of $3.50 per
share, expiring in September 1998, issued to
William R. Jackson, Jr. in connection with a
loan from Mr. Jackson to the Company.
July 18, 1997 Common 384,000 shares to former stockholders of
Thermetic Glass, Inc. in partial
consideration for all issued and outstanding
stock of Thermetic Glass, Inc.
July 18, 1997 Convertible Debentures $2,500,000 in Convertible Debentures sold to
former stockholders of Thermetic Glass, Inc.
in partial consideration for all issued and
outstanding stock of Thermetic Glass, Inc.
July -- August, 1997 Common 108,810 shares issued to six individuals upon
conversion of 4,250 shares of Series B
Preferred Stock that were issued between
April 3 and July 24, 1997.
December 10, 1997 Common 384,615 shares issued to former stockholders
of Danvid Company, Inc. and Danvid Window
Company in partial consideration for
acquisition by the Company of substantially
all of the assets thereof; the Company was
granted an option to repurchase such shares
at $6.50 per share commencing 18 months
following the closing date and terminating 19
months following the closing date.
</TABLE>
II-3
<PAGE> 200
<TABLE>
<CAPTION>
DATE TITLE AMOUNT
---- ----- ------
<S> <C> <C>
January 5, 1998 Options Options to purchase 100,000 shares of Common
Stock at $2.50 per share issued to Anthony
DePrima, a former member of the Company's
Board of Directors.
January 5, 1998 Options Options to purchase 50,000 shares of Common
Stock at $5.43 per share issued to The Miller
Group, the Company's investor relations firm.
</TABLE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The information required by this Item 16(a) is set forth in the Index to
Exhibits accompanying this Registration Statement and is incorporated herein by
reference.
(B) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules listed below accompany this Registration
Statement and are incorporated herein by reference:
<TABLE>
<C> <S>
1. Schedule II -- Valuation and Qualifying Accounts of American
Architectural Products Corporation
2. Schedule II -- Valuation and Qualifying Accounts of Eagle
Window & Door, Inc. and Subsidiaries and Taylor Building
Products Company
3. Schedule II -- Valuation and Qualifying Accounts of Forte
Computer Easy, Inc. and Subsidiaries
4. Schedule II -- Valuation and Qualifying Accounts of Western
Insulated Glass, Co.
5. Schedule II -- Valuation and Qualifying Accounts of
Thermetic Glass, Inc.
6. Schedule II -- Valuation and Qualifying Accounts of Danvid
Company, Inc. and Danvid Window Company (Year ended July 31,
1995)
7. Schedule II -- Valuation and Qualifying Accounts of Danvid
Company, Inc. and Danvid Window Company (Year ended July 28,
1996 and year ended July 27, 1997)
8. Schedule II -- Valuation and Qualifying Accounts of Binnings
Building Products, Inc.
</TABLE>
UNDERTAKINGS
1. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
2. The undersigned Registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and
II-4
<PAGE> 201
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or Rule 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(b) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 202
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boardman and State of Ohio on May 20, 1998.
AMERICAN ARCHITECTURAL
PRODUCTS CORPORATION,
a Delaware corporation
By /s/ Frank J. Amedia
--------------------------------------
Frank J. Amedia
Chief Executive Officer and
President
II-6
<PAGE> 203
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints FRANK J. AMEDIA and JOSEPH DOMINIJANNI, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Form S-1 Registration Statement, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or each of them, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ George S. Hofmeister Chairman of the Board of May 20, 1998
- ------------------------------------------------ Directors
George S. Hofmeister
/s/ Frank J. Amedia President, Chief Executive May 20, 1998
- ------------------------------------------------ Officer and Director
Frank J. Amedia (Principal Executive Officer)
/s/ Richard L. Kovach Vice President and Chief May 20, 1998
- ------------------------------------------------ Financial Officer (Principal
Richard L. Kovach Financial Officer)
Director
- ------------------------------------------------
John J. Cafaro
/s/ Joseph Dominijanni Treasurer and Director May 20, 1998
- ------------------------------------------------
Joseph Dominijanni
Director
- ------------------------------------------------
William R. Jackson, Jr.
Director
- ------------------------------------------------
Joseph C. Lawyer
/s/ John Masternick Director May 20, 1998
- ------------------------------------------------
John Masternick
Director
- ------------------------------------------------
Lawrence J. O'Dowd
/s/ Charles E. Trebilcock Director May 20, 1998
- ------------------------------------------------
Charles E. Trebilcock
</TABLE>
II-7
<PAGE> 204
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Representatives and +
the Company.
2.1 Agreement and Plan of Merger, dated as of November 10, 1997, D
by and among American Architectural Products Corporation,
BBPI Acquisition Corporation and Binnings Building Products,
Inc.
2.2 Asset Purchase Agreement, dated as of November 10, 1997, by D
and among DCI/DWC Acquisition Corporation, Danvid Company,
Inc. and Danvid Window Company
2.3 Shareholders Agreement in Support of Asset Purchase D
Agreement, dated as of November 10, 1997, by and among
Daniel Crawford, Karen Crawford, David Crawford, Paul Comer
and DCI/DWC Acquisition Corporation
2.4 Asset Purchase Agreement, dated as of December 10, 1997, by D
and among American Architectural Products Corporation,
American Glassmith Acquisition Corporation and American
Glassmith, Inc.
2.5 Agreement, dated as of December 10, 1997, by and among D
American Architectural Products Corporation, Modern Window
Acquisition Corporation and Modern Window Corporation
2.6 Agreement and Plan of Reorganization, dated October 25, B
1996, between Forte Computer Easy, Inc. and AAP Holdings,
Inc.
3.1 Certificate of Incorporation of American Architectural C
Products Corporation
3.2 Bylaws of American Architectural Products Corporation C
3.3 Certificate of Incorporation of American Glassmith F
Acquisition Corporation
3.4 Bylaws of American Glassmith Acquisition Corporation F
3.5 Amended and Restated Certificate of Incorporation of F
Binnings Building Products, Inc.
3.6 Bylaws of Binnings Building Products, Inc. F
3.7 Certificate of Incorporation of Danvid Window Company, as G
amended
3.8 Bylaws of Danvid Window Company F
3.9 Certificate of Incorporation of Eagle & Taylor Company, as F
amended
3.10 Bylaws of Eagle & Taylor Company F
3.11 Articles of Incorporation of Forte, Inc. F
3.12 Code of Regulations of Forte, Inc. F
3.13 Certificate of Incorporation of Modern Window Acquisition F
Corporation
3.14 Bylaws of Modern Window Acquisition Corporation F
3.15 Certificate of Incorporation of Thermetic Glass, Inc., as F
amended
3.16 Bylaws of Thermetic Glass, Inc. F
3.17 Articles of Incorporation of Western Insulated Glass, Co. F
3.18 Bylaws of Western Insulated Glass, Co. F
3.19 Certification of Incorporation of VinylSource, Inc., as G
amended
3.20 Bylaws of VinylSource, Inc. G
3.21 Certificate of Incorporation of AAPC One Acquisition G
Corporation
</TABLE>
II-8
<PAGE> 205
<TABLE>
<C> <S> <C>
3.22 Bylaws of AAPC One Acquisition Corporation G
3.23 Certificate of Incorporation of AAPC Two Acquisition G
Corporation
3.24 Bylaws of AAPC Two Acquisition Corporation G
3.25 Certificate of Incorporation of Denver Window Acquisition G
Corporation
3.26 Bylaws of Denver Window Acquisition Corporation G
3.27 Certificate of Incorporation of Eagle Window & Door Center, G
Inc., as amended
3.28 Bylaws of Eagle Window & Door Center, Inc. G
3.29 Certificate of Incorporation of Weather Seal Acquisition G
Corporation
3.30 Bylaws of Weather Seal Acquisition Corporation G
4.1 Form of American Architectural Products Corporation Common E
Stock Certificate
4.2 Indenture dated as of December 10, 1997 with respect to D
11 3/4% Senior Notes due 2007 among American Architectural
Products Corporation, as issuer, American Glassmith
Acquisition Corporation, BBPI Acquisition Corporation,
DCI/DWC Acquisition Corporation, Eagle & Taylor Company,
Forte, Inc., Modern Window Acquisition Corporation,
Thermetic Glass, Inc., and Western Insulated Glass, Co., as
subsidiary guarantors, and United States Trust Company of
New York, as trustee
4.3 Amendment No. 1, dated as of April 15, 1998, to the H
Indenture dated as of December 10, 1997 with respect to
11 3/4% Senior Notes due 2007.
4.4 First Supplemental Indenture, dated as of April 15, 1998, by H
and among American Architectural Products Corporation, Eagle
& Taylor Company, Forte, Inc., Western Insulated Glass, Co.,
Thermetic Glass, Inc., Binnings Building Products, Inc.,
Danvid Window Company, American Glassmith Acquisition
Corporation, Modern Window Acquisition Corporation,
VinylSource, Inc., AAPC One Acquisition Corporation, AAPC
Two Acquisition Corporation, Denver Window Acquisition
Corporation, Eagle Window & Door Center, Inc., Weather-Seal
Acquisition Corporation and United States Trust Company of
New York.
5 Opinion of Squire, Sanders & Dempsey L.L.P. +
10.1 1992 Incentive Stock Option Plan A
10.2 1996 Stock Option Plan C
10.3 Employment Agreement, dated November 17, 1997, between Frank F
J. Amedia and American Architectural Products Corporation
10.4a Lease Agreement, dated December 1989, between Centre F
Consolidated Properties, Ltd. and Danvid Company, Inc.
10.4b Lease Extension Agreement to Industrial Lease Agreement F
between Beltline Business Center Limited Partnership and
Danvid Company, Inc.
10.5 Business Property Lease, dated as of June 25, 1996, between F
C. Lane Mally and Mallyclad Corporation
10.6a Lease Agreement, dated November 28, 1990, between J.M.J. F
Partnership and The New Edgehill Co, Inc.
10.6b Lease Modification No. 1, dated October 19, 1992, between F
J.M.J. Partnership and The American Glassmith, Inc., f/k/a
The New Edgehill Co., Inc.
</TABLE>
II-9
<PAGE> 206
<TABLE>
<C> <S> <C>
10.6c Lease Modification No. 2, dated June 8, 1993, between J.M.J. F
Partnership and The American Glassmith, Inc.
10.6d Lease Modification No. 3, dated January 31, 1995, between F
J.M.J. Partnership and American Glassmith, Inc.
10.6e Lease Modification No. 4, dated as of March 31, 1995, F
between J.M.J. Partnership and American Glassmith, Inc.
10.6f Lease Modification No. 5, dated as of August 31, 1995, F
between J.M.J. Partnership and American Glassmith, Inc.
10.6g Lease Modification No. 6, dated June 19, 1996, between F
J.M.J. Partnership and American Glassmith, Inc.
10.7 Lease Agreement, dated March 14, 1997, by and among Benny J. F
Ellis and Linda M. Ellis and Western Insulated Glass, Co.
10.8 Purchase Agreement, dated as of December 4, 1997, by and D
among American Architectural Products Corporation, NatWest
Capital Markets Limited and McDonald & Company Securities,
Inc.
10.9 Exchange and Registration Rights Agreement, dated as of D
December 10, 1997, by and among American Architectural
Products Corporation, American Glassmith Acquisition
Corporation, BBPI Acquisition Corporation, DCI/DWC
Acquisition Corporation, Eagle & Taylor Company, Forte,
Inc., Modern Window Acquisition Corporation, Thermetic
Glass, Inc., Western Insulated Glass, Co., NatWest Capital
Markets Limited and McDonald & Company Securities, Inc.
21 Subsidiaries of American Architectural Products Corporation F
23.1 Consent of Squire, Sanders & Dempsey L.L.P. (included in +
Exhibit 5)
23.2 Consent of BDO Seidman, LLP *
23.3 Consent of Semple & Cooper, P.L.C. *
23.4 Consent of Clifton Gunderson L.L.C. *
23.5 Consent of Fox, Byrd & Golden, P.C. *
23.6 Consent of Arthur Andersen LLP *
24 Power of Attorney (included at page II-7) *
</TABLE>
- ---------------
* Filed herewith.
+ To be filed by amendment.
A Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form 10-SB filed November 22, 1996.
B Incorporated by reference to the Company's Current Report on Form 8-K dated
October 25, 1996.
C Incorporated by reference to the Company's definitive Information Statement
relating to the special meeting of stockholders held on April 1, 1997.
D Incorporated by reference to the Company's Current Report on Form 8-K dated
December 10, 1997.
E Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on Form 10-SB filed April 17, 1997.
F Incorporated by reference to the Company's Registration Statement on Form S-4
filed January 15, 1998.
G Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-4 filed April 7, 1998.
H Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998 filed May 15, 1998.
II-10
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Architectural Products Corporation
Boardman, Ohio
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 26, 1998 relating to the
consolidated financial statements of American Architectural Products
Corporation, our report dated April 28, 1997 relating to the combined financial
statements of Mallyclad Corporation and Vyn-L Corporation and our report dated
October 20, 1997 relating to the combined financial statements of Danvid
Company, Inc. and Danvid Window Company, which are contained in that
Prospectus, and of our report dated February 26, 1998, relating to the
financial statement schedules of American Architectural Products Corporation
and our report dated October 20, 1997 relating to the financial statement
schedules of Danvid Company, Inc. and Danvid Window Company, which are
contained in Part II of the Registration Statement.
We also consent to the reference to us under the captions "Experts" and
"Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure" in the Prospectus.
BDO SEIDMAN, LLP
Troy, Michigan
May 21, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
inclusion of our report dated January 31, 1997, on the combined financial
statements of Eagle Window & Door, Inc. and Subsidiaries and Taylor Building
Products Company (wholly-owned subsidiaries) for the year ended December 31,
1995 and for the eight month period ended August 29, 1996; our report dated June
3, 1997, on the financial statements of Western Insulated Glass, Co. for the
year ended October 31, 1996; and our report dated May 28, 1996, on the
consolidated financial statements of Forte Computer Easy, Inc. and Subsidiaries
for the year ended December 31, 1995 in the Company's Prospectus constituting a
part of this Form S-1 Registration Statement.
We also consent to the reference to us under the captions "Experts" and
"Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure" contained in the Prospectus.
Semple & Cooper, LLP
Certified Public Accountants
Phoenix, Arizona
May 21, 1998
<PAGE> 1
EXHIBIT 23.4
The Board of Directors
American Architectural Products Corporation
We consent to the inclusion of our reports dated October 3, 1997, with
respect to the balance sheet of Thermetic Glass Inc. as of December 31, 1996,
and the related statements of operations and accumulated deficit and cash flows
and the related financial statement schedule for the year then ended, which
reports appear in the Form S-1 of American Architectural Products Corporation
dated January 13, 1998 and to the reference to our firm under the heading of
"Experts."
Clifton Gunderson L.L.C.
Peoria, Illinois
May 21, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To whom it may concern:
As independent public accountants, we hereby consent to the use of our
report on the financial statements and schedule of Danvid Company, Inc. and
Danvid Window Company dated October 13, 1995, and to all references to our Firm,
included in or made part of the American Architectural Products Corporation Form
S-1 Registration Statement filed May 22, 1998.
Fox, Byrd & Golden
Dallas, Texas
May 21, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports on the financial statements and schedule of Binnings Building Products,
Inc. dated March 21, 1997 (except with respect to the matters discussed in Note
10 as to which the date is December 10, 1997), and March 21, 1997, respectively,
and to all references to our Firm, included in or made part of the American
Architectural Products Corporation Form S-1 Registration Statement filed May
22, 1998.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
May 21, 1998.
