-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GYpESmIiuzB6DDbBjYfkhxwCrxCU27f+TXw3vbOv3cbX0YAxZvBsafTCUwsc2fUt qr99Yv5PQxMs6TYmwu+p9g== 0000899243-00-000611.txt : 20000328 0000899243-00-000611.hdr.sgml : 20000328 ACCESSION NUMBER: 0000899243-00-000611 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXIA INC CENTRAL INDEX KEY: 0000012635 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 133205251 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02321 FILM NUMBER: 580055 BUSINESS ADDRESS: STREET 1: 100 W 22ND ST STE 134 CITY: LOMBARD STATE: IL ZIP: 60148 BUSINESS PHONE: 6306293360 MAIL ADDRESS: STREET 1: 100 W 22ND STREET STREET 2: SUITE 134 CITY: LOMBARD STATE: IL ZIP: 60148 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 333-64555 AXIA INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 13-3205251 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 TRAVIS STREET - SUITE 1400 Houston, Texas 77002 (Address of principal executive office) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 425-2150 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X No _____. --- (2) Yes X No _____. --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] PART I ITEM 1. BUSINESS CAUTIONARY STATEMENTS This document includes forward-looking statements. Forward-looking statements can be identified by the use of the future tense or other forward-looking terms such as "may", "intend", "will", "expect", "anticipate", "plan", "management believes", "estimate", "continue", "should", "strategy" or "position" or the negatives of those terms or other variations on them or by comparable terminology. In particular, statements, express or implied, concerning future operating results or the ability to generate net sales, income or cash flow to service debt are forward-looking statements. The Company has based these forward-looking statements on the Company's current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about the Company, including, among other things: (i) increased competition; (ii) increased costs; (iii) loss or retirement of key members of management and (iv) changes in general economic conditions in the markets in which the company may from time to time compete. The Company undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur. ACQUISITION AND MERGER By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition Co."), a company organized to effect the acquisition (the "Acquisition") of Axia Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the "Predecessor Company" prior to the date of the Transaction) to effect the acquisition for a purchase price of $155,250,000 (including the repayment of indebtedness), subject to certain post-closing adjustments. Upon completion of the Transaction (the "Transaction"): (i) Holdings and AXIA Incorporated (the "Company") became direct and indirect subsidiaries of AXIA Group Inc. ("Group" or "AXIA Group" the parent company of Acquisition Co.) and (ii) the Company became the primary obligor on borrowings made under the credit agreement (the "Bank Credit Agreement") and Senior Subordinated notes issued on the Transaction Date defined below. On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of its common stock ("Common Stock") and contributed the proceeds thereof to Acquisition Co. (the "Equity Investment"). Axia Finance Corp., ("Finance Co.") an indirect subsidiary of AXIA Group, borrowed approximately $39,250,000 under the Bank Credit Agreement and received approximately $100,000,000 in gross proceeds from the sale of subordinated notes. Such funds were used: (i) to effect the Acquisition pursuant to the Merger Agreement; (ii) to fund the Company's Employee Stock Ownership Plan ("ESOP"); (iii) to repay existing indebtedness of the Company and (iv) to pay fees and expenses in connection with the Transaction. GENERAL AXIA Incorporated. The Company is a leading designer, manufacturer, marketer and distributor of a diverse range of products in several niche markets including productivity enhancing construction tools, formed wire products, industrial bag closing equipment and flexible conveyors. Management believes the Company possesses strong market leadership positions in its primary markets. The Company believes that its market leadership position, brand name recognition, established national and international distribution networks, strong customer base and manufacturing expertise provide significant opportunities to grow sales of new and existing products within established markets, as well as expand into new markets. The Company believes that its diverse base of products and markets reduces exposure to any particular industry, product market or geographic region. The Company operates through three business units: Ames, Nestaway and Fischbein. Ames. Ames is the leading designer, manufacturer, marketer and distributor of Automatic Taping And Finishing ("ATF") tools, which are rented or sold to interior finishing contractors to finish drywall joints prior to painting, wallpapering or other forms of final treatment. ATF tools, invented by Ames in 1939, enable interior finishing contractors to finish drywall joints substantially faster than less productive hand finishing methods. The Company is the leader in ATF tool rentals and sales in the markets in which it serves. The primary business of Ames is the rental and service of more than 140,000 ATF tools through its extensive distribution network throughout the U.S. and Canada, including a network of 68 Company-managed stores (including rental stations and vans). Ames also sells ATF tools through an established independent network of dealers in the U.S. and Canada. In addition, Ames sells a variety of other drywall tools, finishing accessories and supplies through its network of Company-managed stores. The Company believes it has opportunities to increase Ames' revenues (i) through its introduction of newly designed and improved ATF tools; (ii) by expanding the use of ATF tools in the fast growing factory-built housing market, which is increasingly utilizing finished drywall rather than other forms of drywall; and (iii) through conversion of interior finishing contractors from traditional hand finishing methods to ATF tools, particularly in the eastern 2 and midwestern U.S. where the use of ATF tools is less prevalent than in the western U.S. Ames accounted for 44% of the Company's 1999 revenues, and by taking advantage of market trends reflecting increased home ownership, second home ownership and larger homes, all of which increase the demand for drywall finishing and the need for drywall tools. Nestaway. Nestaway is a leading manufacturer of formed wire products which are used for a variety of commercial and consumer product applications. Nestaway is North America's largest independent manufacturer of coated wire dishwasher racks and components which are sold to the major U.S. original equipment manufacturers ("OEM's"). Approximately 75% of dishwashers sold in the U.S. are replacements. Nestaway's primary OEM customers include Maytag, EBS-Bosch and Whirlpool/KitchenAid. Nestaway has had relationships with all major OEMs for an average of approximately 19 years. Nestaway also manufactures, on a contract basis, other close tolerance, welded, non-coated or coated formed wire products such as dish drainers, sink protectors, shower caddies, dryer racks, golf cart baskets, bucket bails, medical baskets and small gauge axles. The Company believes it has significant opportunities to increase Nestaway's revenues through: (i) increasing sales to existing customers; (ii) expanding its product offering and customer base by developing new formed wire business; (iii) and pursuing strategic acquisitions. Nestaway accounted for 33% of the Company's 1999 revenues. Fischbein. Fischbein is a leading worldwide manufacturer and marketer of industrial bag closing and handling equipment and systems and a leading manufacturer and marketer of flexible conveyors and storage racks. Bag closing and handling systems products include: (i) portable and stationary industrial sewing heads and sewing systems for paper, textile and woven polypropylene bags; (ii) industrial heat sealing and bag handling systems for paper and plastic bags; (iii) consumables, including thread and tape and (iv) service parts. Fischbein's bag closing products are used across a broad range of industries for packaging chemicals, minerals, agricultural and food products. In addition to bag closing products, Fischbein manufactures extendible, flexible, gravity and motorized conveyors and portable, nestable and stackable warehouse storage racks. Fischbein's flexible conveyors are used by retailers for loading and unloading tractor trailers at store sites and distribution centers. Storage racks are designed for factory and warehouse storage where flexibility in racking is desired and are sold to customers in various industries, including retail, distribution, food, chemical, pharmaceutical and textile. The Company believes it has opportunities to increase Fischbein's revenues by expanding the product offerings that can be sold through its extensive distribution network and by making strategic acquisitions. Fischbein accounted for 23% of the Company's 1999 revenues. Revenue by business unit, including the results of the Predecessor Company, for fiscal years 1999, 1998 and 1997 is detailed in the table below: AXIA INCORPORATED REVENUE BY PRODUCT GROUP (IN THOUSANDS)
1999 1998 1997 --------------- --------------- --------------- Ames $ 57,650 44% $ 48,139 41% $ 42,428 40% Nestaway 43,600 33% 41,441 35% 35,268 34% Fischbein 30,644 23% 27,535 24% 27,104 26% -------- --- -------- --- -------- --- Total Revenues $131,894 100% $117,115 100% $104,800 100% ======== === ======== === ======== ===
See Note 13 of the Notes to the Consolidated Financial Statements for additional segment data. PRODUCTS Ames. Ames' ATF tools are used in the construction industry by professional interior finishing contractors to finish and prepare drywall for painting or other forms of final treatment. Automatic tapers simultaneously apply joint tape and compound to drywall joints and automatically dispense a controlled amount of joint compound for fast, efficient operation. For drywall finishers that prefer to purchase their ATF tools, Ames sells ATF tools through separate dealer networks. Ames also offers its customers a wide variety of other products used in drywall finishing including corner rollers, flat finishers, corner finishers, nail spotters, loading pumps and finisher handles. Corner rollers embed joint tape firmly into an interior corner or ceiling angle, forcing out excess compound and leaving the angle ready for finishing. Corner finishers remove excess compound, feathering both sides at once and apply the second coat of compound for inside corners. Flat finishers are used to apply a final coat of joint compound over taped joints and generally eliminate the need for sanding. Nail spotters apply compound to nail or screw head dimples, preparing them for painting or other final treatment. Loading pumps are used to fill Ames' ATF tools with joint compound. Finisher 3 handles are specifically designed for use with Ames' products and allow the user to complete most of the taping and finishing work from the floor instead of using scaffolding or stilts. In addition, Ames' stores provide its customers with a variety of supplies and other products including hand finishing drywall tools, drywall finishing accessories, including spray rigs, power sanders, scaffolds and board handling devices, and drywall supplies, including compound, paper and mesh joint tape and corner bead. Nestaway. Nestaway's products consist of formed, coated and non-coated wire products used for a variety of commercial and consumer product applications. Nestaway's primary focus is on producing dishwasher racks for OEMs. Nestaway also manufactures, on a contract basis, other close tolerance, welded, non- coated or coated formed wire products such as dish drainers, sink protectors, shower caddies, dryer racks, golf cart baskets, bucket bails, medical baskets and small gauge axles. Nestaway's engineers frequently work with individual customers to design new or improved products which are tailored to meet that customer's specific needs. Fischbein. Fischbein manufactures a variety of bag closing equipment, flexible conveyors and storage equipment. Fischbein's bag closing products consist of a variety of hand-held and stationary industrial sewing and sealing units which utilize portable sewing machines, industrial sewing heads, sewing systems and heat sealing and handling systems. Portable sewing machines are hand-held and lightweight for low and moderate volume applications and are effective in closing a wide variety of bags, including paper and woven polypropylene. Industrial sewing heads are designed for continuous use in moderate to high volume applications and are used to close paper, textile and woven polypropylene bags. Sewing systems consist of pedestal-mounted sewing heads with integrated conveying capabilities. These systems can be integrated into new or existing bagging lines and can be fully automated. Heat sealing and handling systems are generally used for medium to high speed bag closing and sealing applications. These systems incorporate programmable logic controllers, pneumatics, airflow and hot melt adhesive technologies, and are used to close polyethylene bags, paper bags, heat sealable inner liners, pinch style bags and hot melt adhesive closures. Fischbein also provides service parts, consumables, accessories, thread and tape used with Fischbein equipment. Fischbein also offers flexible conveyors and storage racks marketed under the Nestaflex(R), Nestainer(R) and Postainer(TM) brand names. Nestaflex(R) products include a full line of conveyors for a wide variety of material handling applications where stationary conveyors do not provide adequate flexibility. These products are used by major retailers for loading and unloading tractor trailers at store sites, by distribution centers and also in light manufacturing operations. Nestainer(R) and Postainer(TM) products consist of large, welded steel racks designed for factory and warehouse storage and transportation purposes where changes in stored products and quantities make stationary racking inefficient or impractical. The stackable and nestable features of both systems maximize vertical storage capacity and their unique design allows for compact storage when not in use. Nestainer(R) products are also used as containers for transporting products. SALES AND MARKETING The Company markets and sells its broad range of products to a wide variety of customers through an extensive sales and marketing network which utilizes full time sales representatives, franchisees and third party distributors. These sales efforts are enhanced by its product development staff, who works closely with customers to develop products which are customized to meet their specific needs. Ames. Ames' rental tool sales organization conducts sales and marketing activities throughout North America. Ames' ATF rental tools reach drywall professionals in North America through over 131 distribution locations including 68 Company-managed stores (including rental stations and vans) and 63 franchised operations. Ames sells ATF tools through a network of 267 dealers and distributors. Ames utilizes franchises, rental stations, field specialists and mobile operations to support its sales and marketing activities. Franchisees are typically major drywall and construction material distributors who operate multiple locations. Under its franchise arrangements which generally are used in locations where the usage of ATF tools do not support stand-alone Company managed stores, Ames tools are rented to drywall finishers by a third party franchisee, typically a drywall distribution yard or other drywall related sales business. Ames trains franchisee personnel to demonstrate the advantages of using ATF tools , refurbishes and supplies Ames owned tools to the franchisee and uses the franchisee's employees to rent Ames tools to interior drywall finishers. Ames bills the customer, collects the rental revenue and pays the franchisee a fee for its efforts. Rental stations are like franchises except that an Ames employee, rather than the franchisee's employee, operates the Ames rental business at the franchisee's location. Field specialists, who cover territories in well-marked Ames vans, serve as direct marketers and on-site trainers, and operate as rental centers for job site customers. Nestaway. As a result of Nestaway's focus on OEMs, senior executives are directly involved in sales and marketing efforts. Nestaway's sales and marketing efforts also include technical, engineering and manufacturing employees who regularly communicate with their counterparts at the OEM customer. Fischbein. Fischbein's bag closing products are marketed and sold worldwide through a combination of Fischbein sales and marketing personnel as well as independent distributors and dealers and packaging machinery manufacturers. Fischbein's flexible conveyor and 4 storage racks are marketed and sold in the United States through Fischbein sales and marketing personnel as well as through independent material handling dealers, primarily throughout the U.S. Fischbein has company managed distribution operations in Belgium, France, the United Kingdom, and Singapore. CUSTOMERS The Company's customers are diversified across each of the Company's business units. Ames' products are generally used by interior finishing contractors. Ames currently has over 10,000 active customer accounts with no single rental customer exceeding 1% of the Company's 1999 net revenues. Ames' typical rental customer is a sole proprietorship. This, together with industry dynamics, results in higher levels of credit risk and incidence of bad debt than in the Company's other businesses. Nestaway's products are sold to dishwasher manufacturers and other marketers of formed wire products, including major OEMs such as Maytag, Frigidaire, EBS-Bosch, Whirlpool/KitchenAid and General Electric. The Company's most significant OEM customer, Maytag, accounted for approximately 17% of the Company's consolidated revenues in 1999. The Company's contract with this customer requires cost reduction during its term. The inability of the Company to achieve manufacturing cost savings would result in lower gross margins. As with other suppliers to large OEMs, the Company is constantly exposed to intense competitive pricing pressures which potentially may result in lack of growth or a decline in profit margins, reductions in revenue volume, or both. The customers of other formed wire products currently include among others, manufacturers of golf carts, distributors of healthcare products and a major consumer products company whose purchases of formed wire products totaled 10% of the Company's 1999 net revenues. As other supply sources generally exist for these products, including, in some instances, offshore manufacturers, the Company's revenue is dependant upon its ability to maintain competitive prices and satisfy the quality, delivery and other requirements of its customers. The loss of either of Nestaway's two largest customers or material concessions on pricing could have a material adverse effect on the Company. Fischbein's customers include companies in a variety of industries including the food, chemical, agriculture and other industries. In general, Fischbein sells in the western hemisphere through its distributors, although the Company does sell directly to OEMs. In Europe, Africa, the Middle East and Far East, Fischbein sells both directly and through its distributors. OPERATIONS Ames. Ames purchases ATF tool components from both domestic and foreign suppliers and either assembles the parts into finished tools or uses the parts to refurbish rental tools in the Company's two service centers. These tools are then rented or sold through Ames' distribution network. In general, Ames cleans and refurbishes ATF tools at the end of each rental. Ames also sells repair parts to, and repairs tools for, its customers who purchase tools from the Company. Nestaway. Nestaway operates four manufacturing plants which are located near its major customers. Nestaway's manufacturing operations consist of wire cutting, preparation and forming, welding, coating and assembly and packaging. Generally, these manufacturing operations are highly automated and require high tolerance levels. The Company's processes include the use of robotics, custom designed manufacturing processes and tooling, the ability to weld up to 412 spots per unit and complex coating processes. Fischbein. Fischbein's manufacturing processes include precision machining, welding, final assembly and the integration of electronic controls. While most orders are for standard products, Fischbein also designs and builds custom systems. RAW MATERIALS AND SUPPLIERS The Company purchases steel, metal castings, aluminum and other raw materials from various suppliers. While all such materials are available from numerous independent suppliers, commodity raw materials are subject to fluctuations in price. There can be no assurance that severe shortages of such materials will not occur in the future, which could increase the cost of or delay the shipment of the Company's products and have a material adverse effect on the Company's operating results. Because such materials in the aggregate constitute significant components of the Company's cost of goods sold, fluctuations in price could have a material adverse effect on the Company's results of operations. Generally, the Company has been able to pass on increases in prices of raw materials to its customers. However, there can be no assurance that the Company will continue to be able to do so in the future. COMPETITION Each of the business units operates within competitive industries. The Company is not aware of any single competitor that competes with the Company along all three business lines. Ames products compete with alternative methods of drywall finishing and products of other ATF tool manufacturers and distributors. Ames' most significant competition is from traditional hand finishing by individual professional finishers. Ames stores also operate in a highly competitive environment with respect to the sale of drywall related merchandise which is generally based on price and 5 convenience. Drywall related merchandise is available from contractor supply yards, building material retailers and other sources, many of which have greater resources than Ames. Though Nestaway has one primary independent competitor selling to dishwasher OEMs, the majority of dishwasher racks are internally manufactured by OEMs. There can be no assurance that the Company's existing customers will not increase or establish in-house rack manufacturing capacity in the future or that other appliance industry suppliers may not enter this segment of the market. In 1996 and 1994, certain dishwasher rack customers decided to produce dishwasher racks in-house or to utilize other sources, resulting in a material decline in the Company's revenues. General Electric, Frigidaire and Whirlpool operate in- house dishwasher rack manufacturing operations. Competition is generally based on price, quality, flexibility, product design innovation, and manufacturing efficiency. Nestaway's other non-coated and coated formed wire products compete in a highly competitive international environment based on price, quality and delivery capability and includes the product of many other companies, none of which compete with Nestaway across all its product lines. In all product lines, Nestaway is constantly exposed to competitive pricing pressure which may result in lack of growth or a decline in profit margins and a reduction in revenue volume. There can be no assurance the Company will continue to innovate its products offering or continue to reduce manufacturing costs. Such inability to continue to innovate products or pass on manufacturing cost savings pursuant to contract terms or otherwise could lead to the loss of certain customers or lower gross margins. Similarly, since other supply sources exist for Nestaway's products, including offshore manufacturers, the Company may have to make concessions on pricing to retain customers, which concessions could adversely affect profitability. Fischbein's products typically serve specific niche and geographic market. As a result, Fischbein does not compete with any one company in all of its product lines. Fischbein also sells consumable products that it does not manufacture, such as thread, for which there are numerous alternative sources available to its customer. ENVIRONMENTAL MATTERS The Company is subject to various federal, state, local and foreign laws and regulations governing environmental and employee health and safety matters, including the handling, the use, discharge and disposal of hazardous materials and pollutants. The Company believes that the conduct of its operations is in substantial compliance with current applicable environmental laws and regulations. Maintaining such compliance in the conduct of its operations has not had, and is not expected to have, a material adverse effect on the Company's financial condition or operating results. However, changes in laws or regulations or other circumstances might, individually or in the aggregate, have a material adverse effect on the Company's financial condition or operating results. See "Item 3. LEGAL PROCEEDINGS" for further information on environmental matters. EMPLOYEES As of December 31, 1999, the Company had approximately 1,054 employees, of which approximately 125 at one location were represented by a union contract which expires in 2002. The Company believes that its relations with its employees are satisfactory. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position held by the directors, and executive officers of AXIA Group and the Company following the consummation of the Transaction. Each director is elected for a one-year term or until such person's successor is duly elected and qualified.
Name Age Position - ------------------------- --- ------------------------------------------------------------- Gary L. Rosenthal 50 Chairman of the Board, President and Chief Executive Officer Lyle J. Feye 46 Vice President-Finance, Treasurer and Chief Financial Officer David H. Chesney 56 President and General Manager of Nestaway Ian G. Wilkins 60 President and General Manager of Fischbein Robert G. Zdravecky 53 President and General Manager of Ames Susan O. Rheney 40 Director C. Byron Snyder 51 Director James D. Woods 68 Director
Gary L. Rosenthal has served as Chairman of the Board since the transaction and as Chief Executive Officer and President since January 1999. Mr. Rosenthal is the President of Heaney Rosenthal, Inc., a private financial organization specializing in the acquisition of businesses, a position he has held since 1994. From 1990 to 1994, he was Chairman, and in 1994 assumed the additional titles of Chief Executive Officer and President of Wheatley TXT Corp., a publicly-traded oil field equipment manufacturer. From 1988 to 1990, he was a principal of the Sterling Group, ("Sterling"). From 1987 to 1988, he was a Senior Vice President of Cain Chemical, 6 Inc. Mr. Rosenthal will continue to devote a portion of his time to business activities other than AXIA. Lyle J. Feye became Vice President-Finance, Treasurer and Chief Financial Officer of the Company in March 1994. From 1988 to March 1994, Mr. Feye was Corporate Controller and Assistant Treasurer of the Company. From 1975 to 1988, Mr. Feye served in various positions with the Continental Group Inc. (formerly the Continental Can Company), including divisional financial and accounting management. David H. Chesney became President and General Manager of Nestaway in 1991. From 1987 to 1991, Mr. Chesney served as General Manager of Lawrence Industries, a division of Electrolux, an assembler of vacuum cleaners and manufacturer of vacuum cleaner components, rubber and plastic hoses and electrical cord sets and harnesses. From 1967 to 1987, Mr. Chesney worked for General Electric Company where he held a variety of positions, the most recent being Materials Manager & Quality Assurance Manager with the Major Appliance Business Group. Ian G. Wilkins became President and General Manager of Fischbein in May 1994. From 1988 to May 1994, Mr. Wilkins was Chief Operating Officer and General Manager of HK Metalcraft Manufacturing, a manufacturer of metal assemblies, components and other precision products primarily for the auto industry. Mr. Wilkins' responsibilities included supervision of manufacturing, sales and customer service. From 1984 to 1988, Mr. Wilkins had responsibility for all operations of Scott Aviation, a Division of Figgie International, as Vice President of Manufacturing. Robert G. Zdravecky became President and General Manager of Ames in 1993. Mr. Zdravecky first joined the Company in 1986 as General Manager of Sales and Marketing for Ames. He was promoted to Vice President of the Construction Tool Group, a position he held until 1992, when his employment with the Company terminated as a result of the sale of two of the Company's divisions to The Stanley Works. He rejoined the Company in 1993 in his current position. From 1981 to 1986, Mr. Zdravecky served as Vice President-Marketing and Sales with Adhesive Engineering Company. Susan O. Rheney has been a principal of Sterling since February 1992. She worked as an independent financial consultant from December 1990 to January 1992. Prior to that time, from June 1987 to November 1990, she was an associate at Sterling. Ms. Rheney is a director of Texas Petrochemical Holdings, Inc., and a director of American Plumbing and Mechanical, Inc. C. Byron Snyder is the President of Sterling City Capital, LLC, a Houston-based investment company specializing in consolidating privately owned businesses simultaneously with an initial public offering. Mr. Snyder was the owner and President of Relco Refrigeration Company, a distributor of refrigeration equipment, which he acquired in 1992. In February 1998, Relco Refrigeration Company was merged into Hospitality Companies, Inc. Prior to 1992, Mr. Snyder was the owner and Chief Executive Officer of Southwestern Graphics International, Inc., a diversified holding company. Mr. Snyder is the Chairman of the Board of Directors of Integrated Electrical Services, Inc., a publicly traded national provider of electrical contracting and maintenance services in the commercial, industrial and residential markets. He also serves as a director for Carriage Services, Inc., and American Plumbing and Mechanical, Inc. James D. Woods retired from Baker Hughes Incorporated and its predecessor, Baker International, a provider of equipment and services to the petroleum and process industries in 1997, after 41 years of service. He served as president of several Baker affiliates until the merger of Baker International and Hughes Tool Company in 1987. He assumed the Chairmanship of the merged companies in January 1989 and held the positions of Chairman of the Board and Chief Executive Officer until his 1997 retirement. In addition, Mr. Woods serves on the Board of Directors of The Kroger Co., Varco International, Inc., Wynn's International Inc., Howmet International, Inc., OMI Corporation and Kaiser Aluminum & Chemical Corp. Currently, Mr. Woods serves as an Advisor to SCF Partners. THE BOARD AND CERTAIN BOARD COMMITTEES The Company's Board supervises the management of the Company as provided by Delaware law. AXIA Group's Board has established the following committees: The Audit Committee, which recommends independent public accountants to AXIA Group's Board, reviews the annual audit reports of AXIA Incorporated and reviews the fees paid to AXIA Group's independent public accountants. The Compensation Committee has the responsibility for supervising AXIA's executive compensation policies, administering employee incentive plans, reviewing officers' salaries, approving significant changes in executive employee benefits and recommending to the Board such other forms of remuneration as it deems appropriate. The AXIA Group Board, acting as a committee of the whole, has the responsibility for considering nominations for prospective AXIA Group Board members. The AXIA Group Board will consider nominees recommended by other AXIA directors, stockholders and management provided that nominations by stockholders are made in accordance with AXIA Group's by-laws. The AXIA Board may 7 also establish other committees. COMPENSATION OF DIRECTORS Directors of AXIA Group and the Company who are not employees of the Company receive an annual retainer of $15,000 and a fee of $500 for each meeting of the Board or any committee thereof that they attend. Directors who are also employees of the Company do not receive Director compensation. The AXIA Group, Inc. Nonqualified Stock Option Plan for Non-Employee Directors grants each non-employee director of the Company the option to purchase 150 shares of AXIA Group common stock. Currently, options of 450 shares are outstanding. Under the plan, 1,500 shares of common stock are reserved for issuances pursuant to the exercise of options granted under the plan. ITEM 2. PROPERTIES REAL ESTATE AND FACILITIES The Company believes it has adequate capacity to meet its current obligations to its customers. The major properties of the Company are listed below. The Company also leases 60 Ames stores. Store locations are historically leased on a short- term basis of one to five years to provide maximum flexibility. The business conducted at these leased store locations is relocatable and no individual lease or location is material to the Company.
Size in Location Sq. Feet Owned/Leased Description - ---------------------------------------------------------------- -------- ------------ ---------------------------------- Garfield Heights, Cleveland, Ohio............................... 120,000 Owned Fabrication of dish drainer racks, wire products and storage racks and assembly of flexible conveyors McKenzie, Tennessee............................................. 79,000 Owned Fabrication of dishwasher racks Beaver Dam, Kentucky............................................ 64,000 Owned Fabrication of dishwasher racks, dishwasher rack components and other formed wire products Clinton, North Carolina......................................... 60,000 Owned Fabrication of dishwasher racks Commerce, California(1)......................................... 54,500 Owned Subleased Statesville, North Carolina(2).................................. 50,000 Leased Assembly and manufacture of industrial sewing and packaging machines Livermore, California(3)........................................ 27,600 Leased Office and warehouse space for the manufacture, distribution, repair and maintenance of ATF tools Stone Mountain, Georgia(2)...................................... 18,000 Leased Office and warehouse space for the manufacture, distribution, repair and maintenance of ATF tools Duluth, Georgia(4).............................................. 16,000 Leased General Office Brussels, Belgium(5)............................................ 11,000 Leased Assembly and warehousing of packaging machines assembly of sold ATF tools Paris, France................................................... 5,200 Owned Assembly and distribution of packaging machines London, U.K..................................................... 14,500 Owned Assembly and distribution of packaging machines Houston, Texas(5)............................................... 6,400 Leased Corporate office
(1) Property is 50% owned and leased to an unrelated party. (2) Lease expires in 2003. 8 (3) Lease expires in 2008. (4) Lease expires in 2001. (5) Lease expires in 2006. During 1999, the Company consolidated its Union City, California, and Hayward, California, operations into its Livermore, California, location. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a number of lawsuits incidental to its business. Including the environmental matters discussed below and taking into account the proceeds held in escrow pursuant to the Merger Agreement, the Company believes that none of these proceedings, individually, or in the aggregate, will have a material adverse effect on the Company's financial condition or operating results. The Company is subject to various federal, state, local and foreign laws and regulations governing environmental and employee health and safety matters, including the handling, the use, discharge and disposal of hazardous materials and pollutants. The Company believes that the conduct of its operations is in substantial compliance with current applicable environmental laws and regulations. Maintaining such compliance in the conduct of its operations has not had, and is not expected to have, a material adverse effect on the Company's financial condition or operating results. However, changes in laws or regulations or other circumstances might, individually or in the aggregate, have a material adverse effect on the Company's financial condition or operating results. On February 25, 1991, the New York State Department of Environmental Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had documented the release and/or threatened release of "hazardous substances" and/or the presence of "hazardous wastes" at a property located in Buffalo, New York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the Company. NYSDEC determined that the Company, among others, may be a responsible party through its past ownership of the property. The site is currently listed on the New York State Registry of Inactive Hazardous Waste Disposal Sites. Environmental consultants engaged by the Company have established a range of estimated remediation costs of approximately $1.0 million to $3.0 million, plus or minus 30% of those costs. From 1992 to 1994, the Company established an accrual of $3.9 million for the remediation and associated costs. In 1997, the Company entered into an agreement with an adjoining landowner, who is obligated by NYSDEC to address environmental concerns at his property. By this agreement, the adjoining landowner agreed to accept responsibility for remediating the property formerly owned by the Company if a particular remedy for that property is ultimately approved by NYSDEC. On the advice of its environmental consultants, provided after reviewing available data about the Company's former property, the Company believes it is likely that NYSDEC will approve the remedy in question, but the Company can give no assurance the NYSDEC will in fact offer its approval. The Company paid the $520,000 payable under the agreement and has an exposure under the agreement of up to an additional $120,000 if contamination is more widespread than estimated by the Company's environmental consultants. In the event NYSDEC does not approve the remedy envisioned in the agreement with the adjoining landowner, the Company may terminate the agreement and demand the return of its payment with interest. In that case, the adjoining landowner would no longer be obligated to undertake the remediation of the property formerly owned by the Company. Of the consideration paid pursuant to the Merger Agreement, $5.0 million was set-aside in a special escrow account to cover environmental costs which may be incurred by the Company in connection with cleanup of the site and any damages or other required environmental expenditures relating to the site. The balance in the account, after payment of such costs, will be released to the former stockholders upon the first to occur of the approval by NYSDEC of the proposed remediation action or the confirmation by NYSDEC that remediation at the site has been completed in accordance with its then applicable decision in the matter (the "Early Release Date"). If, however, the Early Release Date occurs before the additional $120,000 is paid under the above-described agreement, the special escrow account will continue as to that $120,000 until it is paid or it has become clear that no claim will be made for such funds. In addition, if certain additional specified cleanup activities are not completed by the Early Release Date, an additional $80,000 will be withheld in the special escrow account until such cleanup is completed. If all of the funds in the special escrow account have not been released by the third anniversary of the Transaction Date, the funds remaining in the special escrow account will be disbursed to the Company to cover the remaining estimated costs, with the balance to be distributed to the former stockholders of the Company, in accordance with an agreement to be reached by the Company and the Stockholder Representative identified in the Merger Agreement, or upon failure of such parties to agree, through an arbitration procedure. Since the escrow account is under the control of the representative of the former stockholders and the escrow has sufficient funds to cover the estimated costs to remediate the site, the Company has neither an asset nor a liability on its Consolidated Balance Sheet related to this matter. The settlement of this issue is dependant upon agreements by and between parties unrelated to the Company and therefore the date upon which this matter will be resolved cannot be estimated. 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company is wholly owned by Holdings, and Holdings is wholly owned by Group. There is no established public trading market for the common equity of the Company, Holdings, or Group. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data with respect to the Company and should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and accompanying Notes in "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Form 10-K. AXIA INCORPORATED AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA (in thousand $)
Predecessor Company -------------------------------------------- Period Period Year Year Year Jan. 1, July 23, Year Ended Ended Ended 1998 to 1998 to Ended Dec. 31, Dec. 31, Dec. 31, July 22, Dec. 31, Dec. 31, 1995 1996 1997 1998 1998 1999 --------- ------- -------- -------- -------- -------- Income Statement Data: Net revenues $104,326 $104,787 $104,800 $ 62,567 $ 54,548 $131,894 EBITDA (2), (3) 20,246 24,375 24,066 3,573 12,855 33,012 Income from operations (2) 15,316 18,347 19,354 914 9,758 25,440 Interest expense 6,596 5,123 3,710 1,553 6,515 14,475 Other expense (income) 493 18 37 205 71 (9) -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item $ 8,227 $ 13,206 $ 15,607 $ (844) $ 3,172 $ 10,974 Provision for income taxes 3,338 5,730 6,412 (119) 1,679 5,147 -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary item $ 4,889 $ 7,476 $ 9,195 $ (725) $ 1,493 $ 5,827 Loss on early extinguishments of debt -- 614 772 682 -- -- -------- -------- -------- -------- -------- -------- Net income (loss) $ 4,889 $ 6,862 $ 8,423 $ (1,407) $ 1,493 $ 5,827 ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA: Current assets (1) $ 27,012 $ 26,211 $ 26,253 $ 32,966 $ 35,703 $ 41,200 Total assets (1) $103,288 $ 99,331 $ 96,773 $104,241 $194,957 $198,808 Current liabilities (1) $ 20,262 $ 18,849 $ 22,429 $ 38,679 $ 20,868 $ 23,755 Long-term debt, less current maturities (1) $ 43,507 $ 34,548 $ 20,439 $ 13,074 $131,020 $126,618 Stockholder's equity (1) $ 25,828 $ 32,118 $ 40,067 $ 38,596 $ 28,202 $ 33,579
(1) Due to a substantial change in controlling interest in the Company, the Company reflected a complete change in the accounting basis of its assets and liabilities from historical cost to estimated fair value as of July 22, 1998. (2) Income from operations and EBITDA for the period ended July 22, 1998, includes $11,280,000 in Transaction related expense, including $10,773,000 in compensation related expenses from the sale of stock or options, or both, and payments pursuant to various employee incentive programs, which were paid from the former stockholders' purchase price proceeds on the Transaction Date. (3) Earnings before interest, taxes, depreciation and amortization ("EBITDA") EBITDA is defined as operating income plus depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA should not be considered as an alternative to income from operations as determined in accordance with generally accepted accounting principals as an indicator of the operating performance of the Company or as an alternative to cash flows as a measure of liquidity. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto and the comparative summary of selected financial data appearing elsewhere in this report. Historical results and trends which might appear should not be taken as indicative of future operations. This report contains certain estimates and forward-looking statements. Actual results could differ materially from those projected in the estimates and forward looking statements as a result of any number of factors. Therefore, undue reliance should not be placed upon such estimates and statements. No assurance can be given that any of such estimates or statements will be realized and actual results may differ materially from those contemplated by such forward looking statements. Factors that may cause such differences include: (i) increased competition or price erosion: (ii) increased costs; (iii) loss or retirement of key members of management and (iv) changes in general economic conditions in the markets in which the Company may from time to time compete. Many of such factors will be beyond the control of the Company and its management. GENERAL The Company is a leading designer, manufacturer, marketer and distributor of a diverse range of products in several niche markets including productivity enhancing construction tools, formed wire products, industrial bag closing equipment and flexible conveyors. The Company operates through three business units: Ames, Nestaway and Fischbein. Ames is the leading designer, manufacturer, marketer and distributor of ATF tools, which are rented or sold to interior finishing contractors to finish drywall joints prior to painting, wallpapering or other forms of final treatment. Nestaway is a leading manufacturer of formed wire products which are used for a variety of commercial and consumer product applications. Fischbein is a leading worldwide manufacturer and marketer of industrial bag closing and handling equipment and systems and a leading manufacturer of flexible conveyors and storage racks. By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition Co."), a company organized to effect the acquisition (the "Acquisition") of Axia Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the "Predecessor Company" prior to the date of the Transaction) to effect the acquisition for a purchase price of $155,250,000 (including the repayment of indebtedness), subject to certain post-closing adjustments. Upon completion of the Transaction (the "Transaction"): (i) Holdings, and AXIA Incorporated (the "Company") became direct and indirect subsidiaries of AXIA Group Inc. ("Group" the parent company of Acquisition Co.) and (ii) the Company became the primary obligor on borrowings made under the bank credit agreement (the "Bank Credit Agreement") and Senior Subordinated notes issued on the Transaction Date defined below. On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of its common stock ("Common Stock") and contributed the proceeds thereof to Acquisition Co. (the "Equity Investment"). Axia Finance Corp., ("Finance Co.,") an indirect subsidiary of AXIA Group, borrowed approximately $39,250,000 under the Bank Credit Agreement and received approximately $100,000,000 in gross proceeds from the sale of subordinated notes. Such funds were used: (i) to effect the Acquisition pursuant to the Merger Agreement; (ii) to fund the Company's Employee Stock Ownership Plan ("ESOP"); (iii) to repay existing indebtedness of the Company and (iv) to pay fees and expenses in connection with the Transaction. As a result of the Transaction, the Company incurs significantly higher interest costs and goodwill amortization than in historical periods included herein. The Company distributes certain products through subsidiaries located in Belgium, France, the United Kingdom, Singapore and Canada. The Company accounts for gains and losses resulting from foreign currency transactions in its consolidated statement of income. Income and expense items are translated at the average exchange rate for the period. The assets and liabilities of foreign subsidiaries are translated at the current rate of exchange at the balance sheet date. Balance sheet translation adjustments have been excluded from the results of operations and are reported as a separate component of stockholder's equity. As the Company's foreign revenues accounted for approximately 13% of the Company's 1999 net revenues, the results of the Company may be favorably or unfavorably affected to the extent the U.S. dollar weakens or strengthens versus the applicable corresponding foreign currency. The Company currently does not enter into hedging programs in an attempt to mitigate the fluctuations against the U.S. dollar. During the periods discussed below, except as may be noted, inflation and changing prices have not had, and are not expected to have a material impact on the Company's net revenues or its income from operations. In 1997, the Company repurchased and extinguished $9.3 million in principal of its 11% Senior Subordinated Notes due 2001 (the "2001 Notes"). The Company recorded a charge of $1.3 million, $0.8 million net of tax, for the redemption premium, the write-off of unamortized capitalized financing costs associated with the issuance of the 2001 Notes, the applicable original issue discount, and the expenses of the Transaction. In May 1998, the Company repurchased and extinguished the remaining $5.3 million in principal of its 2001 Notes, and similarly recorded a charge of $0.5 million, $0.3 million net of tax. Additional debt extinguishment charges were recorded with the Transaction. The proforma amounts for the twelve months ended December 31, 1998 include the applicable results of the Predecessor Company for the period ending July 22, 1998. The amounts for the year ended December 31, 1997, are the results of the Predecessor Company. 11 RESULTS OF OPERATIONS The table below summarizes the results of operations of the Company for the years indicated (in million $):
Years Ended December 31, ------------------------------------------------------------- Proforma(2) Predecessor Company (1) 1999 1998 1997 ---------------- --------------- ------------------------ $ % $ % $ % Net Revenues: Ames net revenue $ 57.7 43.7% $ 48.1 41.1% $ 42.4 40.4% Nestaway net revenue 43.6 33.1 41.4 35.4 35.3 33.7 Fischbein net revenue 30.6 23.2 27.6 23.5 27.1 25.9 ------ ----- ------ ----- ------ ----- Total net revenue 131.9 100.0 117.1 100.0 104.8 100.0 ------ ----- ------ ----- ------ ----- Cost of revenue (3) 69.4 52.6 63.1 53.9 56.9 54.3 ------ ----- ------ ----- ------ ----- Gross Profit (3) 62.5 47.4 54.0 46.1 47.9 45.7 Selling, general, administrative expenses (3) 29.5 22.4 26.3 22.4 23.8 22.7 ------ ----- ------ ----- ------ ----- EBITDA (4) 33.0 25.0 27.7 23.7 24.1 23.0 Depreciation and amortization 7.6 5.8 5.7 4.9 4.7 4.5 ------ ----- ------ ----- ------ ----- Income from operations 25.4 19.2 22.0 18.8 19.4 18.5 Interest expense 14.5 11.0 8.1 6.9 3.7 3.5 Other expense (income) (0.1) (0.1) 0.2 0.2 0.1 0.1 ------ ----- ------ ----- ------ ----- Income before income taxes and extraordinary items 11.0 8.3 13.7 11.7 15.6 14.9 Provision for income taxes 5.2 3.9 5.9 5.0 6.4 6.1 ------ ----- ------ ----- ------ ----- Income before extraordinary items $ 5.8 4.4% $ 7.8 6.7% $ 9.2 8.8% ====== ===== ====== ===== ====== =====
(1) Predecessor Company results exclude debt extinguishment costs. (2) Proforma results are the combined financial results of the Company including Predecessor Company prior to the Transaction and exclude transaction related expenses of $11.3 million, $7.0 million net of tax, and debt extinguishment cost of $.7 million. Transaction expenses include $10.8 in compensation from the sale of stock or options, or both, and payments pursuant to various employee incentive programs, which were paid from the former stockholders' purchase price proceeds on the Transaction Date. (3) Excluding operating depreciation and amortization. (4) Earnings before interest, taxes, depreciation and amortization ("EBITDA") EBITDA is defined as operating income plus depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to incur and service debt. EBITDA should not be considered as an alternative to income from operations as determined in accordance with generally accepted accounting principals as an indicator of the operating performance of the Company or as an alternative to cash flows as a measure of liquidity. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Net Revenues Net revenues increased 12.6% to $131.9 million in 1999 from $117.1 million in 1998. The increase was primarily attributable to the growth in both sales and rentals of ATF tools, sales of drywall related merchandise and dishwasher racks, and the impact of acquisitions. Each of the Company's three business units recorded revenue growth from the prior year as detailed below. Ames' net revenues increased 20.0% to $57.7 million in 1999 from $48.1 million in 1998. Revenue growth was primarily the result of increases in both the price and volume of rented ATF tools and improved sales of drywall related merchandise and ATF tools. Ames continued to benefit from the strength of the U.S. housing market. In June 1999, the Company acquired the assets of Concorde Tool Corporation ("Concorde"), a Canadian manufacturer and distributor of ATF tools. Revenue from the sale of ATF tools under the Concorde trade name subsequent to the acquisition was $.4 million. Nestaway's net revenues increased 5.3% to $43.6 million in 1999 from $41.4 million in 1998. The revenue increase was attributable to growth in sales to dishwasher OEMs offset in part by a decline in the sale of certain other formed wire products. Fischbein's net revenues increased 10.9% to $30.6 million in 1999 from $27.6 million in 1998. The increase was primarily attributable to the acquisition in April 1999 of the Thames Packaging Equipment Company, Ltd. ("Thames") which contributed revenues of $2.3 million. Revenues from conveyor sales also improved over the prior year. Bag closing revenues exclusive of Thames were flat primarily as a result of adverse economic conditions in Latin America and Asia, reduced activity in the U.S. agricultural economy and the continued strength of the dollar against European currencies. 12 Gross Profit Excluding Depreciation & Amortization. Gross profit excluding depreciation and amortization increased 15.7% to $62.5 million in 1999 from $54.0 million in 1998. The increase in gross profit was primarily attributable to the net revenue increase discussed above. Gross profit as a percentage of net revenues improved to 47.4% from 46.1% primarily due to business mix including greater revenue growth occurring within its most profitable business unit, Ames, and cost reductions in certain areas. Ames' gross profit improved as a result of revenue growth. Profit margin growth was also attributable to improved margins on the sale of drywall related merchandise at Company operated stores and a rental rate increase. Ames also benefited from consolidating its warehouse and TapeTech manufacturing into its Livermore, California service center during 1999. Nestaway's gross profit also improved with revenue growth. Gross profit as a percentage of net revenues declined primarily due to the benefit recorded in the prior year of a nonrecurring favorable pricing adjustment of $.4 million. Fischbein's gross profit growth was also the result of the improvement in revenue discussed above. Selling, General and Administrative Expenses excluding Depreciation and Amortization (SG&A). Selling, general, and administrative expenses increased 12.2% to $29.5 million in 1999 from $26.3 million in 1998. SG&A growth was primarily attributable to increased selling expenses related to Ames' efforts to take advantage of market opportunities related to strong housing starts and continued emphasis on expanded marketing programs. Ames also incurred an additional $.5 million in bad debt expense over the comparable prior year period primarily as a result of revenue growth and an additional $0.2 million over the prior year related to implementation of its new Y2K compliant computer software programs. The Company recorded approximately $.3 million in expenses in 1999 for severance and other costs associated with the relocation of its corporate offices to Houston, Texas. The Company established an Employee Stock Ownership Plan ("ESOP") with the Transaction in July 1998. As a result of a full year's participation in 1999, an increase in the appraised valuation of the stock and forgiveness of a portion of the note receivable from the ESOP retroactive to December 31, 1998, the Company recorded $0.8 million in expense in 1999 related to the ESOP of which $ 0.6 million was recorded in selling, general and administrative expenses. Total ESOP expense in 1998 was $0.2 million which was recorded in selling, general and administrative expense. EBITDA. EBITDA increased 19.1% to $33.0 million in 1999 from $27.7 million in 1998 primarily as a result of the matters discussed above. Depreciation and Amortization. Depreciation and amortization increased 33.3% to $7.6 million in 1999 from $5.7 million in 1998. This increase was primarily the result of $1.5 million in additional goodwill amortization from the Transaction and subsequent acquisitions. Interest Expense. Interest expense increased 79.0% to $14.5 million in 1999 from $8.1 million in 1998. The increase was the result of the acquisition of the Company and resultant increase in debt. Other Income and Expense. The Company recorded other income of $.1 million in 1999 compared to other expense of $.2 million in 1998 due to increased interest income and a gain in life insurance policies insuring a former executive of the Company who passed away in 1999. The gain represents the excess of the proceeds of the insurance over the present value of the liability of the Company to the former executive's estate. Income Taxes and Income before Extraordinary Item. The effective income tax rate for 1999 was 46.9% in 1999 compared to 43.1% in 1998. The increase was primarily due to the impact of an increase in nondeductible goodwill amortization discussed above. Income before an extraordinary item declined 24.4% to $5.8 million in 1999 from $7.8 million in 1998. The reduction was primarily due to additional goodwill amortization and interest expense from the Transaction as discussed in the preceding paragraph. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997. Net Revenues. Net revenues increased 11.7% to $117.1 million in 1998 from $104.8 million in 1997. The increase in net revenues was a result of increased rentals and sales of ATF tools and increased sales of drywall related merchandise, dishwasher racks, other formed wire products and material handling equipment. Ames' net revenues increased 13.4% to $48.1 million in 1998 from $42.4 million in 1997. The increase was primarily the result of an increase in both price and volume of rented ATF tools. Factory-built housing initiatives also results in higher ATF rental revenues. In addition Ames' revenues increased due to higher demand for drywall related merchandise and ATF tool sales. Ames benefited from the strength of the U.S. housing market. Nestaway's net revenues increased 17.2% to $41.4 million in 1998 from $35.3 million in 1997. The increase was the result of revenue growth of 11.3% in dish rack and dish rack component sales to OEM's and a 30.9% growth in revenues of formed wire products. Dish rack revenues improved primarily as a result of additional volumes with a new customer, a favorable nonrecurring $.4 million pricing 13 adjustment, and volume growth with Nestaway's largest customer. Formed wire product revenues improved with added sales of traditional product lines such as dish drainers and shower caddies, together with revenues generated by new products including dryer racks and golf cart baskets. Fischbein's net revenues increased 1.8% to $27.6 million in 1998 from $27.1 million in 1997. The increase was primarily due to increased sales of flexible conveyors. Increased revenues from bag closing equipment in the U.S. and Europe were offset by declines in Asia and Latin America, two regions impacted by general adverse economic conditions. Gross Profit Excluding Depreciation and Amortization. Gross profit excluding depreciation and amortization increased 12.7% to $54.0 million in 1998 from $47.9 million in 1997. The increase in gross profit was primarily attributable to the net revenue increase discussed above. Gross profit without depreciation and amortization as a percentage of net revenues improved to 46.1% from 45.7%. Ames' gross profit improved with revenues. This improvement was offset by operating inefficiencies as the Bensenville, Illinois and Tucker, Georgia rental ATF tool repair operations were consolidated into a new facility in Stone Mountain, Georgia. Nestaway's gross profit margins improved with revenue growth. Nestaway also benefited from a one time refund and temporary reduction in workers' compensation insurance and a nonrecurring favorable pricing adjustment aggregating $.8 million recorded in 1998. Fischbein's gross profits improved due to continued cost reductions from its foreign parts sourcing program and additional machining centers which improved operating efficiencies and overhead absorption. Selling, General and Administrative Expenses Excluding Depreciation and Amortization. Selling, general and administrative expenses excluding depreciation and amortization increased 10.5% to $26.3 million in 1998 from $23.8 million in 1997. Selling expenses increased due to additional personnel, travel and entertainment, and advertising. The Company also incurred an increase in professional services expense due to additional legal assistance to establish new benefit plans and assistance in the preparation of multiple federal and state tax returns. EBITDA. EBITDA increased 14.9% to $27.7 million in 1998 from $24.1 million in 1997 primarily as a result of the matters discussed above. Depreciation and Amortization. Depreciation and amortization increased 21.2% to $5.7 million from $4.7 million in 1997. This was primarily attributable to an increase in goodwill amortization from the Transaction. Interest Expense. Interest expense increased to $8.1 million in 1998 from $3.7 million in 1997. The increase was the result of the acquisition of the Company and resultant increase in debt. Other Expense. Other expense was $0.2 million in 1998 compared to other expense of $0.1 million in 1997. Income Taxes and Income before Extraordinary Item. The effective tax rate for 1998 was 43.1% compared to 41.1% for the prior year comparable period. This increase in the effective tax rate was primarily due to the impact of non- deductible amortization expense. Income before an extraordinary item and excluding transaction related expense decreased 15.2% to $7.8 million from $9.2 million in 1997. The decrease was primarily attributable to an increase in interest expense as discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company generated cash from operations of $12.8 million in 1999 compared to $6.9 million in 1998 and had cash and cash equivalents of $7.2 million at December 31, 1999. The increase in cash generated from operations was primarily attributable to non-recurring Transaction related expenses recorded in 1998 of $11.3 million, $7.0 million net of tax, including $10.8 million in compensation from the sale of stock or options, or both, and payments pursuant to various employee incentive programs recorded in the prior year period. The compensation payments were deducted from the purchase price, discussed in Item I BUSINESS-- Acquisition and Merger, prior to distribution of net proceeds to former stockholders. At December 31, 1999, the Company had working capital of $17.4 million compared to working capital of $14.8 million at December 31, 1998. The increase in working capital was due to an increase in cash, accounts receivable, and inventories. Receivables increased 24.5% as a result of revenue growth and due to increases in the days' sales in accounts receivable at two of the divisions. Inventories increased 6.3% as a result of higher merchandise and parts inventories to support revenue growth at Ames. During 1999, the Company utilized net cash provided by operations to fund capital expenditures of $2.7 million primarily for revenue maintenance and growth. The majority of capital spending was for new ATF tools for Ames to replace scrapped or lost tools and support revenue growth. The Company acquired the assets of Concorde and the assets of Thames for an aggregate cost of $5.5 million, of which $2.5 million was funded from operations and $3.0 million was funded from the Company's acquisition line of credit. 14 With consummation of the Transaction, interest payments on the Notes and under the Bank Credit Agreement and amortization of the Term Loan represent significant obligations of the Company. The Company's remaining liquidity demands relate to capital expenditures and working capital needs. For the year ended December 31, 1999, the Company spent $2.7 million on capital projects. The Company projects capital expenditures of approximately $6.0 million in 2000, although the amount is subject to change based on numerous factors including but not limited to the Company's success in obtaining certain new business. The Company's primary sources of liquidity are cash flows from operations and borrowings under the Bank Credit Agreement. The Revolving Credit Facility provides the Company with $15.0 million of borrowings, subject to availability under the borrowing base which was $14.8 million at December 31, 1999. The Acquisition Facility provides the Company with $25.0 million borrowings, subject to customary conditions, of which $22.0 million was available at December 31, 1999. The Company believes that, based on current and anticipated financial performance, cash flow from operations and available borrowings under the Revolving Credit Facility will be adequate to meet anticipated requirements for capital expenditures, working capital and scheduled interest payments. However, the Company's capital needs may change, particularly if the Company should complete any material acquisitions or be required to install additional capacity to meet the requirements of current and new customers. The ability of the Company to satisfy its capital requirements will be dependent upon the future financial performance of the Company, which in turn will be subject to general economic conditions and to financial, business and other factors, including factors beyond the Company's control. The management of the Company continues to evaluate its business and organizational structure on an ongoing basis to determine actions it believes to be in the best interests of the Company and its stockholders. This includes the frequent consideration of acquisitions which may or may not be synergistic with the Company's current businesses. ACCOUNTING CHANGES In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2001. Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes. Accordingly, management does not expect implementation of this standard to affect its financial position or results of operations. OTHER MATTERS Based on reviews of mission critical and non-mission critical software and hardware, the Company concluded prior to the end of 1999 that its systems were Year 2000 compliant. No significant problems related to the Year 2000 were experienced or are expected in the future. Major customers, suppliers and utility companies have represented to the Company that they are Year 2000 compliant. While the Company has not been affected by any Year 2000 issues, there is no guarantee that the Company's systems and those of its customers and suppliers will continue to operate as intended. As a result of dishwasher rack sourcing decisions made by its customers in 1996, the Company shut down a leased production facility in Canal Winchester, Ohio, and temporarily idled a second plant in Clinton, North Carolina. The Clinton facility resumed operations in 1997 when the Company was awarded a contract by a new dishwasher rack customer. The Beaver Dam, Kentucky plant, shut down in 1994 due to a customer's decision to utilize an alternative source of supply, was reopened in 1996 to produce dishwasher rack components, lower volume dishwasher racks, and other formed and coated wire products. During 1997 and 1996, the Company charged $0.6 million and $1.0 million, respectively, of the costs incurred against a facility realignment reserve established in prior periods. The Company has no further reserves for the realignment of its production capacities as of December 31, 1999, and management believes its current manufacturing operations are properly positioned to service its current customer requirements. RISK FACTORS Substantial Leverage. In connection with the consummation of the Transaction, the Company incurred a significant amount of indebtedness and has significant debt service requirements. In addition, the Indenture will permit the Company to incur or guarantee additional indebtedness, including indebtedness under the Bank Credit Agreement, subject to certain limitations. The Company has additional borrowing capacity on a revolving credit basis under the Bank Credit Agreement and on a term basis to fund future acquisitions under the Acquisition Facility of the Bank Credit Agreement. The Company's high degree of leverage could have important consequences to the holders of the Notes, including but not limited to the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements, general corporate purposes or other purposes may be impaired in the future; (ii) a substantial portion of the 15 Company's cash flow from operations is required to be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for other purposes, including its operations and future business opportunities; (iii) certain of the Company's borrowings, including certain borrowings under the Bank Credit Agreement, are at variable rates of interest, which expose the Company to the risk of increased interest rates; (iv) the indebtedness outstanding under the Bank Credit Agreement is secured by substantially all the assets of the Company and will mature prior to the maturity of the Notes and (v) the Company's leveraged position and the covenants contained in its debt instruments could limit the Company's flexibility to adjust to changing market conditions and its ability to withstand competitive pressures, and the Company may be more vulnerable to a downturn in general economic conditions or in its business or be unable to carry out capital spending that is important to its growth and productivity improvement programs. The Company is required to make scheduled principal payments under the Bank Credit Agreement. The company's ability to make scheduled payments or to refinance its obligations with respect to its indebtedness, including the Notes, depends on its financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond its control, including the strength of the general economy, interest rates, unscheduled plant shutdowns, increased operating costs, raw material and product prices, and regulatory developments. There can be no assurance that the Company will maintain a level of cash flow from operations sufficient to permit it to pay the principal, premium, if any, and interest on its indebtedness (including the Notes). If the Company's cash flow and capital resources are insufficient to fund its debt service obligations, the Company may be forced to reduce or delay capital expenditures, sell assets, or seek to obtain additional equity capital or restructure or refinance its debt (including the Notes). There can be no assurance that such alternative measures would be successful or would permit the Company to meet its scheduled debt service obligations. In the absence of such operating results and resources, the Company could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations. The Bank Credit Agreement and the Indenture restrict the Company's ability to sell assets and use the proceeds therefrom. There can be no assurance as to the ability of the Company to consummate such sales or the proceeds which the Company could realize therefrom or that such proceeds would be adequate to meet the obligations then due. Restrictive Financing Covenants; Cross-Default Risks. The Bank Credit Agreement and the Indenture contain a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets or merge, incur additional indebtedness, incur guarantee obligations, prepay the Notes or amend the Indenture, pay dividends, create liens on assets, enter into sale and leaseback transaction, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, make capital expenditures or engage in certain transactions with affiliates, and will otherwise restrict corporate activities. In addition, under the Bank Credit Agreement, the Company is required to comply with specified financial ratios and tests. The Company's ability to comply with the covenants and restrictions contained in the Bank Credit Agreement and the Indenture may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any such covenants or restrictions could result in a default under the Bank Credit Agreement or the Indenture which would permit the lenders under the Bank Credit Agreement or the holders of the Notes, as the case may be, to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest, and the commitments of the lenders under the Bank Credit Agreement to make further extensions of credit could be terminated. In addition, in the event of a default under the Bank Credit Agreement, in certain circumstances the lenders under the Bank Credit Agreement could prevent the Company from making any payments on the Notes. There can be no assurance that in the event of any such default the Company will have adequate resources to repay in full principal, premium, if any, and interest on the Notes. Competition. Each of the business units operates within competitive industries. The Company is not aware of any single competitor that competes with the Company along all three business lines. (See "Business-Competition") Reliance on Major Customers. One of Nestaway's dishwasher rack customers accounted for 17% of the Company's 1999 revenues. Since the contract with this customer requires cost reductions during its term, the inability of the Company to achieve manufacturing cost savings could lead to lower gross margins. Another Nestaway customer who markets dish drainers, shower caddies, and other formed wire products accounted for 10% of the Company's 1999 revenues. A loss of either or both of these customers could have a material adverse effect on the Company. Certain of Nestaway's contracts require it to maintain competitive prices and satisfy quality, delivery and other requirements. Failure to do so could result in a material loss of revenue and margin. In each of 1994 and 1996 the Company discontinued operations at certain of its facilities, in each case as a result of a decision by certain major dishwasher rack customers to produce dishwasher racks in-house or purchase from an alternate source. In each instance the company's revenues were adversely affected. No assurance can be given that such actions by the Company's dishwasher rack customers will not recur. Pursuant to the Company's requirement contracts, a decrease in sales by the company's customers may cause a decrease in the revenues derived by the Company under such requirements contracts. 16 Risks Relating to Acquisition Strategy. The Company's strategy includes making acquisitions, but there can be no assurance that suitable acquisition candidates will continue to be available. In addition, acquisitions that the Company may make will involve risks, including the successful integration and management of acquired technology, operations and personnel. The integration of acquired businesses may also lead to the loss of key employees of the acquired companies and diversion of management attention from ongoing business concerns. There can be no assurance that any additional acquisitions will be made, that the Company will be able to obtain additional financing needed for such transactions and, if any acquisitions are so made, that they will be successful. Fluctuations in Raw Materials Cost and Supply. The Company purchases steel, metal castings, aluminum and other raw materials from various suppliers. There can be no assurance that severe shortages of such materials will not occur in the future, which could increase the cost or delay the shipment of the Company's products and have a material adverse effect on the Company's operating results. Because such materials in the aggregate constitute significant components of the Company's cost of goods sold, fluctuations in price could have a material adverse effect on the Company's results of operations. Generally, the Company has passed on any increases in prices of raw materials to its customers. However, there can be no assurance that the company will be able to do so in the future. General Economic Conditions. The industries in which the Company operates are affected by changes in general economic conditions, including national, regional and local slowdowns in home building, remodeling, construction and other industrial activity, all of which are outside of the Company's control. There can be no assurance that economic slowdowns, adverse economic conditions, cyclical trends, increases in interest rates and other factors will not have a material adverse effect on the Company's consolidated operating results or financial condition. Though Ames has a broad customer base, adverse economic changes in home building, remodeling and construction may result in reductions in the rental and sales of ATF tools and the sales of drywall related merchandise. Ames would also be at greater risks of incurring higher levels of bad debt expense. Potential Legacy Liabilities. The Company has retained or assumed certain environmental liabilities and risks of future liabilities associated with businesses previously operated or acquired by it, including Bliss and Laughlin Steel Company. The Company does not believe that these retained or assumed liabilities and risks would be expected to have a material adverse effect on the Company's financial condition or operating results. However, changes in laws or regulations, liabilities identified or incurred in the future, or other circumstances, might, individually or in the aggregate, have such an effect. In addition, the Company is currently addressing certain legacy liabilities of this nature. Foreign Sales and Operations. In 1999 approximately 13% of the Company's net revenues were derived from foreign sales and operations and export sales. A portion of these net revenues are derived from sales in countries that have recently experienced economic downturns. There can be no assurance that the Company's net revenues will not be affected by these economic downturns in such countries. In addition, a portion of the Company's anticipated growth is expected to come from foreign sales and operations. Foreign sales and operations involve varying degrees of risks and uncertainties inherent in doing business abroad. Such risks include the possibility of unfavorable circumstances arising from host country laws or regulations, including unexpected changes of interpretations thereof. Other risks include partial or total expropriation; export duties and quotas; currency exchange rate fluctuations; restrictions on repatriation of funds; the disruption of operations from labor and political disturbances, insurrection, or war; and the requirements of partial local ownership of operations in certain countries. Furthermore, customer credit risks are exacerbated in foreign sales and operations because there often is little information available about the credit histories of customers in certain countries. The value of the Company's foreign sales and earnings may vary with currency exchange rate fluctuations. To the extent that the Company does not take steps to mitigate the effects of changes in relative values, changes in currency exchange rates could have an adverse effect upon the Company's results of operations, which in turn could adversely affect the ability of the Company to meet its debt obligations, including payments on the Notes. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates and commodity prices. The Company is exposed to some market risk due to the floating interest rate under its Bank Credit Agreement. As of December 31, 1999, the Bank Credit Agreement had a principal balance of $31.9 million at an average floating interest rate of 8.0% per annum. A 1.0% increase in interest rates could result in a $.3 million annual increase in interest expense on the existing principal balance (See also Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Risk Factors). 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company called for by this Item 8, together with the reports thereon of the independent accountants are set forth on pages 19 to 48 inclusive. Financial statement schedules not included in this Report on Form 10-K have been omitted because they are not applicable or because the information called for is shown in the consolidated financial statements or notes thereto. AXIA INCORPORATED Index to Consolidated Financial Statements
Pages Consolidated Balance Sheets as of December 31, 1999 and 1998 19 Consolidated Statements of Stockholder's Equity and Comprehensive Income for the year ended December 31, 1999, the periods ended December 31, 1998, and July 22, 1998, and the year ended December 31, 1997 20 Consolidated Statements of Income for the year ended December 31, 1999, the periods ended December 31, 1998, and July 22, 1998, and the year ended December 31, 1997 21 Consolidated Statements of Cash Flows for the year ended December 31, 1999, the periods ended December 31, 1998, and July 22, 1998, and the year ended December 31, 1997 22 Notes to the Consolidated Financial Statements 23 - 46 Independent Auditors' Report 47 Report of Independent Public Accountants 48
18 PART I ITEM 1. FINANCIAL STATEMENTS AXIA INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998 (In thousands, except share and per share data)
December 31, 1999 December 31, 1998 ------------------ ------------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 7,218 $ 5,904 Accounts receivable, net 17,600 14,133 Inventories 11,793 11,092 Prepaid income taxes and other current assets 1,100 1,135 Deferred income tax benefits 3,489 3,439 -------- -------- Total Current Assets $ 41,200 $ 35,703 PLANT AND EQUIPMENT, AT COST: Land 984 984 Buildings and improvements 5,307 4,600 Machinery and equipment 19,903 18,750 Equipment leased to others 10,891 10,113 -------- -------- 37,085 34,447 Less: Accumulated depreciation 5,965 1,758 -------- -------- Net Plant and Equipment $ 31,120 $ 32,689 OTHER ASSETS: Goodwill, net 108,319 107,633 Intangible assets, net 1,122 807 Deferred charges, net 17,027 18,097 Other assets 20 28 -------- -------- Total Other Assets $126,488 $126,565 -------- -------- TOTAL ASSETS $198,808 $194,957 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY - ------------------------------------ CURRENT LIABILITIES Current maturities of long-term debt $ 5,464 $ 4,655 Accounts payable 5,011 4,334 Payable to parent 603 -- Accrued liabilities 12,526 11,868 Accrued income taxes 151 11 -------- -------- Total Current Liabilities $ 23,755 $ 20,868 NON-CURRENT LIABILITIES: Long-term debt, less current maturities 126,618 131,020 Other non-current liabilities 7,913 7,970 Deferred income taxes 6,205 6,750 -------- -------- Total Non-Current Liabilities $140,736 $145,740 Commitments and contingencies Common stock held by ESOP 2,183 1,620 Less: Note receivable from ESOP (1,445) (1,473) STOCKHOLDER'S EQUITY: Common stock ($.01 par value; 100 shares authorized, issued and outstanding) $ -- $ -- Additional paid-in capital 26,680 26,511 Retained earnings 7,086 1,482 Accumulated other comprehensive (loss) income (187) 209 -------- -------- Total Stockholder's Equity $ 33,579 $ 28,202 -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $198,808 $194,957 ======== ========
The accompanying notes to the consolidated financial statements are an integral part of these financial statements. 19 AXIA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 1999, THE PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998 AND JANUARY 1, 1998 TO JULY 22, 1998 AND THE YEAR ENDED DECEMBER 31, 1997 (Dollars in thousands)
Other Comprehensive Income -------------------------------------------------- Accumulated Common Additional Minimum Cumulative Other Compre- Stock Paid-in Retained Pension Translation Comprehensive hensive Par Value Capital Earnings Liability Adjustments Income (loss) Income --------- ----------- --------- ---------- ------------ ------------- -------- PREDECESSOR COMPANY: BALANCE, DECEMBER 31, 1996 $ -- $ 16,723 $ 15,395 $(324) $ 324 $ -- Net income -- -- 8,423 -- -- -- $ 8,423 Cumulative translation adjustment -- -- -- -- (616) (616) (616) Other, net of tax of $88 -- -- -- 142 -- 142 142 ------- Comprehensive income $ 7,949 ---- -------- -------- ----- ----- ----- ======= BALANCE, DECEMBER 31, 1997 $ -- $ 16,723 $ 23,818 $(182) $(292) $(474) ==== ======== ======== ===== ===== ===== Net income -- -- (1,407) -- -- -- $(1,407) Cumulative translation adjustment -- -- -- -- (64) (64) (64) ------- Comprehensive loss $(1,471) ======= ---- -------- -------- ----- ----- ----- BALANCE, JULY 22, 1998 $ -- $ 16,723 $ 22,411 $(182) $(356) $(538) ==== ======== ======== ===== ===== ===== AXIA INCORPORATED: Acquisition Adjustments: Eliminate Predecessor Company Equity $ -- $(16,723) $(22,411) $ 182 $ 356 $ 538 Contribution from Holdings -- 26,500 -- -- -- -- Net income -- -- 1,493 -- -- -- $ 1,493 Cumulative translation adjustment -- -- -- -- 210 210 210 Other -- 11 (11) (1) -- (1) (12) ------- Comprehensive income $ 1,691 ======= ---- -------- -------- ----- ----- ----- BALANCE DECEMBER 31, 1998 $ -- $ 26,511 $ 1,482 $ (1) $ 210 $ 209 ==== ======== ======== ===== ===== ===== Net Income -- -- $ 5,827 -- -- -- $ 5,827 Cumulative translation adjustment -- -- -- -- (397) (397) (397) Option compensation -- 37 -- -- -- -- Other -- 132 (223) 1 -- 1 (222) ------- Comprehensive income $ 5,208 ======= ---- -------- -------- ------ ----- ----- BALANCE, DECEMBER 31, 1999 $ -- $ 26,680 $ 7,086 $ -- $(187) $(187) ==== ======== ======== ====== ===== =====
The accompanying notes to the consolidated financial statements are an integral part of these financial statements. 20 AXIA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR YEAR ENDED DECEMBER 31, 1999, THE PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998 AND JANUARY 1, 1998 TO JULY 22, 1998 AND THE YEAR ENDED DECEMBER 31, 1997 (Dollars in thousands)
Predecessor Company ----------------------------- Year Ended July 23 January 1, Year Ended December 31, 1998 to 1998 to December 31, 1999 December 31, July 22, 1997 ----------- ----------- ---------- ------------ Net sales $ 95,887 $40,417 $46,257 $ 77,418 Net rentals 36,007 14,131 16,310 27,382 -------- ------- ------- -------- Net revenues $131,894 $54,548 $62,567 $104,800 Cost of sales 58,713 25,675 28,228 48,526 Cost of rentals 10,703 4,219 4,979 8,422 Selling, general and administrative expenses 29,466 11,799 14,507 23,786 Depreciation and amortization 7,572 3,097 2,659 4,712 Transaction expenses -- -- 11,280 -- -------- ------- ------- -------- Income from operations $ 25,440 $ 9,758 $ 914 $ 19,354 Interest expense 14,475 6,515 1,553 3,710 Interest income (298) (88) (9) (367) Other expense, net 289 159 214 404 -------- ------- ------- -------- Income (loss) before income taxes and extraordinary item $ 10,974 $ 3,172 $ (844) $ 15,607 Provision for income taxes 5,147 1,679 (119) 6,412 -------- ------- ------- -------- Income (loss) before extraordinary item $ 5,827 $ 1,493 $ (725) $ 9,195 Extraordinary item: Loss on early extinguishments of debt, net of income taxes of $404 and $479 respectively -- -- 682 772 -------- ------- ------- -------- Net income (loss) $ 5,827 $ 1,493 $(1,407) $ 8,423 ======== ======= ======= ========
The accompanying notes to the consolidated financial statements are an integral part of these statements. 21 AXIA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999, THE PERIODS OF JULY 23, 1998 TO DECEMBER 31, 1998, AND JANUARY 1, 1998 TO JULY 22, 1998 AND THE YEAR ENDED DECEMBER 31, 1997 (Dollars in thousands)
Predecessor Company ----------------------------- July 23 January 1, Year Ended 1998 to 1998 to Year Ended December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ----------- ----------- ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 5,827 $ 1,493 $(1,407) $ 8,423 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,618 3,543 2,824 5,099 Extraordinary item - write-off of capitalized financing costs and original issue discount -- -- 843 826 Deferred income tax provision (benefit) (595) (498) (506) 623 Loss (gain) on disposal of fixed assets 276 20 52 159 Gain on sale of investment -- -- -- (559) Allocated ESOP shares 592 147 -- -- Provision for losses on accounts receivable 2,512 990 999 2,169 Provision for obsolescence of inventories 23 86 (80) 79 Loss (gain) on pension expense (262) (138) (191) (231) Changes in assets and liabilities (net of effect of acquired businesses): Accounts receivable (5,858) (720) (2,587) (4,557) Inventories (310) (663) (1,239) (426) Accounts payable 545 (1,066) 1,250 442 Accrued liabilities 735 (6,505) 11,199 (1,244) Payable to parent 603 -- -- -- Other current assets (205) 41 (90) (14) Income taxes payable 391 1,553 (2,458) 1,532 Other non-current assets 43 (91) (273) (642) Other non-current liabilities (144) 130 226 51 ------- --------- ------- -------- Net Cash (used in) provided by Operating Activities $12,791 $ (1,678) $ 8,562 $ 11,730 CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for acquisitions, (net of cash acquired) $(5,343) $ -- $ -- $ -- Cash used for capital expenditures (2,664) (978) (3,468) (3,475) Proceeds from sale of fixed assets 62 15 4 357 Proceeds from sale of investment -- -- -- 1,459 Acquisition of Predecessor Company -- (120,784) -- -- ------- --------- ------- -------- Net Cash (used in) provided by Investing Activities $(7,945) $(121,747) $(3,464) $ (1,659) CASH FLOWS FROM FINANCING ACTIVITIES: Net payments on new Revolving Credit Loan $ -- $ (2,750) $ -- $ -- Net (payments) receipts on prior Revolving Credit Loan 3,000 (8,900) 4,400 4,500 Payments of other long-term debt (6,593) (19,871) (8,319) (15,931) Proceeds from other long-term debt -- 139,250 -- 944 Payments of deferred financing costs -- (7,352) -- -- Contribution from parent -- 26,500 -- -- Other equity transactions (53) (9) (58) 37 ------- --------- ------- -------- Net Cash (used in) provided by Financing Activities $(3,646) $ 126,868 $(3,977) $(10,450) EFFECT OF EXCHANGE RATE CHANGES ON CASH 114 44 (14) (27) ------- --------- ------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ 1,314 $ 3,487 $ 1,107 $ (406) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,904 2,417 1,310 1,716 ------- --------- ------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,218 $ 5,904 $ 2,417 $ 1,310 ======= ========= ======= ========
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. 22 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE 1 BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS AXIA Incorporated (the "Company") is a diversified manufacturer and marketer of (i) formed and coated wire products, (ii) material handling and storage equipment, (iii) industrial bag closing equipment, and (iv) tools and other products for finishing drywall in new, manufactured, and renovated housing and commercial construction. (See Note 13 for further discussion of the Company's business segments.) On July 22, 1998, the Company was acquired as part of a merger. (See Note 2.) ESTIMATES AND ASSUMPTIONS 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 as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The Consolidated Financial Statements include those of the Company and all majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at the current rate of exchange at the balance sheet date. Revenues and expenses are translated at the average exchange rate for the period. Translation adjustments have been excluded from the results of operations and are reported as a separate component of Stockholder's Equity and Other Comprehensive Income. Gains and losses resulting from foreign currency transactions, which are not material, are included in the Consolidated Statements of Income. ENVIRONMENTAL COSTS Environmental costs are expensed unless the expenditures extend the economic useful life of the assets. Costs that extend the economic life of the assets are capitalized and depreciated over the remaining life of such assets. Liabilities are recorded when environmental assessments and/or remedial efforts are probable, and the cost can be reasonably estimated. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In preparing disclosures about the fair value of financial instruments, the Company has assumed that the carrying amount approximates fair value for cash and cash equivalents, receivables, accounts payable and certain accrued expenses because of the short maturities of those instruments. Likewise, the carrying amount of the Term and ESOP loans approximate their fair values due to the variable interest rates on these obligations. The fair values of 10.75% Senior Subordinated Notes are estimated based upon quoted market values. Considerable judgment is required in developing these estimates and, accordingly, no assurance can be given that the estimated values presented herein are indicative of the amounts that would be realized in a free market exchange. CASH AND CASH EQUIVALENTS Cash equivalents are carried at cost, which approximates market. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are stated at the lower of first-in, first-out ("FIFO") cost or market. Inventories have been reduced to reflect the Company's estimate of slow moving and obsolete inventory. 23 AXIA INCORPORATED AND SUBSIDIRIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INCOME TAXES Income tax provisions are made for the estimated amount of income taxes on reported earnings which are payable currently and in the future. As required by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", the deferred tax provision is determined using the liability method. Under this method, deferred tax assets and liabilities are recognized based on differences between the financial statements and the tax basis of assets and liabilities as determined using presently enacted tax laws and the appropriate tax rates. PLANT AND EQUIPMENT Depreciation on plant and equipment is provided on the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Accelerated methods and lives are used for income tax purposes. Expenditures for maintenance and repairs are charged to expense when incurred. Expenditures for renewals and betterments are capitalized and depreciated over the estimated remaining useful lives of the assets. Depreciation is provided over the following useful lives: Buildings and improvements.......... 2-40 years Machinery and equipment............. 2-10 years Equipment leased to others.......... 5-7 years The original cost and related accumulated depreciation of assets sold or retired are removed from the applicable accounts, with any gain or loss resulting from the transaction included in income. Plant, property and equipment assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of plant, property and equipment is not recoverable based upon estimated future cash flows, the carrying amount of such assets is reduced to estimated recoverable value. DEFERRED CHARGES, INTANGIBLE ASSETS AND GOODWILL Amortizable loan costs, organization costs, patents, customer lists, and other intangible assets and deferred charges are stated in the accompanying Consolidated Balance Sheets net of amortization and are amortized over their estimated useful lives, which range from 2 to 40 years. Goodwill represents the excess purchase price paid over the estimated fair value of the net assets acquired in the July 22, 1998 merger discussed in Note 2 and the excess purchase price paid over the estimated fair value of the net assets of two acquisitions made during 1999. Goodwill is stated net of amortization and is being amortized on a straight-line basis over the estimated period of benefit of 16 to 40 years (see Note 6). Goodwill and other intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of goodwill and other intangible assets is not recoverable based upon estimated future cash flows, the carrying amount of such assets is reduced to estimated recoverable value. REVENUE RECOGNITION Revenue from product sales is recognized at shipment of products to the customer. Rental revenues are recorded over the rental term. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted the new disclosure standards discussed below. Results of operations and financial position were unaffected by implementation of these new standards. SFAS No. 130, "Reporting Comprehensive Income," 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 24 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) investments by owners and distributions to owners. Among other disclosures, the statement 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 No. 131, "Disclosure about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas, and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 132, "Employer's Disclosures about Pensions and Other Post-retirement Benefits," standardizes the disclosure requirements for pensions and other post- retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets, and eliminates certain disclosures that are no longer considered useful. It does not change the measurement or recognition of these plans. In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2001. Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes. Accordingly, management does not expect implementation of this standard to affect its financial position or results of operations. NOTE 2 ORGANIZATION AND PRESENTATION By agreement dated June 17, 1998, AXIA Acquisition Corp. ("Acquisition Co."), a company organized to effect the acquisition (the "Acquisition") of Axia Holdings Corp., entered into an Agreement and Plan of Merger (the "Merger Agreement") with Axia Holdings Corp. ("Holdings"), the parent of AXIA Inc. (the "Predecessor Company" prior to the date of the Acquisition) to effect the acquisition for a purchase price of $155,250,000 (including the repayment of specified indebtedness), subject to certain post-closing adjustments. Upon completion of the transaction (the "Transaction"): (i) Holdings and AXIA Incorporated (the "Company") became direct and indirect subsidiaries of AXIA Group, Inc. ("Group" the parent company of Acquisition Co.) and (ii) the Company became the primary obligor on borrowings made under the bank credit agreement (the "Bank Credit Agreement") and Senior Subordinated notes issued on the Transaction Date defined below. The Merger Agreement contains indemnification provisions binding each of the parties to the Merger Agreement. Pursuant to such provisions, each of the parties has agreed to indemnify each other for breaches of representations, warranties and covenants. In addition, the selling stockholders, limited to the amount set forth below, agreed to indemnify the Company for certain working capital deficiencies, increases in tax liabilities, and for certain environmental and litigation matters. In connection with the indemnity provisions, $15,000,000 of the purchase price was placed into an escrow account, including $12,000,000 to cover specified indemnification claims and $3,000,000 to cover purchase price adjustments. As a result of contractual distributions and earnings on the escrowed funds, at December 31, 1999, approximately $9,500,000 remained in the escrow accounts. Subsequent to the transaction date, the selling stockholders received an additional $1,738,000 as a result of increased working capital on the Transaction Date. On July 22, 1998 (the "Transaction Date"), AXIA Group sold $28,000,000 of its common stock ("Common Stock") and contributed the proceeds thereof to Acquisition Co. (the "Equity Investment"). Finance Co., an indirect subsidiary of AXIA Group, borrowed approximately $39,250,000 under the Bank Credit Agreement and received approximately $100,000,000 in gross proceeds from the sale of subordinated notes. Such funds were used: (i) to effect the Acquisition pursuant to the Merger Agreement; (ii) to fund the ESOP; (iii) to repay existing indebtedness of the Company and (iv) to pay fees and expenses in connection with the transaction. NOTE 3 MERGER AND REFINANCING EFFECTS Goodwill of the surviving company as of December 31, 1999, represents the excess purchase price paid over the estimated fair value of the net assets acquired, excluding Predecessor Company goodwill, in the July 22, 1998 merger and the excess purchased price paid 25 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) over the estimated fair value of the net assets of two acquisitions made during 1999. The merger was accounted for under the purchase method of accounting and resulted in goodwill of $108,837,000 recorded on the Transaction Date. The 1999 acquisitions were also accounted for as purchases and resulted in additional goodwill of $3,490,000. Goodwill is stated net of amortization and is being amortized on a straight-line basis over the estimated period of benefit of 16 to 40 years. (See Note 6.) The Predecessor Company recorded expenses related to the transaction including compensation related expenses of $10,773,000 from the sale of stock or option payments, or both, and payments pursuant to various employee incentive programs as a result of the transaction which were paid by the former stockholders from purchase price proceeds on the Transaction Date. This amount is included as "Transaction expense" in the accompanying Consolidated Statements of Income. Certain assets and liabilities were revalued upon the July 22, 1998 acquisition to reflect their then-current estimated fair values. The following table summarizes those revaluations including the goodwill recorded in the merger (in thousands).
July 22, 1998 Subsequent to merger -------------------- Total current assets $ 29,336 Net property plant and equipment 33,581 Total other assets 128,022 Total current liabilities (16,061) Long-term debt, less current maturities (133,698) Other non-current liabilities (14,680) --------- Net assets $ 26,500 =========
Financing costs paid or accrued by the Company and associated with the debt issued in the refinancing totaled $7,352,000 and are included above in other assets. Such costs were deferred and will be amortized over the term of the issued debt. The following table illustrates the unaudited pro forma results of operations of the Company for the year ended December 31, 1998 as if the merger and refinancing occurred on January 1, 1998 (in thousands):
December 31, 1998 Pro Forma ------------------------ Net revenues $117,115 Income from operations 20,726 Income before income taxes 6,286 Net income 3,301
The preceding pro forma balances include the effect of an increase in goodwill amortization, adjustments to depreciation expense as a result of the revaluation of fixed assets, an increase in interest expense as a result of the new debt structure, a reduction in the annual management fee, the addition of an ESOP plan, the elimination of transaction related expenses and debt extinguishment costs, and the income tax effect of these adjustments. The results are not necessarily indicative of the results which would actually have occurred if the merger and refinancing had taken place on January 1, 1998. NOTE 4 ACCOUNTS RECEIVABLE Trade accounts receivable are stated net of allowance for doubtful accounts. Transactions affecting the allowance for doubtful accounts are shown in the following table (in thousands):
Predecessor Company ----------------------------------- December 31, 1999 December 31, 1998 July 22, 1998 December 31, 1997 ------------------ ------------------ -------------- ------------------ Balance, beginning of period $ 874 $ -- $1,846 $ 1,491 Additions, charged to income 2,512 990 999 2,169 Deductions, write-off of uncollectible accounts, net of recoveries (984) (116) (647) (1,814) ------ ------ ------ ------- Balance, end of period $2,402 $ 874 $2,198 $ 1,846 ====== ====== ====== =======
26 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company is a diversified distributor, marketer and manufacturer of a wide range of high quality products used in the construction industry and agricultural and durable goods businesses. As such, its customers range from individual entrepreneurs to large corporations. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for accounts receivable. NOTE 5 INVENTORIES Inventories are stated at the lower of first-in, first-out ("FIFO") cost or market. The cost elements included in inventories are material, labor and factory overhead. Inventories, net of reserves of $386,000 and $531,000 as of December 31, 1999 and 1998, respectively, consist of (in thousands):
December 31, 1999 December 31, 1998 ------------------------ -------------------------- Raw materials $ 4,651 $ 4,752 Work in process 1,073 1,176 Finished goods 6,069 5,164 ------- ------- Total Inventories $11,793 $11,092 ======= =======
NOTE 6 GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGES Goodwill, intangible assets and deferred charges consist of the following (in thousands):
December 31, 1999 December 31, 1998 -------------------------- --------------------------- Goodwill $112,296 $108,837 Less amortization (3,977) (1,204) -------- -------- Goodwill, net $108,319 $107,633 ======== ======== Patents $ 404 $ 187 Computer software 800 646 Other intangibles 50 18 -------- -------- Subtotal 1,254 851 Less amortization (132) (44) -------- -------- Intangible assets, net $ 1,122 $ 807 ======== ======== Prepaid pension costs $ 7,749 $ 7,400 Life insurance deposits 3,263 3,638 Deferred financing costs 7,352 7,352 Other deferred charges 151 152 -------- -------- Subtotal 18,515 18,542 Less amortization (1,488) (445) -------- -------- Deferred charges, net $ 17,027 $ 18,097 ======== ========
Total amortization expense related to the above assets was $3,939,000 for the year ended December 31, 1999, $1,693,000 for the period ended December 31, 1998, $664,000 for the period ended July 22, 1998, and $1,236,000 for the year ended December 31, 1997. NOTE 7 ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
December 31, 1999 December 31, 1998 ---------------------- ---------------------- Salaries, wages, vacations and payroll taxes $ 2,764 $ 2,660 Insurance 812 1,057 Interest 4,998 4,785 Other current liabilities 3,952 3,366 ------- ------- Total accrued liabilities $12,526 $11,868 ======= =======
27 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 LONG-TERM DEBT Long-term debt, inclusive of capitalized lease obligations which are not material, is as follows (in thousands):
December 31, 1999 December 31, 1998 ---------------------- ---------------------- 10.75% Senior Subordinated Notes $100,000 $100,000 Term Loan 28,040 34,167 ESOP Loan 862 1,313 Acquisition Facility 3,000 -- Other 180 195 -------- -------- Total Debt $132,082 $135,675 Less: Current Maturities 5,464 4,655 -------- -------- Total Long-Term Debt $126,618 $131,020 ======== ========
The carrying amount of the Term Loan and ESOP Loan approximates their fair value as the interest rates are variable. The fair value of the 10.75% Senior Subordinated Notes at December 31, 1999 was $91,750,000 as determined by market quotations. SCHEDULED PRINCIPAL PAYMENTS Scheduled principal payments of long-term debt outstanding at December 31, 1999, including capitalized lease obligations, are (in thousands):
Senior Acquisition Subordinated Term Loan ESOP Loan Facility Notes Other --------- --------- ----------- ------------ ----- 2000 $ 5,021 $359 $ -- $ -- $ 84 2001 5,476 335 375 -- 71 2002 6,369 168 900 -- 21 2003 7,263 -- 1,125 -- 4 2004 3,911 -- 600 -- -- Subsequent years -- -- -- 100,000 -- ------- ---- ------ -------- ---- Total $28,040 $862 $3,000 $100,000 $180 ======= ==== ====== ======== ====
The scheduled maturities above include the impact of an estimated prepayment in 2000 related to an excess cash flow payment required under the Bank Credit Agreement. The Company made the following interest payments for the year ended December 31, 1999, the periods ended December 31, 1998, and July 22, 1998, and the year ended December 31, 1997 (in thousands):
Predecessor Company ------------------------------ December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------ ------------ -------- ------------------- Interest payments $13,221 $1,281 $1,871 $3,551
BANK CREDIT AGREEMENT On the Transaction Date, the Company and its domestic subsidiaries entered into a credit agreement (the "Bank Credit Agreement") which included a term loan ("Term Loan") with an original principal amount of $35,000,000, a $1,500,000 term loan for an ESOP (the "ESOP Loan"), an aggregate $25,000,000 in principal amount available for acquisitions (the "Acquisition Facility"), and a non- amortizing revolving credit loan ("Revolving Credit Facility") of up to $15,000,000, including up to $2,000,000 of letters of credit. The Company, at closing, borrowed $35,000,000 on the Term Loan, $1,500,000 of the ESOP Loan and $2,750,000 against the Revolving Credit Facility. Borrowings under the Revolving Credit Facility are subject to a borrowing base as determined per the agreement and the satisfaction of certain conditions. At December 31, 1999, there were no borrowings under the Revolving Credit Facility and the borrowing base was $14,815,000. 28 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS (CONTINUED) The Revolving Credit Facility, Acquisition Facility, Term Loan and ESOP Term Loan (collectively, the "Loans") bear interest at an alternate base rate, as defined in the agreement, based in part on a prime rate, or at a LIBOR rate, in each case plus an applicable margin, which is initially 2.25% for LIBOR rate advances and 1.00% for alternate base rate advances. The applicable margin may be adjusted based on the ratio of total debt to EBITDA, as defined, and will range from 0% to 1.00% for alternate base rate advances and 1.00% to 2.25% for LIBOR rate advances. The weighted average interest rate at December 31, 1999 was 8.00%. All principal and interest on the Loans are due in 2004, except the ESOP Term Loan, which is due in 2002, and are subject to certain mandatory prepayments and scheduled payments. Accrued interest under the Loans is due quarterly and/or at the end of the relevant interest period in the case of LIBOR rate advances. The Term Loan matures June 30, 2004 with quarterly amortization payments commencing December 31, 1998. Amounts borrowed under the Acquisition Facility are due on the last day of each September, December, March and June, from September 2001 to June 2004. The Bank Credit Agreement permits prepayments with notice, provides for reimbursement for certain costs, and requires prepayments from a portion of excess cash flow (as defined) as well as to the extent cash proceeds from certain events exceed amounts determined by certain formulas. Borrowings under the Acquisition Facility (which are available until September 2001) are subject to certain conditions precedent, including delivering certain information to the Lenders about the proposed acquisition, the delivery of guarantees and security documents as to the proposed acquisition and the conformance of the acquisition to certain criteria. The Company had borrowings of $3,000,000 outstanding under the Acquisition Facility at December 31, 1999. 10.75% SENIOR SUBORDINATED NOTES The 10.75% Senior Subordinated Notes (the "Notes") were issued pursuant to the Transaction and mature on July 15, 2008. Interest is payable January 15 and July 15 of each year, commencing January 15, 1999. The Notes are unsecured Senior Subordinated obligations of the Company and, as such, are subordinated in right of payment to all existing and future senior indebtedness of the Company. The Notes may be redeemed at the option of the Company, in whole or in part, at any time on or after July 15, 2003 at the redemption prices set forth in the indenture plus accrued interest on the date of redemption. Up to an aggregate of 35% of the principal amount of the Notes may be redeemed from time to time prior to July 15, 2001 at the option of the Company at the redemption price set forth in the indenture plus accrued interest to the date of redemption, with the net proceeds received from one or more public equity offerings. Upon a change of control, the Company will be required to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued interest to the date of repurchase. The Notes are guaranteed, jointly and severally on a Senior Subordinated basis, by each of the Company's existing and future direct and indirect subsidiaries, excluding unrestricted subsidiaries, as defined, and foreign subsidiaries. The guarantees are general unsecured obligations of the Guarantors hereinafter referred to. The Guarantors also guarantee all obligations of the Company under the Bank Credit Agreement. The obligations of each Guarantor under its Guaranty is subordinated in right of payment to the prior payment in full of all Guarantor senior indebtedness (as defined), including such subsidiary's guarantee of indebtedness under the Bank Credit Agreement, of such Guarantor to substantially the same extent as the Notes are subordinated to all existing and future senior indebtedness of the Company. RESTRICTIVE LOAN COVENANTS The Bank Credit Agreement contains restrictive covenants limiting the ability (subject to certain exceptions) of the Company and its subsidiaries to, among other things: (i) incur debt or contractual contingent obligations; (ii) pay certain subordinated debt or amend subordinated debt documents without the prior consent of the Lenders; (iii) create or allow to exist liens or other encumbrances; (iv) transfer assets outside the Company except for sales and other transfers of inventory or surplus, immaterial or obsolete assets in the ordinary course of business of the Company; (v) enter into mergers, consolidations and asset dispositions of all or substantially all of its properties; (vi) make investments; (vii) sell, transfer or otherwise dispose of any class of stock or the voting rights of any subsidiary of the Company; (viii) enter into transactions with related parties other than in the ordinary course of business on an arm's-length basis on terms no less favorable to the Company than those available from third parties; (ix) amend certain agreements, unless such amendment is not expected to have a material adverse effect; (x) make any material change in the general nature of the business conducted by the Company; (xi) pay cash dividends or redeem shares of capital stock; (xii) make capital expenditures and (xiii) pay dividends or repurchase stock. Under the Bank Credit Agreement, the Company is required to satisfy certain financial covenants, including (i) a fixed charge 29 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) coverage ratio; (ii) a minimum net worth test; (iii) a ratio of total debt to EBITDA and (iv) a minimum interest coverage ratio, all as defined in the agreement. The Company was in compliance with its loan covenants at December 31, 1999. The indenture under which the Notes were issued contains certain covenants that, among other things, limit the ability of the Company and/or its Restricted Subsidiaries (as defined) to (i) incur additional indebtedness, (ii) pay dividends or make certain other restricted payments, (iii) make investments, (iv) enter into transactions with affiliates, (v) make certain asset dispositions, and (vi) merge or consolidate with, or transfer substantially all of its assets to, another person. The indenture also limits the ability of the Company's Restricted Subsidiaries to issue Capital Stock (as defined) and to create restrictions on the ability of such Restricted Subsidiaries to pay dividends or make any other distributions. In addition, the Company is obligated, under certain circumstances, to offer to repurchase Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase, with the net cash proceeds of certain sales or other dispositions of assets. However, all of these limitations and prohibitions are subject to a number of important qualifications. NOTE 9 CAPITAL STOCK At December 31, 1999, the Company had 100 shares of common stock, par value $.01 per share, authorized, issued and outstanding, all of which are owned by Holdings which is 100% owned by Group. NOTE 10 INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities presented in the financial statements and the amounts used for income tax purposes. Deferred tax assets and liabilities were composed of the following (in thousands):
DEFERRED INCOME TAX ASSETS December 31, 1999 December 31, 1998 ------------------------- ------------------------ Current Assets - -------------- Bad Debt reserves $ 912 $ 893 Inventory valuation 617 778 Compensation and Benefits 509 285 Insurance accruals 328 312 Professional services 262 344 Rental tool repair 203 203 Environmental costs 199 199 Other, net 459 425 ------- ------- Total deferred tax asset $ 3,489 $ 3,439 ======= ======= DEFERRED INCOME TAX ASSETS (LIABILITIES) December 31, 1999 December 31, 1998 ------------------------ ----------------------- Noncurrent Assets (Liabilities) - ------------------------------- Depreciation & amortization $(6,316) $(6,888) Pension plans (2,738) (2,630) Insurance accruals 383 383 Post-retirement benefits (except pensions) 1,957 1,789 Environmental costs 191 191 Other net 318 405 ------- ------- Total deferred tax (liability), net $(6,205) $(6,750) ======= =======
The components of the income tax provision, excluding the amount attributable to the extraordinary item, are as follows (in thousands):
Predecessor Company ------------------------ December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------- ------------- --------- ------------ U.S. and state taxes payable $5,209 $1,940 $ 187 $5,013 Foreign taxes payable 533 237 200 776 ------ ------ ----- ------ Taxes currently payable $5,742 $2,177 $ 387 $5,789 Deferred taxes, net (595) (498) (506) 623 ------ ------ ----- ------ Total provision $5,147 $1,679 $(119) $6,412 ====== ====== ===== ======
30 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income (loss) before income taxes and extraordinary items of the Company's domestic and foreign operations are as follows (in thousands):
Predecessor Company ------------------- December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------ ------------ --------- ------------ Domestic $ 9,661 $2,600 $(1,266) $14,285 Foreign 1,313 572 422 1,322 ------- ------ ------- ------- Total $10,974 $3,172 $ (844) $15,607 ======= ====== ======= =======
A reconciliation between the statutory and the effective income tax rates, excluding the amount attributable to the extraordinary item, is as follows:
Predecessor Company ------------------- December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------- ------------- ---------- ------------- Statutory income tax rate 34.3% 34.0% (34.0%) 34.0% Non-deductible expenses including amortization 8.3% 14.4% 26.3% 3.5% State income taxes, net of federal income tax benefit 4.3% 3.4% (.5%) 2.5% Other, net -- 1.1% (5.8%) 1.1% ---- ---- ----- ---- Effective income tax rate 46.9% 52.9% (14.0%) 41.1% ==== ==== ===== ====
The Company made the following income tax payments, net of refunds, during the year ended December 31, 1999, the periods ended December 31, 1998, and July 22, 1998, and the year ended December 31, 1997 (in thousands):
Predecessor Company ------------------- December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------ ------------ -------- ------------ Income Taxes paid $5,189 $ 453 $2,313 $3,795
The Company does not record deferred income taxes applicable to undistributed earnings of foreign subsidiaries. The Company considers these earnings to be invested for an indefinite period. If such earnings were distributed, the U.S. income taxes payable would not be material as the resulting liability would be substantially offset by foreign tax credits. 31 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 EMPLOYEE BENEFITS RETIREMENT BENEFIT PLANS The Company's pension plans provide benefits for substantially all employees. A majority of plan assets are invested in cash, bonds, domestic and international equities and real estate. Pension costs are funded by the Company at a rate necessary to maintain the plans on an actuarially sound basis. Reconciliation of the benefit obligations, plan assets at fair value and the funded status of the plans are as follows (in thousands):
December 31, 1999 December 31, 1998 ----------------------- ----------------------- Benefit obligation at beginning of year $31,490 $29,179 Service Cost 1,358 1,258 Interest cost 2,044 1,991 Actuarial loss (242) 1,266 Benefit payments (2,239) (2,204) ------- ------- Benefit obligation at end of year $32,411 $31,490 ======= ======= Fair value of plan assets at beginning of year 38,020 36,996 Actual return on plan assets 4,759 3,228 Benefit payments (2,239) (2,204) ------- ------- Fair value of plan assets at end of year $40,540 $38,020 ======= ======= Plan assets at fair value less benefit obligation (8,129) (6,530) Unrecognized prior service cost (47) -- Unrecognized gain (loss) 999 (346) ------- ------- Net amount recognized $(7,177) $(6,876) ======= ======= Amounts recognized in the Consolidated Balance Sheet: Prepaid benefit cost $ 7,749 $ 7,400 Accrued benefit liability (572) (525) Accumulated other comprehensive income -- 1 ------- ------- Net asset amount recognized $ 7,177 $ 6,876 ======= =======
The components of net periodic pension credit are as follows (in thousands):
Predecessor Company ------------------------ December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------- ------------- --------- ------------- Service cost $ 1,358 $ 524 $ 734 $ 1,127 Interest cost 2,044 829 1,162 1,726 Expected return on plan assets (3,669) (1,491) (2,089) (3,095) Prior service cost 5 -- 2 4 Actuarial gain -- -- -- 7 ------- ------- ------- ------- Total $ (262) $ (138) $ (191) $ (231) ======= ======= ======= =======
Assumptions used to develop periodic expense and the actuarial present value of the benefit obligations were:
Predecessor Company ------------------------- December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------- ------------- --------- ------------- Weighted average discount rate 6.75% 6.75% 7.00% 7.00% Expected long term rate of return on plan assets 10.00% 10.00% 10.00% 10.00% Rate of increase in compensation levels 4.50% 4.50% 4.50% 4.50%
32 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company also has contracts with certain former officers of the Company which provide for benefits in excess of the accrual benefit from its defined benefit pension plan. The supplemental retirement plan is not funded. The Company has liabilities under the Plan of $437,000 in its Consolidated Balance Sheets at December 31, 1999 and recorded expenses of $30,000, $29,000 and $32,000 for the year ended December 31, 1999 and for the periods ended December 31, 1998 and July 22, 1998, respectively. For the year ended December 31, 1997, the Company recorded expenses of $50,000 for these benefits. EMPLOYEE STOCK OWNERSHIP AND 401(k) PLAN All U.S. salaried and non-bargaining hourly employees, who have provided service to the Company for one-half of a year and are at least age 21, may participate in the AXIA Incorporated 401(k) Plan ("401(k) Plan"). The 401(k) Plan is designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). Each such employee has the option to defer taxation of a portion of his or her earnings by directing AXIA Incorporated to contribute a percentage of earnings to the 401(k) Plan ("Deferral Contributions"). A participant may defer up to 15% of eligible earnings to the 401(k) Plan, subject to certain limitations set forth in the 401(k) Plan. A participant is always 100% vested in his or her Deferral Contributions. A participant's Deferral Contributions become distributable upon the termination of his or her employment for any reason. In connection with the Transaction, the Company established an Employee Stock Ownership Plan (the "ESOP") covering substantially all full time employees, including executive officers, of the Company, who satisfy the requirements described below. As of December 31, 1998, the 401(k) Plan was merged into the ESOP, and an employee satisfying the eligibility requirements under the 401(k) Plan is able to make Deferral Contributions to the Employee Stock Ownership and 401(k) Plan as was allowed under the 401(k) Plan. The ESOP borrowed $1.5 million from Finance Co. (the "Company ESOP Loan") to purchase 15,000 shares of Common Stock at the Closing. Finance Co. funded the Company ESOP Loan from the ESOP Term Loan. The 15,000 shares of Common Stock purchased by the ESOP are pledged (the "ESOP Pledge") as security for the Company ESOP Loan, and such shares will be released and allocated to ESOP participants' accounts as the Company ESOP Loan is discharged. The Company makes ESOP contributions in amounts sufficient to enable the ESOP to discharge its indebtedness under the Company ESOP Loan. A percentage of the shares released under the ESOP Pledge will be allocated to each participant based on a percentage of such participant's Deferral Contributions ("Matching Contributions"), and (ii) the remaining percentage of such shares released are allocated to each participant based on such participant's compensation relative to total compensation for all ESOP participants ("Discretionary Contributions"). Until the Company ESOP Loan is paid in full, ESOP Contributions will be used to pay the outstanding principal and interest on the Company ESOP Loan. Participation begins the earlier to occur of (i) for all employees hired prior to July 21, 1998 and are age 21, the later of (x) July 22, 1998 or (y) their date of hire or (ii) the date an employee satisfies the eligibility requirements to make Deferral Contributions. A participant's ESOP account, which is such participant's allocation of shares based on Matching and/or Discretionary Contributions, vests at the rate of 20% per year. Distributions from the participant's ESOP account are made in cash or Common Stock upon a participant's retirement, death, disability or termination of employment. In the event of retirement, death or disability, the entire balance of a participant's ESOP account will be come distributable without regard to the ordinary vesting schedule. In the event of termination of employment for any other reason, the vested portion of a participant's ESOP account will become distributable and the remaining portion, if any, will be forfeited. If Common Stock is distributed to a participant, the participant may, within two 60-day periods, require the Company to purchase all or a portion of such Common Stock at the fair market value of the Common Stock as determined under the ESOP (the "Put Options"). The first 60-day period commences on the date the participant receives a distribution of Common Stock and the second 60- day period commences a year from such date. If a participant fails to exercise either of the two Put Options, the participant may transfer the shares of Common Stock only upon receipt of a bona fide third party offer and only after first offering the shares to the ESOP and then to the Company. Employees of the Company own approximately 5.3% of the outstanding Common Stock through the ESOP. 1998 STOCK AWARDS PLAN In connection with the closing of the Transactions, the Board of Directors and the Company's stockholders approved the Company's 1998 Stock Awards Plan (the "1998 Stock Awards Plan"). The 1998 Stock Awards Plan provides for the granting of options (either incentive stock options within the meaning of Code Section 422(b), or options that do not constitute incentive stock options ("non- qualified stock options")), restricted stock awards, stock appreciation rights, performance awards and phantom stock awards, or any combination thereof. The number of shares of Common Stock that may be subject to outstanding awards is 31,111 shares of Common Stock. Shares of Common Stock which are attributable to awards which have expired, terminated, or been canceled or forfeited are available for issuance or use in connection with future awards. 33 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The 1998 Stock Awards Plan is administered by the Compensation Committee of AXIA Group. The Compensation Committee has the power to determine which employees, consultants and other service providers will receive an award, the time or times when such award will be made, the type of the award and the number of shares of Common Stock to be issued under the award or the value of the award. Only persons who at the time of the award are employees of or service providers to AXIA Group or of any subsidiary of AXIA Group will be eligible to receive awards under the 1998 Stock Awards Plan. A director of AXIA Group is not eligible to receive an award under the 1998 Stock Awards Plan unless such director is an employee of AXIA Group or any of its subsidiaries. At December 31, 1999, there were 24,230 options totaling $2.4 million in exercise price outstanding. NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS The AXIA Group, Inc. Nonqualified Stock Option Plan for Non-Employee Directors grants each non-employee director of the Company the option to purchase 150 shares of AXIA Group common stock. Currently, options of 450 shares are outstanding. Under the plan, 1,500 shares of common stock are reserved for issuances pursuant to the exercise of options granted under the plan. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS The Company sponsors three defined benefit post-retirement plans exclusive of pension plans. From 1980 to 1986 the Company entered into employment agreements with then key executive employees which provide for death benefits to the executive's estate upon the executive's death. A second plan provides prescription drug benefits to nonsalaried employees at one of its plants, and the third provides post-retirement life insurance benefits to selected salaried and nonsalaried employees. All plans are noncontributory and unfunded. The following table sets forth the plans' combined status reconciled with the amount shown in the Company's Consolidated Balance Sheets as of December 31, 1999 and 1998 (in thousands):
December 31, 1999 December 31, 1998 -------------------------- --------------------------- Benefit obligation at beginning of year $ 4,751 $ 4,103 Service cost 21 46 Interest cost 155 261 Actuarial loss 616 419 Benefits paid (82) (78) ------- ------- Benefit obligation at end of year $ 5,461 $ 4,751 Fair Value of plan assets at end of year -- -- ------- ------- Funded status $(5,461) $(4,751) Net amount recognized $(5,461) $(4,751) ======= =======
Components of post-retirement benefits (other than pension) expense (in thousands):
Predecessor Company ----------------------- December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------ ------------ -------- ------------ Service cost $ 21 $ 18 $ 28 $ 85 Interest cost 155 161 100 224 ----- ----- ----- ----- Net periodic benefit cost $ 176 $ 179 $ 128 $ 309 ===== ===== ===== =====
From 1980 to 1986 the Company entered into Salary Continuation Agreements with then key executive employees which provide a death benefit, contingent upon employment or service as a consultant with the Company until retirement or death. Pursuant to the agreement with each such executive, upon the executive's death, the Company will pay to the respective designated beneficiary, annually for a period of ten years, an amount equal to 40% of the executives salary at the date of retirement. The total post-retirement benefit obligation of this benefit program included in the table above is $4,831,000 and $4,136,000 at December 31, 1999 and 1998, respectively. The Company has purchased life insurance policies on the lives of the former executives, naming the Company as the sole beneficiary. The amount of such coverage is designed to provide to the Company a source of funds to satisfy its obligations under the program. All plan participants have retired from the Company. The Company, in accordance with a union contract, provides prescription drug benefits at one of its plants. For measurement 34 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) purposes, a 6.75% annual rate of increase in the per capita cost of covered prescription drug benefits was assumed for 1999 and 1998 . The prescription drug cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated post-retirement benefit obligation as of December 31, 1999 by approximately $36,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the year then ended by approximately $2,000. The discount rate used in determining the accumulated post-retirement benefit obligation was 6.75% in 1999 and 1998. NOTE 12 LEASES Minimum rental commitments of the Company under noncancellable operating leases (primarily real estate) with initial terms of one year or more are as follows (in thousands):
Year Ending December 31 ----------------------- 2000............................................................................................. $1,881 2001............................................................................................. 1,318 2002............................................................................................. 1,011 2003............................................................................................. 723 2004............................................................................................. 616 Subsequent years................................................................................. 1,658 ------ Total.......................................................................................... $7,207 ======
The Company incurred the following expense for operating leases for the year ended December 31, 1999, the periods ended December 31, 1998, and July 22, 1998, and for the year ended December 31, 1997 (in thousands):
Predecessor Company ----------------------- December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------ ------------ -------- ------------ Lease expenses $2,461 $1,136 $1,307 $2,369
NOTE 13 BUSINESS SEGMENTS The Company is a designer, manufacturer, distributor and marketer of a diverse range of products in several niche markets including productivity enhancing construction tools, formed wire products and industrial bag closing equipment and systems, and conveyor handling systems. In 1998, the Company adopted SFAS No. 131. The aggregation methodology under SFAS No. 131 does differ materially from the prior disclosures under SFAS No. 14. Nestaway ("Nestaway") is a manufacturer of formed wire products which are used for a variety of commercial and consumer product applications. Nestaway manufactures coated wire dishwasher racks and components which are sold to dishwasher appliance manufacturers. Nestaway also manufactures other close tolerance, formed, welded and coated formed wire products such as dish drainers, sink protectors, shower caddies, dryer racks, golf cart baskets, bucket bails, medical baskets and small gauge axles. Fischbein ("Fischbein") is a worldwide manufacturer of industrial bag closing equipment and systems, and a manufacturer of flexible conveyor handling systems and stackable storage equipment. Bag closing equipment and systems include: (i) portable and stationary industrial sewing heads and sewing systems for paper, textile and woven polypropylene bags; (ii) industrial heat sealing and bag handling systems for paper and plastic bags and (iii) consumables, including thread, tape and service parts. Fischbein manufacturers extendable, flexible, gravity and motorized conveyors and portable, nestable and stackable warehouse storage racks. Ames ("Ames") is the designer, manufacturer, distributor and marketer of automatic taping and finishing tools, which are rented or sold to interior finishing contractors to finish drywall joints prior to painting, wallpapering and other forms of final treatment. In addition, Ames sells a variety of other drywall tools, finishing accessories, and supplies through its network of Company-owned stores. One of Nestaway's dish rack customers accounted for 17%, 19% and 20% of the Company's revenues for 1999, 1998 and 1997, 35 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) respectively. Another customer of Nestaway who purchases various consumer and other formed wire products accounted for 10%, 11% and 10% of the Company's revenues for 1999, 1998 and 1997, respectively. Nestaway competes directly with the dishwasher manufacturer's in-house manufacturing capability. Frigidaire, General Electric and Whirlpool, major dishwasher manufacturers, have dish rack manufacturing capability. As a result of dish rack sourcing decisions made by its customers, in 1996 Nestaway shut down a leased production facility in Canal Winchester, Ohio, and temporarily idled a second plant in Clinton, North Carolina. The Clinton facility resumed operations in 1997 when the Company was awarded a contract for dish racks by a new customer. Nestaway's Beaver Dam, Kentucky plant, shut down in 1994 due to a customer's decision to utilize an alternative source of supply and was reopened in 1996 to produce dish rack components, lower volume dish racks, and other formed and coated wire products. During 1997, Nestaway charged $624,000 of the costs incurred against a facility realignment reserve established in prior periods. The reserve was fully utilized as of December 31, 1997. 36 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of segment data for the year ended December 31, 1999, the periods ended December 31, 1998, and July 22, 1998, and the year ended December 31, 1997, is as follows (in thousands):
Nestaway Fischbein Ames Corporate Consolidated -------- --------- ------- ---------- ------------ Year ended December 31, 1999: Net revenues $43,600 $30,644 $57,650 $ -- $131,894 Income (loss) from operations 8,785 4,193 15,973 (3,511) 25,440 Total assets 58,085 36,189 80,364 24,170 198,808 Depreciation and amortization 2,630 1,085 3,829 1,074 8,618 Capital expenditures 499 268 1,787 110 2,664 Period July 23 to December 31, 1998: Net revenues $19,496 $12,777 $22,275 $ -- $ 54,548 Income (loss) from operations 3,773 1,880 5,635 (1,530) 9,758 Total assets 59,672 33,108 77,952 24,225 194,957 Depreciation and amortization 1,073 476 1,532 462 3,543 Capital expenditures 39 284 652 3 978 PREDECESSOR COMPANY Period January 1 to July 22, 1998: (prior to acquisition) Net revenues $21,945 $14,758 $25,864 $ -- $ 62,567 Income (loss) from operations 4,876 1,991 7,152 (13,105) 914 Total assets 40,279 19,042 30,843 11,772 101,936 Depreciation and amortization 1,181 374 1,083 186 2,824 Capital expenditures 1,644 88 1,735 1 3,468 Year ended December 31, 1997: Net revenues $35,268 $27,104 $42,428 $ -- $104,800 Income (loss) from operations 6,575 3,838 11,693 (2,752) 19,354 Total assets 38,873 18,141 27,969 11,790 96,773 Depreciation and amortization 2,077 746 1,860 416 5,099 Capital expenditures 1,340 319 1,813 3 3,475
The period ended July 22, 1998 includes $11,280,000 in nonrecurring transaction related expenses at Corporate. This includes $10,773,000 in compensation related expenses from the sale of stock or options, or both, and payments pursuant to various employee incentive programs which were paid by the former stockholders from purchase price proceeds at the Transaction Date. The Company conducts the majority of its business within the United States. Fischbein has operations in various other countries, primarily in Europe and Singapore. Ames also conducts business in Canada. Activity in any single country or area outside of the United States is not material. Foreign revenues which represent approximately 13% of the Company's 1999 net revenues are derived from approximately 75 foreign countries, none of which was in excess of 4% of the Company's 1999 net revenues. 37 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of geographical data for the year ended December 31, 1999, the periods ended December 31, 1998 and July 22, 1998, and the year ended December 31, 1997, is as follows (in thousands):
Predecessor Company ----------------------- December 31, December 31, July 22, December 31, 1999 1998 1998 1997 ------------ ------------ -------- ------------ Net revenue: United States $115,276 $48,361 $54,317 $ 89,132 Foreign 16,618 6,187 8,250 15,668 -------- ------- ------- -------- Total $131,894 $54,548 $62,567 $104,800 ======== ======= ======= ========
December 31, December 31, 1999 1998 ------------------ ------------------- Net Plant, Property and Equipment: United States $30,248 $32,450 Foreign 872 239 ------- ------- Total $31,120 $32,689 ======= =======
NOTE 14 CONTINGENCIES The Company is subject to various federal, state, local and foreign laws and regulations governing environmental and employee health and safety matters, including the handling, use, discharge and disposal of hazardous materials and pollutants. The Company believes that the conduct of its operations is in substantial compliance with current applicable environmental laws and regulations. Maintaining such compliance in the conduct of its operations has not had, and is not expected to have, a material adverse effect on the Company's financial condition or operating results. However, changes in laws or regulations or other circumstances might, individually or in the aggregate, have a material adverse effect on the Company's financial condition or operating results. On February 25, 1991, the New York State Department of Environmental Conservation ("NYSDEC") sent a notice letter to the Company alleging that it had documented the release and/or threatened release of "hazardous substances" and/or the presence of "hazardous wastes" at a property located in Buffalo, New York, formerly owned by Bliss and Laughlin Steel Company, a predecessor of the Company. NYSDEC determined that the Company, among others, may be a responsible party through its past ownership of the property. The site is currently listed on the New York State Registry of Inactive Hazardous Waste Disposal Sites. Environmental consultants engaged by the Company established a range of estimated remediation costs of approximately $1.0 million to $3.0 million, plus or minus 30% of those costs. From 1992 to 1994, the Company established an accrual of $3.9 million for the remediation and associated costs. In 1997, the Company entered into an agreement with an adjoining landowner, who is obligated by NYSDEC to address environmental concerns at his property. By this agreement, the adjoining landowner agreed to accept responsibility for remediating the property formerly owned by the Company if a particular remedy for that property is ultimately approved by NYSDEC. On the advice of its environmental consultants, provided after reviewing available data about the Company's former property, the Company believes it is likely that NYSDEC will approve the remedy in question, but the Company can give no assurance that NYSDEC will in fact offer its approval. The Company paid the $520,000 payable under the agreement and has further exposure under the agreement of up to an additional $120,000 if contamination is more widespread than estimated by the Company's environmental consultants. In the event NYSDEC does not approve the remedy envisioned in the agreement with the adjoining landowner, the Company may terminate the agreement and demand the return of its payment with interest. In that case, the adjoining landowner would no longer be obligated to undertake the remediation of the property formerly owned by the Company. Of the consideration paid pursuant to the Merger Agreement, $5,000,000 was set aside in a special escrow account to cover environmental costs which may be incurred by the Company in connection with cleanup of the site and any damages or other required environmental expenditures relating to the site. The balance in the account, after payment of such costs, will be released to the former stockholders upon the first to occur of the approval by NYSDEC of the proposed remediation action or the confirmation by NYSDEC that remediation at the site has been completed in accordance with its then applicable decision in the matter (the "Early Release Date"). If, however, the Early Release Date occurs before the additional $120,000 is paid under the above-described agreement, the special escrow account will continue as to that $120,000 until it is paid or it has become clear that no claim will be made for such 38 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) funds. In addition, if certain additional specified cleanup activities are not completed by the Early Release Date, an additional $80,000 will be withheld in the special escrow account until such cleanup is completed. If all of the funds in the special escrow account have not been released by the third anniversary of the Closing Date, the funds remaining in the special escrow account will be disbursed to the Company to cover the remaining estimated costs, with the balance to be distributed to the former stockholders of the Company, in accordance with an agreement to be reached by the Stockholder Representative and the Company, or upon failure of such parties to agree, through an arbitration procedure. Since the escrow account is under the control of the representative of the former stockholders and the escrow has sufficient funds to cover the estimated costs to remediate the site, the Company has neither an asset nor a liability on its Consolidated Balance Sheets related to this matter. The settlement of this issue is dependant upon agreements by and between parties unrelated to the Company and therefore the date upon which this matter will be resolved cannot be estimated. The Company is aware of other formerly-owned sites at which activities similar to the operations previously conducted on the Buffalo, New York property have taken place. However, the Company has received no claims in connection with those sites, and has no information that would lead it to believe that any such claim is likely to be made. The Company is also a part-owner and landlord at a stainless steel and aluminum facility in Commerce, California that is leased to and operated by an unrelated company. The Company has received no claims against it in connection with this site, but the Company cannot rule out the possibility that it might incur some liability should a claim actually be made against it as current owner of the property. The Buffalo, New York property formerly owned by the Company referred to above was at one time used to mill uranium rods for the Atomic Energy Commission. The U.S. Department of Energy has since identified residual radioactivity in a building at the site. In 1996, the government estimated the costs of addressing the residual radioactivity at $965,000. Given the available data, the Company and its environmental consultants believe that a more likely total cost is less than $100,000. To date, no cleanup costs have been assessed against the Company. The Company has provided an accrual of $100,000 for this matter. The Company may also make claims against the warranty fund of the escrow fund for breach of certain representatives and warranties in the Merger Agreement regarding other environmental matters for a period of 24 months after Closing Date, subject to a specified threshold and deductible. In addition, the Company has retained or assumed certain environmental liabilities and risks of future liabilities associated with businesses previously operated or acquired by it, including Bliss and Laughlin Steel Company. The Company does not believe that these retained or assumed liabilities and risks would be expected to have a material adverse effect on the Company's financial condition or operating results. However, changes in laws or regulations, liabilities identified or incurred in the future, or other circumstances, might (individually or in the aggregate) have such an effect. NOTE 15 RELATED TRANSACTIONS The equity portion of the financing for the Transaction was provided by an investor group led by the Sterling Group, Inc. ("Sterling"). Sterling is a private financial organization engaged in the acquisition and ownership of operating businesses. Sterling entered into an agreement with AXIA Group and the Company pursuant to which Sterling is to provide consulting and advisory services concerning employee benefit and compensation arrangements and other matters. The agreement also provides that AXIA Group and the Company, jointly and severally, will indemnify Sterling against liabilities related to its services. At the Closing, the Company paid Sterling a one-time transaction fee of $2,500,000 for these services and reimbursed Sterling for its expenses of $109,000. In addition, through 2008, AXIA Group will pay Sterling an annual management fee of $100,000 in cash and annually grant Sterling AXIA Group Common Stock having a value of $100,000 calculated based upon the latest ESOP valuation price. In addition, each of AXIA Group and the Company has agreed that if any one or more of them or any of their subsidiaries determines within ten years of the date of the closing of the Acquisition to dispose of or acquire any assets or business having a value of $1,000,000 or more (a "Future Corporate Transaction") or to offer its securities for sale publicly or privately to raise any debt or equity financing (a "Future Securities Transaction"), either AXIA Group or the relevant subsidiary will retain Sterling as a consultant with respect to the transaction, provided a principal, officer or director of Sterling or any of their respective affiliates or family members owns any equity securities of AXIA Group or any of its successors. For any Future Corporate Transactions, Sterling is entitled to receive a fee in the amount of 1% of the aggregate consideration paid or received plus the aggregate amount of any liabilities assumed in connection with an acquisition or disposition and any expenses or fees incurred by Sterling in connection therewith. In addition to the annual management fee discussed above, Sterling received fees of $51,958 and was reimbursed $32,279 in expenses in connection with the acquisitions of Concorde Tool Corporation and Thames Packaging Equipment Company, Ltd. and other matters in 1999. For any Future Securities Transactions, Sterling is entitled to receive a fee in the amount of 0.5% of the aggregate gross selling price of such securities and, regardless of whether such Future Securities Transaction is consummated, Sterling is entitled to receive reimbursements of any expenses or fees incurred by Sterling in connection therewith. The agreement is automatically renewable for successive one-year 39 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) periods, subject to notice of termination by either Sterling or AXIA Group. From its transaction fee received at Closing, Sterling paid Mr. Rosenthal a fee of $250,000 for consulting services rendered in connection with the Transaction. Mr. Rosenthal became Chairman and President subsequent to the Transaction. NOTE 16 SUPPLEMENTAL GUARANTOR INFORMATION The Company's payment obligations under the Subordinated Notes are fully and unconditionally guaranteed on a joint and several basis (collectively, the "Subsidiary Guarantees") by Ames Taping Tool Systems, Inc., and TapeTech Tool Co., Inc., each a wholly-owned subsidiary of the Company and each a "Guarantor." These subsidiaries, together with the operating divisions of the Company, represent all of the operations of the Company conducted in the United States. The remaining subsidiaries of the Company are foreign subsidiaries. The Company's payment obligations under the Bank Credit Agreement are fully and unconditionally guaranteed on a joint and several basis by the Company and each Guarantor. The obligations of each Guarantor under its Subsidiary Guarantee are subordinated to all senior indebtedness of such Guarantor, including the guarantee by such Guarantor of the Company's borrowings under the Bank Credit Agreement. With the intent that the Subsidiary Guarantees not constitute fraudulent transfers or conveyances under applicable state or federal law, the obligation of each Guarantor under its Subsidiary Guarantee is also limited to the maximum amount as will, after giving effect to such maximum amount and all other liabilities (contingent or otherwise) of such Guarantor that are relevant under such laws, and after giving effect to any rights to contribution of such Guarantor pursuant to any agreement providing for an equitable contribution among such Guarantor and other affiliates of the Company of payments made by guarantees by such parties, result in the obligations of such Guarantor in respect of such maximum amount not constituting a fraudulent conveyance. The following supplemental, consolidating condensed financial data illustrates the composition of the combined Guarantors. Management believes separate complete financial statements of the respective Guarantors would not provide additional material information which would be useful in assessing the financial composition of the Guarantors. No single Guarantor has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in event of default on the Subsidiary Guarantee other than its subordination to senior indebtedness described above. Investments in subsidiaries are accounted for by the parent on the equity method for purposes of the supplemental, consolidating presentation. Earnings of subsidiaries are therefore reflected in the parent's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. 40 AXIA INCORPORATED AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1999 (Dollars in thousands)
Parent and Guarantor Non-Guarantor Consolidated its Divisions Subsidiaries Subsidiaries Eliminations Totals ------------- ------------ ------------ ------------ ------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 6,249 $ 427 $ 542 $ -- $ 7,218 Accounts receivable, net 7,685 7,123 3,676 (884) 17,600 Inventories, net 6,677 2,461 3,144 (489) 11,793 Prepaid income taxes and other current assets 938 138 24 -- 1,100 Deferred income tax benefits 3,489 -- -- -- 3,489 -------- ------- ------ -------- -------- Total Current Assets $ 25,038 $10,149 $7,386 $ (1,373) $ 41,200 -------- ------- ------ -------- -------- PLANT AND EQUIPMENT, AT COST: Land $ 984 $ -- $ -- $ -- $ 984 Buildings and improvements 4,223 136 948 -- 5,307 Machinery and equipment 18,762 597 544 -- 19,903 Equipment leased to others 10,883 -- 8 -- 10,891 -------- ------- ------ -------- -------- $ 34,852 $ 733 $1,500 -- $ 37,085 Less: Accumulated Depreciation 5,051 286 628 -- 5,965 -------- ------- ------ -------- -------- Net Plant and Equipment $ 29,801 $ 447 $ 872 -- $ 31,120 -------- ------- ------ -------- -------- OTHER ASSETS: Goodwill, net $ 90,362 $16,652 $1,305 -- $108,319 Intangible assets, net 1,115 7 -- -- 1,122 Deferred assets, net 16,037 989 1 -- 17,027 Investment in wholly-owned subsidiaries 21,913 -- -- (21,913) -- Interco Payable / Receivable -- -- -- -- -- Other Assets 20 -- -- -- 20 -------- ------- ------ -------- -------- Total Other Assets $129,447 $17,648 $1,306 $(21,913) $126,488 -------- ------- ------ -------- -------- TOTAL ASSETS $184,286 $28,244 $9,564 $(23,286) $198,808 ======== ======= ====== ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ 5,423 $ 41 $ -- $ -- $ 5,464 Accounts payable 3,094 863 1,938 (884) 5,011 Payable to parent 603 -- -- -- 603 Accrued liabilities 10,972 893 661 -- 12,526 Accrued income taxes -- -- 151 -- 151 Advance accounts (11,477) 10,349 1,128 -- -- -------- ------- ------ -------- -------- Total Current Liabilities $ 8,615 $12,146 $3,878 $ (884) $ 23,755 -------- ------- ------ -------- -------- NON-CURRENT LIABILITIES Long-term debt, less current maturities $126,560 $ 58 $ -- $ -- $126,618 Other non-current liabilities 7,913 -- -- -- 7,913 Deferred income taxes 6,205 -- -- -- 6,205 -------- ------- ------ -------- -------- Total non-Current liabilities $140,678 $ 58 $ -- $ -- $140,736 -------- ------- ------ -------- -------- Common stock held by ESOP $ 2,183 $ -- $ -- $ -- $ 2,183 Less: Note receivable from ESOP (1,445) -- -- -- (1,445) STOCKHOLDER'S EQUITY: Common stock and additional paid-in capital $ 26,680 $ 5,098 $1,929 $ (7,027) $ 26,680 Retained earnings 7,575 10,942 3,944 (15,375) 7,086 Accumulated other comprehensive income (loss) -- -- (187) -- (187) Total Stockholder's Equity $ 34,255 $16,040 $5,686 $(22,402) $ 33,579 -------- ------- ------ -------- -------- TOTAL LIABILITY AND STOCKHOLDER'S EQUITY $184,286 $28,244 $9,564 $(23,286) $198,808 ======== ======= ====== ======== ========
41 SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1999 (Dollars in thousands)
Parent and Guarantor Non-Guarantor Consolidated its Divisions Subsidiaries Subsidiaries Eliminations Totals ------------- ------------ ------------ ------------ ------------ Net sales $67,380 $21,722 $13,505 $ (6,720) $ 95,887 Net rentals 19,807 35,067 934 (19,801) 36,007 ------- ------- ------- -------- -------- Net revenues $87,187 $56,789 $14,439 $(26,521) $131,894 Cost of sales $44,549 $12,672 $ 8,346 $ (6,854) $ 58,713 Cost of rentals 2,442 27,493 569 (19,801) 10,703 Selling, general and administrative expenses 15,177 10,750 3,539 -- 29,466 Depreciation and amortization 6,800 628 144 -- 7,572 ------- ------- ------- -------- -------- Income from operations $18,219 $ 5,246 $ 1,841 $ 134 $ 25,440 Interest Expense $14,463 $ 11 $ 1 $ -- $ 14,475 Intercompany interest expense (income) (547) 442 105 -- -- Other expense (income), net (4,003) 107 422 3,465 (9) ------- ------- ------- -------- -------- Income (loss) before income taxes and extraordinary item $ 8,306 $ 4,686 $ 1,313 $ (3,331) $ 10,974 Provision for income taxes 2,613 2,001 533 -- 5,147 ------- ------- ------- -------- -------- Net income (loss) $ 5,693 $ 2,685 $ 780 $ (3,331) $ 5,827 ======= ======= ======= ======== ========
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1999 (Dollars in thousands)
Parent and Guarantor Non-Guarantor Consolidated its Divisions Subsidiaries Subsidiaries Eliminations Totals ------------- ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES $12,288 $ 252 $ 251 $ -- $12,791 CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for capital expenditures (2,582) -- (82) -- (2,664) Cash used for acquisition (2,523) -- (2,820) -- (5,343) Proceeds from sale of fixed assets 62 -- -- -- 62 ------- ----- ------- -------- ------- Net Cash used in Investing Activities $(5,043) $ -- $(2,902) $ -- $(7,945) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing on Acquisition Facility 3,000 -- -- -- 3,000 Payments of other long-term debt (6,605) 12 -- -- (6,593) Intercompany dividends 207 -- (207) -- -- Intercompany loan (2,000) -- 2,000 -- -- Net increase (decrease) in advance account 216 (144) (72) -- -- Equity contribution to subsidiary (753) -- 753 -- -- Other Equity transactions (53) -- -- -- (53) ------- ----- ------- -------- ------- Net Cash (used in) provided by Financing Activities $(5,988) $(132) $ 2,474 $ -- $(3,646) EFFECT OF EXCHANGE RATE CHANGES ON CASH $ -- $ -- $ 114 $ -- $ 114 ------- ----- ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 1,257 $ 120 $ (63) $ -- $ 1,314 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,992 307 605 -- 5,904 ------- ----- ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,249 $ 427 $ 542 $ -- $ 7,218 ======= ===== ======= ======= =======
42 AXIA INCORPORATED AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1998 (Dollars in thousands)
Parent and Guarantor Non-Guarantor Consolidated its Divisions Subsidiaries Subsidiaries Eliminations Totals ------------- ------------ ------------ ------------ ------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 4,992 $ 307 $ 605 $ -- $ 5,904 Accounts receivable, net 6,601 6,049 2,716 (1,233) 14,133 Inventories, net 6,742 2,422 2,551 (623) 11,092 Prepaid income taxes and other current assets 894 140 101 -- 1,135 Deferred income tax benefits 3,439 -- -- -- 3,439 -------- ------- ------ -------- -------- Total Current Assets $ 22,668 $ 8,918 $5,973 $ (1,856) $ 35,703 -------- ------- ------ -------- -------- PLANT AND EQUIPMENT, AT COST: Land $ 984 $ -- $ -- $ -- $ 984 Building and improvements 4,371 51 178 -- 4,600 Machinery and equipment 18,099 528 123 -- 18,750 Equipment leased to others 10,101 -- 12 -- 10,113 -------- ------- ------ -------- -------- $ 33,555 $ 579 $ 313 $ -- $ 34,447 Less: Accumulated depreciation 1,603 81 74 -- 1,758 -------- ------- ------ -------- -------- Net Plant and Equipment $ 31,952 $ 498 $ 239 $ -- $ 32,689 OTHER ASSETS: Goodwill, net $ 92,706 $14,915 $ 12 $ -- $107,633 Intangible assets, net 796 11 -- -- 807 Deferred charges, net 17,184 912 1 -- 18,097 Investment in wholly-owned subsidiaries 17,806 -- -- (17,806) -- Other assets 28 -- -- -- 28 -------- ------- ------ -------- -------- Total Other Assets $128,520 $15,838 $ 13 $(17,806) $126,565 -------- ------- ------ -------- -------- TOTAL ASSETS $183,140 $25,254 $6,225 $(19,662) $194,957 ======== ======= ====== ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ 4,621 $ 34 $ -- $ -- $ 4,655 Accounts payable 3,197 620 1,750 (1,233) 4,334 Accrued liabilities 10,566 795 507 -- 11,868 Accrued income taxes -- -- 11 -- 11 Advance account (9,693) 10,493 (800) -- -- -------- ------- ------ -------- -------- Total Current Liabilities $ 8,691 $11,942 $1,468 $ (1,233) $ 20,868 -------- ------- ------ -------- -------- NON-CURRENT LIABILITIES: Long-term debt, less current maturities $130,967 $ 53 $ -- $ -- $131,020 Other non-current liabilities 7,970 -- -- -- 7,970 Deferred income taxes 6,750 -- -- -- 6,750 -------- ------- ------ -------- -------- Total Non-Current Liabilities $145,687 $ 53 $ -- $ -- $145,740 -------- ------- ------ -------- -------- Common stock held by ESOP $ 1,620 $ -- $ -- $ -- $ 1,620 Less: Note receivable from ESOP (1,473) -- -- -- (1,473) STOCKHOLDER'S EQUITY: Common stock and additional paid-in capital $ 26,511 $ 5,098 $1,176 $ (6,274) $ 26,511 Retained earnings 2,105 8,161 3,371 (12,155) 1,482 Accumulated other comprehensive (loss) income (1) -- 210 -- 209 -------- ------- ------ -------- -------- Total Stockholder's Equity $ 28,615 $13,259 $4,757 $(18,429) $ 28,202 -------- ------- ------ -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $183,140 $25,254 $6,225 $(19,662) $194,957 ======== ======= ====== ======== ========
43 SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION FOR THE PERIOD FROM JULY 23, 1998 TO DECEMBER 31, 1998 (Dollars in thousands)
Parent and Guarantor Non-Guarantor Consolidated its Divisions Subsidiaries Subsidiaries Eliminations Totals ------------- ------------ ------------ ------------ ------------ Net sales $30,643 $ 7,993 $4,982 $ (3,201) $40,417 Net rentals 7,773 13,734 396 (7,772) 14,131 ------- ------- ------ -------- ------- Net revenues $38,416 $21,727 $5,378 $(10,973) $54,548 Cost of sales $20,931 $ 4,767 $3,143 $ (3,166) $25,675 Cost of rentals 855 10,893 243 (7,772) 4,219 Selling, general and administrative expenses 6,191 4,336 1,272 -- 11,799 Depreciation and amortization 2,876 182 39 -- 3,097 ------- ------- ------ -------- ------- Income (loss) from operations $ 7,563 $ 1,549 $ 681 $ (35) $ 9,758 Interest Expense $ 6,511 $ 4 $ -- $ -- $ 6,515 Intercompany interest expense (income) 5 (5) -- -- -- Other expense (income), net (1,286) 45 109 1,203 71 ------- ------- ------ -------- ------- Income (loss) before income taxes $ 2,333 $ 1,505 $ 572 $ (1,238) $ 3,172 Provision for income taxes 805 637 237 -- 1,679 ------- ------- ------ -------- ------- Net income (loss) $ 1,528 $ 868 $ 335 $ (1,238) $ 1,493 ======= ======= ====== ======== =======
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION THE PERIOD FROM JULY 23, 1998 TO DECEMBER 31, 1998 (Dollars in thousands)
Parent and Guarantor Non-Guarantor Consolidated its Divisions Subsidiaries Subsidiaries Eliminations Totals ------------- ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES $ (2,175) $ 321 $176 $ -- $ (1,678) CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for capital expenditures (826) (130) (22) -- (978) Proceeds from sale of fixed assets 15 -- -- -- 15 Acquisition of predecessor company (120,784) -- -- -- (120,784) --------- ------- ---- ------- --------- Net Cash used in Investing Activities $(121,595) $ (130) $(22) $ -- $(121,747) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in Revolving Credit $ (2,750) $ -- $ -- $ -- $ (2,750) Net payments on prior Revolving Credit (8,900) -- -- -- (8,900) Payments of other long-term debt (19,905) 34 -- -- (19,871) Proceeds from other long-term debt 139,250 -- -- -- 139,250 Net increase (decrease) in advance account 1,061 (1,067) 6 -- -- Payments of deferred financing costs (7,352) -- -- -- (7,352) Contribution from parent 26,500 -- -- -- 26,500 Other equity transactions -- -- (9) -- (9) --------- ------- ---- ------- --------- Net Cash (used in) provided by Financing Activities $ 127,904 $(1,033) $ (3) $ -- $ 126,868 EFFECT OF EXCHANGE RATE CHANGES ON CASH -- $ -- $ 44 $ -- $ 44 -------- ------- ---- ------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 4,134 $ (842) $195 $ -- $ 3,487 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 858 1,149 410 -- 2,417 --------- ------- ---- ------ --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,992 $ 307 $605 $ -- $ 5,904 ========= ======= ==== ====== =========
44 SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998 (Dollars in thousands)
Parent and Guarantor Non-Guarantor Consolidated its Divisions Subsidiaries Subsidiaries Eliminations Totals -------------- ------------ ------------- ------------ ----------- Net sales $34,554 $ 9,595 $6,445 $ (4,337) $46,257 Net rentals 8,973 15,792 512 (8,967) 16,310 ------- ------- ------ -------- ------- Net revenues $43,527 $25,387 $6,957 $(13,304) $62,567 Cost of sales $22,372 $ 5,747 $4,307 $ (4,198) $28,228 Cost of rentals 1,093 12,539 314 (8,967) 4,979 Selling, general and administrative expenses 8,057 4,801 1,649 -- 14,507 Depreciation and amortization 2,512 107 40 -- 2,659 Transaction expenses (see Note 6)) 11,280 -- -- -- 11,280 ------- ------- ------ -------- ------- Income (loss) from operations $(1,787) $ 2,193 $ 647 $ (139) $ 914 Interest Expense $ 1,549 $ 4 $ -- $ -- $ 1,553 Intercompany interest expense (income) 58 (58) -- -- -- Other expense (income), net (1,635) 28 225 1,587 205 ------- ------- ------ -------- ------- Income (loss) before income taxes and extraordinary item $(1,759) $ 2,219 $ 422 $ (1,726) $ (844) Provision for income taxes (1,173) 854 200 -- (119) ------- ------- ------ -------- ------- Net income (loss) before extraordinary item $ (586) $ 1,365 $ 222 $ (1,726) $ (725) ======= ======= ====== ======== =======
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION FOR THE PERIOD FROM JANUARY 1, 1998 TO JULY 22, 1998 (Dollars in thousands)
Parent and Guarantor Non-Guarantor Consolidated its Divisions Subsidiaries Subsidiaries Eliminations Totals -------------- ------------ ------------- ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES $ 7,473 $ (7) $ 1,096 $ -- $ 8,562 CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for capital expenditures (3,389) (49) (30) -- (3,468) Proceeds from sale of fixed assets 4 -- -- -- 4 ------- ------ ------- ------ ------- Net Cash used in Investing Activities $(3,385) $ (49) $ (30) $ -- $(3,464) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in Revolving Credit $ 4,400 $ -- $ -- $ -- $ 4,400 Payments of other long-term debt (7,987) (8) (324) -- (8,319) Net increase (decrease) in advance account (271) 288 (17) -- -- Intercompany dividends 669 -- (669) -- -- Other equity transactions (6) -- (52) -- (58) ------- ------ ------- ------ ------- Net Cash (used in) provided by Financing Activities $(3,195) $ 280 $(1,062) $ -- $(3,977) EFFECT OF EXCHANGE RATE CHANGES ON CASH -- $ -- $ (14) $ -- $ (14) ------- ------ ------- ------ ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 893 224 (10) -- 1,107 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD (35) 925 420 $ -- 1,310 ------- ------ ------- ------ ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 858 $1,149 $ 410 $ -- $ 2,417 ======= ====== ======= ====== =======
45 SUPPLEMENTAL CONSOLIDATING STATEMENT OF INCOME INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 (Dollars in thousands)
Parent and its Guarantor Non-Guarantor Consolidated Divisions Subsidiaries Subsidiaries Eliminations Totals --------------- ------------ ------------- ------------- ------------ Net sales $57,366 $14,837 $11,549 $ (6,334) $ 77,418 Net rentals 15,063 26,379 986 (15,046) 27,382 ------- ------- ------- -------- -------- Net revenues $72,429 $41,216 $12,535 $(21,380) $104,800 Cost of sales $38,944 $ 8,683 $ 7,280 $ (6,381) $ 48,526 Cost of rentals 1,975 20,872 621 (15,046) 8,422 Selling, general and administrative expenses 13,041 7,903 2,842 -- 23,786 Depreciation and amortization 4,456 183 73 -- 4,712 ------- ------- ------- -------- -------- Income (loss) from operations $14,013 $ 3,575 $ 1,719 $ 47 $ 19,354 Interest Expense 3,695 9 6 -- 3,710 Intercompany interest expense (income) (7) 7 -- -- -- Other expense (income), net (3,381) 205 391 2,822 37 ------- ------- ------- -------- -------- Income (loss) before income taxes and extraordinary item $13,706 $ 3,354 $ 1,322 $ (2,775) $ 15,607 Provision for income taxes 4,558 1,295 559 -- 6,412 ------- ------- ------- -------- -------- Income (loss) before extraordinary item $ 9,148 $ 2,059 $ 763 $ (2,775) $ 9,195 ======= ======= ======= ======== ========
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1997 (Dollars in thousands)
Parent and its Guarantor Non-Guarantor Consolidated Divisions Subsidiaries Subsidiaries Eliminations Totals --------------- ------------- -------------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 9,530 $ 1,899 $ 301 $ -- $ 11,730 CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for capital expenditures (3,255) (71) (149) -- $ (3,475) Proceeds from sale of investment 1,459 -- -- -- 1,459 Proceeds from sale of fixed assets 357 -- -- -- 357 -------- ------- ----- ------ -------- Net Cash used in Investing Activities $ (1,439) $ (71) $(149) $ -- $ (1,659) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in Revolving Credit Loan 4,500 -- -- -- 4,500 Proceeds from other long-term debt 620 -- 324 -- 944 Payments of other long-term debt (15,907) (24) -- -- (15,931) Dividends received from (paid by) subsidiaries 638 -- (638) -- -- Net increase (decrease) in advance account 1,471 (1,386) (85) -- -- Other equity transactions 145 -- (108) -- 37 -------- ------- ----- ------ -------- Net Cash used in Financing Activities $ (8,533) $(1,410) $(507) $ -- $(10,450) EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- (27) -- (27) -------- ------- ----- ------ -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (442) $ (418) $(382) $ -- $ (406) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 407 507 802 -- 1,716 -------- ------- ----- ------ -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ (35) $ 925 $ 420 $ -- $ 1,310 ======== ======= ===== ====== ========
46 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of AXIA Incorporated We have audited the accompanying consolidated balance sheets of AXIA Incorporated and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholder's equity and comprehensive income, and cash flows for the year ended December 31, 1999, and for the period from July 23, 1998 to December 31, 1998 and for the period from January 1, 1998 to July 22, 1998. 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. The financial statements of the Company for the year ended December 31, 1997 were audited by other auditors whose report, dated February 25, 1998, expressed an unqualified opinion on those statements. 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the year ended December 31, 1999 and for the periods ended December 31, 1998 and July 22, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas February 11, 2000 47 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of AXIA Incorporated: We have audited the consolidated balance sheet of AXIA INCORPORATED (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 (not presented herein) and the related accompanying consolidated statements of income, stockholder's equity and comprehensive income, 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 our 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 present fairly, in all material respects, the financial position of AXIA INCORPORATED AND SUBSIDIARIES as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois February 25, 1998 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On December 9, 1998, the Board of Directors of AXIA Incorporated approved management's recommendation on July 23, 1998 to engage the independent certified public accounting firm of Deloitte & Touche LLP ("D&T") to audit the consolidated financial statements of the Company for the year ending December 31, 1999. Prior to the sale of the predecessor company on July 22, 1998, the predecessor company's independent auditor was Arthur Andersen LLP. See Form 8-K filed on December 15, 1998 for change in accountants. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information is set forth under the heading "Directors and Executive Officers of the Registrant" in Part I, Item 1 of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth the total value of compensation received by the Chairman, President and Chief Executive Officer and the four most highly compensated executive officers, other than the Chairman, President and Chief Executive Officer who served as executive officers of the Company as of December 31, 1999 (the "Named Executive Officers") for services rendered in all capacities to the Company for the years ended December 31, 1999, 1998 and 1997. Summary Compensation Table
Incentive Other Annual Name and Principal Position (1) Year Salary Compensation (2) Compensation (3) (4) - -------------------------------------------------- ---- -------- ---------------- -------------------- Gary L. Rosenthal 1999 $296,301 $159,000 $ 1,857 Chairman, President and Chief Executive Officer 1998 $121,323 $ 50,000 -- Dennis W. Sheehan (5) 1998 $283,386 -- $13,725 Chairman, President and Chief Executive Officer 1997 $336,000 $200,000 $19,837 Lyle J. Feye 1999 $166,312 $ 56,700 $74,820 Vice President-Finance, Treasurer and 1998 $150,667 $ 57,500 $10,725 Chief Financial Officer 1997 $140,500 $ 45,000 $10,210 Robert G. Zdravecky 1999 $189,287 $ 70,000 $11,359 President and General Manager of Ames 1998 $179,983 $ 75,594 $11,889 1997 $171,500 $ 62,640 $11,766 David H. Chesney 1999 $181,035 $ 66,000 $ 9,997 President and General Manager of Nestaway 1998 $174,525 $112,952 $10,660 1997 $166,900 $ 25,000 $ 9,317 Ian G. Wilkins 1999 $174,525 $ 35,000 $ 8,796 President and General Manager of Fischbein 1998 $170,084 $ 17,000 $12,212 1997 $163,083 $ 48,000 $ 8,611
(1) These individuals have not received any restricted stock awards or options for the periods indicated. None of the executive officers has received perquisites, the value of which exceeded the lesser of $50,000 or 10% of the salary and bonus of such executive officer. (2) The company provides a management incentive plan with payments to be made in cash. (3) Includes payments for life insurance and automobile allowance and Mr. Feye had additional earnings of $64,296 as a result of compensation recorded due to reimbursement of moving expenses related to relocation of the Corporate office. (4) In connection with the closing of the Transaction, Mr. Sheehan, Mr. Feye, Mr. Zdravecky, Mr.Chesney and Mr. Wilkins received compensation as a result of the sale of stock, the exercising of options, or both, and payments pursuant to various 49 employee incentive bonus programs. Compensation recognized as a result of the Transaction for these individuals was $1.2 million, $2.1 million, $2.3 million, $2.1 million and $2.1 million, respectively. Mr. Feye, Mr. Zdravecky, Mr. Chesney and Mr. Wilkins received additional compensation of $43,171 as a result of the Transaction from escrow disbursement in 1999. In 1998, Mr. Rosenthal received a fee of $250,000 from Sterling for consulting services rendered prior to and in connection with the Transaction. (5) Dennis W. Sheehan retired concurrently with the Transaction. EMPLOYEE STOCK OWNERSHIP AND 401(K) PLAN All U.S. salaried and non-bargaining hourly employees, who have provided service to AXIA Incorporated for one-half of a year and are at least age 21, may participate in the AXIA Incorporated 401(k) Plan ("401(k) Plan"). The 401(k) Plan is designed to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). Each such employee has the option to defer taxation of a portion of his or her earnings by directing AXIA Incorporated to contribute a percentage of earnings to the 401(k) Plan ("Deferral Contributions"). A participant may defer up to 15% of eligible earnings to the 401(k) Plan, subject to certain limitations set forth in the 401(k) Plan. A participant is always 100% vested in his or her Deferral Contributions. A participant's Deferral Contributions become distributable upon the termination of his or her employment for any reason. In connection with the Transaction the Company established an Employee Stock Ownership Plan (the "ESOP"), covering substantially all full time employees, including executive officers of the Company who satisfy the requirements described below. As of December 31, 1998, the 401(k) Plan was merged into the ESOP, and an employee satisfying the eligibility requirements under the 401(k) Plan is able to make Deferral Contributions to the Employee Stock Ownership and 401(k) Plan as was allowed under the 401(k) Plan. The ESOP borrowed $1.5 million from Finance Co. (the "Company ESOP Loan") to purchase 15,000 shares of Common Stock at the Closing. Finance Co. funded the Company ESOP Loan from the ESOP Term Loan. The Company ESOP Loan matures on December 31, 2003 and bears interest at interest rates based on the Alternative Base Rate (as defined) or the LIBOR Rate (as defined). The outstanding principal of the Company ESOP Loan is payable in equal quarterly installments of $68,182 during the period beginning September 30, 1998, but payments may be accelerated to allocate sufficient shares to participants. The 15,000 shares of Common Stock purchased by the ESOP are pledged (the "ESOP Pledge") as security for the Company ESOP Loan, and such shares will be released and allocated to ESOP participants' accounts as the Company ESOP Loan is discharged. The Company will make ESOP contributions in amounts sufficient to enable the ESOP to discharge its indebtedness under the Company ESOP Loan. A percentage of the shares released under the ESOP Pledge will be allocated to each participant based on a percentage of such participant's Deferral Contributions (Matching Contributions"), and (ii) the remaining percentage of such shares released are allocated to each participant based on such participant's compensation relative to total compensation for all ESOP participants ("Discretionary Contributions"). Until the Company ESOP Loan is paid in full, ESOP Contributions will be used to pay the outstanding principal and interest on the Company ESOP Loan. Participation begins the earlier to occur of (i) for all employees hired prior to July 31, 1998 and are age 21, the later of (x) July 22, 1998 or (y) their date of hire or (ii) the date an employee satisfies the eligibility requirements to make Deferral Contributions. A participant's ESOP account, which is such participant's allocation of shares based on Matching and/or Discretionary Contributions, vests at the rate of 20% per year. Distributions from the participant's ESOP account are made in cash or Common Stock upon a participant's retirement, death, disability or termination of employment. In the event of retirement, death or disability, the entire balance of a participant's ESOP account will become distributable without regard to the ordinary vesting schedule. In the event of termination of employment for any other reason, the vested portion of a participant's ESOP account will become distributable and the remaining portion, if any, will be forfeited. If Common Stock is distributed to a participant, the participant may, within two 60-day periods, require the Company to purchase all or a portion of such Common Stock at the fair market value of the Common Stock as determined under the ESOP (the "Put Options"). The first 60-day period commences on the date the participant receives a distribution of Common Stock and the second 60-day period commences a year from such date. If a participant fails to exercise either of the two Put Options, the participant may transfer the shares of Common Stock only upon receipt of a bona fide third party offer and only after first offering the shares to the ESOP and then to the Company. Employees of the Company own approximately 5.3% of the outstanding Common Stock through the ESOP. RETIREMENT PLAN Substantially all salaried and non-bargaining hourly employees participate in the AXIA Incorporated Salaried Employees' Retirement Plan. Under the terms of the Plan, each eligible employee receives a retirement benefit based on the number of years of Credited Service with the Company and average total earnings for the five consecutive years of highest earnings during the fifteen years preceding termination of employment. As of December 31, 1999, the number of years of Credited Service for the indicated persons are: Mr. Rosenthal, .42 year; Mr. Feye, 10.33 years; Mr. Zdravecky, 11.08 years; Mr. Chesney, 7.83 years; and Mr. Wilkins, 4.58 years. 50 The amounts shown in the following table are estimated annual retirement benefits (payable as a straight life annuity) for the respective compensation levels and years of service, after deduction of an offset of anticipated Social Security benefits as provided under the terms of the Plan.
Years of Service ------------------------------------------------------------------ Annual Earnings 10 15 20 25 30 ------- ------- ------- ------- ------- Average $120,000 $21,382 $32,073 $42,764 $53,455 $64,146 $140,000 25,382 $38,073 $50,764 $63,455 $76,146 $160,000* $29,382 $44,073 $58,764 $73,455 $88,146
* The Internal Revenue Code limits the amount of compensation that can be taken into account in 1999 to $160,000. MEDICAL INSURANCE Certain Company officers participate in a medical insurance plan covering up to $100,000 per participant in annual medical expenses. The aggregate benefit amount paid for such participants totaled $8,140 for 1999. SALARY CONTINUATION In order to attract and encourage key executives to remain with the Company from 1980 to 1986, the Company instituted a salary continuation program to provide certain then key executives with a death benefit, contingent upon employment or service as a consultant with the Company until retirement or death. The program provides that upon the executive's death, the Company will pay to his designated beneficiary, annually for a period of ten years, an amount equal to 40% of the executive's current annual salary or salary at date of retirement. The Company has purchased life insurance policies on the lives of the executives, naming the Company as the sole beneficiary. The amount of such coverage is designed to provide to the Company a source of funds to satisfy its obligations under the program. Annual premiums paid in 1999 were approximately $41,850; however, if current assumptions as to mortality experience, policy dividends and other factors are realized, the Company will recover, through tax deductions over the life of the program, all of its payments to the insurance company and the executives. As of the Transaction date, all plan participants were retired. MANAGEMENT INCENTIVE COMPENSATION PLAN The Company has adopted an incentive plan which provides to certain employees, including the executives listed above, an annual performance bonus. These bonuses are calculated on the basis of the employee's level of participation and achievement of objectives as defined in the plan. Bonuses are paid in the first quarter of the following year, assuming the Company meets a targeted earnings improvement, revenues, gross margin, cash flow, and/or such other measures as may be determined annually by the Company's Compensation Committee. 1998 STOCK AWARDS PLAN In connection with the closing of the Transaction, the Board of Directors and the Company's stockholders approved the Company's 1998 Stock Awards Plan (the "1998 Stock Awards Plan"). The 1998 Stock Awards Plan is intended to provide employees, consultants and other service providers with an opportunity to acquire a proprietary interest in AXIA Group and additional incentive and reward opportunities based on the growth in the Common Stock price of AXIA Group. The 1998 Stock Awards Plan provides for the granting of options (either incentive stock options within the meaning of Code Section 422(b), or options that do not constitute incentive stock options ("non-qualified stock options")), restricted stock awards, stock appreciation rights, performance awards and phantom stock awards, or any combination thereof. The number of shares of Common Stock that may be subject to outstanding awards is 31,111 shares of Common Stock. Shares of Common Stock which are attributable to awards which have expired, terminated or been canceled or forfeited are available for issuance or use in connection with future awards. As of December 31, 1999, options were outstanding for 26,600 shares of common stock. Administration. The 1998 Stock Awards Plan will be administered by the Compensation Committee of AXIA Group. The Compensation Committee will have the power to determine which employees, consultants and other service providers will receive an award, the time or times when such award will be made, the type of the award and the number of shares of Common Stock to be issued under the award or the value of the award. Only persons who at the time of the award are employees of or service providers to 51 AXIA Group or of any subsidiary of AXIA Group will be eligible to receive awards under the 1998 Stock Awards Plan. A director of AXIA Group is not eligible to receive an award under the 1998 Stock Awards Plan unless such director is an employee of AXIA Group or any of its subsidiaries. Options. The 1998 Stock Awards Plan provides for two types of options: incentive stock options and non-qualified stock options. The Compensation Committee will designate the persons to receive the options, the number of shares subject to the options and the terms and conditions of each option granted under the 1998 Stock Awards Plan. The term of any option granted under the 1998 Stock Awards Plan shall be determined by the Compensation Committee; provided, however, that an incentive stock option may only be awarded to an employee and that the term of any incentive stock option cannot exceed ten years from the date of the grant and any incentive stock option granted to an employee who possesses more than 10% of the total combined voting power of all classes of shares of AXIA Group or of its subsidiary within the meaning of Section 422(b)(6) of the Code must not be exercisable after the expiration of five years from the date of grant. The exercise price of options granted under the 1998 Stock Awards Plan will be determined by the Compensation Committee; provided, however, that an incentive stock option exercise price cannot be less than the fair market value of a share of Common Stock on the date such option is granted (subject to certain adjustments provided under the 1998 Stock Awards Plan). Further, the exercise price of any incentive stock option granted to an employee who possesses more than 10.0% of the total combined voting power of all classes of shares of AXIA Group or of its subsidiaries within the meaning of Section 422(b)(6) of the Code must be at least 110% of the fair market value of the Common Stock on the date such option is granted. The exercise price of options granted under the 1998 Stock Awards Plan will be paid in full in a manner prescribed by the Compensation Committee. Restricted Stock Awards. Pursuant to a restricted stock award, Common Stock will be granted to an eligible person at the time the award is made without any cash payment to AXIA Group, except to the extent otherwise provided by the Compensation Committee or required by law; provided, however, that such shares will be subject to certain restrictions on the disposition thereof and certain obligations to forfeit such shares to the Company as may be determined in the discretion of the Compensation Committee. The restrictions on disposition may lapse based upon (a) AXIA Group's attainment of specific performance targets established by the Compensation Committee that are based on: (i) the fair market value of a share of Common Stock; (ii) AXIA Group earnings per share; (iii) the Company's revenue; (iv) the revenue of a business unit of AXIA Group designated by the Compensation Committee; (v) the return on stockholders' equity achieved by AXIA Group or (vi) AXIA Group's pre-tax cash flow from operation (b) the grantee's tenure with AXIA Group, or (c) a combination of factors. AXIA Group will retain custody of the Common Stock issued pursuant to a restricted stock award until the disposition restrictions lapse. A grantee may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of such shares until the expiration of the restriction period. However, upon the issuance to the grantee of Common Stock pursuant to a restricted stock award, except for the foregoing restrictions, such grantee will have all the rights of a stockholder of the Company with respect to such shares, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares. Stock Appreciation Rights. A stock appreciation right permits the holder thereof to receive an amount in cash, Common Stock, or a combination thereof (as determined by the Compensation Committee), equal in value to the number of stock appreciation rights exercised by the holder multiplied by the excess of the fair market value of Common Stock on the exercise date over the stock appreciation rights' exercise price. Stock appreciation rights may or may not be granted in connection with the grant of an option and no stock appreciation right may be exercised earlier than six months from the date of grant. A stock appreciation right may be exercised in whole or in installments and at such time as determined by the Compensation Committee. Performance and Phantom Stock Awards. The 1998 Stock Awards Plan permits grants of performance awards and phantom stock awards, which may be paid in cash, Common Stock, or a combination thereof as determined by the Compensation Committee. Performance awards granted under the 1998 Stock Awards Plan will have a maximum value established by the Compensation Committee at the time of the grant. A grantee's receipt of such amount will be contingent upon satisfaction by AXIA Group, or any subsidiary, division or department thereof, of performance conditions established by the Compensation Committee prior to the beginning of the performance period. Future performance conditions may be based on: (i) the price of a share of Common Stock; (ii) AXIA Group's earnings per share; (iii) the Company's revenue; (iv) the revenue of a business unit of AXIA Group designated by the Compensation Committee; (v) the return on stockholder's equity achieved by AXIA Group; (vi) AXIA Group or business unit's pre-tax cash flow from operations or (vii) a combination of such factors. Such performance awards, however, may be subject to later revisions as the Compensation Committee deems appropriate to reflect significant unforeseen events or changes. A performance award will terminate if the grantee's employment or service with the Company terminates during the applicable performance period except as otherwise provided by the Compensation Committee at the time of grant. Phantom stock awards granted under the 1998 Stock Awards Plan are awards of Common Stock or rights to receive amounts equal to stock appreciation over a specific period of time. Such awards vest over a period of time or upon the occurrence of a specific event(s) established by the Compensation Committee, without payment of any amounts by the holder thereof (except to the extent required by law) or satisfaction of any performance criteria or objectives. Future performance conditions may be based on (i) the price of a share of Common Stock; (ii) AXIA Group's earnings per share; (iii) AXIA Group's revenue; (iv) the revenue of a business unit of AXIA Group designated by the 52 Compensation Committee; (v) the return on stockholder's equity achieved by AXIA Group; (vi) AXIA Group or business unit's pre-tax cash flow from operations or (vii) a combination of such factors. A phantom stock award will terminate if the grantee's employment or service with the Company terminates during the applicable vesting period or, if applicable, the occurrence of a specific event(s), except as otherwise provided by the Compensation Committee at the time of grant. In determining the value of performance awards or phantom stock awards, the Compensation Committee must take into account a grantee's responsibility level, performance, potential, other awards under the 1998 Stock Awards Plan and such other considerations as it deems appropriate. Such payment may be made in a lump sum or in installments as prescribed by the Compensation Committee. Any payment made in Common Stock will be based upon the fair market value of the Common Stock on the payment date. Income Tax Considerations. Upon the exercise of a nonqualified option, the optionee will recognize ordinary taxable income on the amount by which the fair market value of the Common Stock purchased exceeds the price paid for such Common Stock under the option. The Company shall be able to deduct the same amount for federal income tax purposes. The exercise of an incentive stock option has no tax consequence to an optionee or the Company. At the time the restrictions lapse on a restricted stock award, the holder of such award will recognize ordinary taxable income in an amount equal to the fair market value of the shares of Common Stock on which the restrictions lapse. The amount of ordinary taxable income recognized by such holder of a restricted stock award is deductible by the Company. Upon the exercise of a stock appreciation right, the holder of such right must include in ordinary taxable income the amount of cash or the fair market value of the shares of Common Stock received. The amount of ordinary taxable income recognized by such holder of the stock appreciation right is deductible by the Company. A holder of a performance award or a phantom stock award will include in his or her ordinary taxable income the fair market value of the shares of Common Stock related to such award when the holder's rights in such award first becomes transferable or is no longer subject to a substantial risk of forfeiture. The amount of ordinary taxable income recognized by the holder of either award is deductible by the Company. NONQUALIFIED STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS The AXIA Group, Inc. Nonqualified Stock Option Plan for Non-Employee Directors grants each non-employee director of the Company the option to purchase 150 shares of AXIA Group common stock. Currently, options of 450 shares are outstanding. Under the plan, 1,500 shares of common stock are reserved for issuances pursuant to the exercise of options granted under the plan. 53 ITEM 12. SECURITY OWNERSHIP BENEFICIAL OWNERSHIP The Company is wholly owned by Holdings, a wholly-owned subsidiary of AXIAGroup, Inc. The following table sets forth as of December 31, 1999, the number and percentage of the outstanding shares of AXIA Group's Common Stock beneficially owned by the ESOP, the Named Executive Officers, each director of AXIA Group and the Company, all directors and officers as a group and each person who is the beneficial owner of more than 5% of the outstanding Common Stock.
NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE OF OUTSTANDING BENEFICIAL OWNER OWNERSHIP OF COMMON STOCK COMMON STOCK (1) -------------------- ------------------------------- ------------------------- David H. Chesney 3,804 1.3% 9501 Granger Rd Cleveland, Ohio 44125 Lyle J. Feye 3,067 1.1% 801 Travis - Suite 1400 Houston, Texas 77002 Susan O. Rheney 5,000 1.7% Eight Greenway Plaza - Suite 702 Houston, Texas 77046 Gary L. Rosenthal 5,358(2) 1.9% 600 Travis - Suite 6110 Houston, Texas 77002 C. Byron Snyder 1,000 .4% 1502 Augusta #425 Houston, Texas 77057 Ian G. Wilkins 2,553 0.9% 151 Walker Road Statesville, North Carolina 28625 James D. Woods 2,000 .7% 600 Travis - Suite 6602 Houston, Texas 77002 Robert G. Zdravecky 3,556 1.2% 3305 Breckinridge Blvd., Suite 122 Duluth, Georgia 30096 All directors and Named Executive Officers as a group (8 persons) 26,338 9.2% The CIT Group/Equity Investments, Inc 25,000 8.8% 650 CIT Drive Livingston, New Jersey 07039 Fayez Sarofim Investment Partnership No. &, L.P. 25,000 8.8% Two Houston Center - Suite 702 Houston, Texas 77010 Frank J. Hevrdejs 24,190 8.5% Eight Greenway Plaza - Suite 702 Houston, Texas 77046 Paribas North America 25,000 8.8% 787 Seventh Avenue New York, New York 10019 Gordon A. Cain 17,500 6.1% Eight Greenway Plaza - Suite 702 Houston, Texas 77046 AXIA Incorporated Employee Stock Ownership Plan (3) 15,000 5.3%
54 (1) Gives effect to the conversion of outstanding Class B Common Stock to Class A Common Stock. At December 31, 1999, AXIA Group had 261,318 shares of Class A Common Stock and 24,500 shares of Class B Common Stock outstanding. Class B Common Stock is non-voting stock and is fully convertible at any time at the option of the holder into an equal number of shares of Class A Common Stock. Prior to such conversion, the CIT Group/Equity Investments Inc., Fayez Sarofim Investment partnership, Paribas North America, Frank Hevrdejs and all directors and officers as a group own beneficially 4.9%, 9.6%, 4.9%, 9.3% and 10.1% of the outstanding Class A Common Stock. (2) Does not include 2,675 shares held in trust for Mr. Rosenthal's descendants. Mr. Rosenthal disclaims beneficial ownership of such shares. (3) Any shares of Common Stock acquired by the ESOP in the Equity Investment will be voted by the trustee of the ESOP (the "ESOP Trustee") pursuant to the direction of the Board of Directors or by a committee to be designated by the Board of Directors, except that participants will be entitled to direct the ESOP Trustee to vote the shares of Common stock allocated to their accounts with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business or such similar transactions as may be prescribed in regulations under the Code. ITEM 13. CERTAIN RELATIONSHIPS The following is information concerning certain transactions between the Company and certain affiliates. The Company believes that these transactions are on terms at least as favorable to the Company as it could obtain from unaffiliated third parties. These transactions were not approved by a majority of the disinterested members of the Board of Directors. RELATED TRANSACTIONS Sterling entered into an agreement with AXIA Group and Acquisition Co. pursuant to which Sterling is to provide consulting and advisory services with respect to the organization of AXIA Group, Acquisition Co. and Finance Co., the structuring of the Transaction, employee benefit and compensation arrangements and other matters. The agreement also provides that AXIA Group and Acquisition Co., jointly and severally, will indemnify Sterling against liabilities relating to its services. At the Closing, the Company paid Sterling a one-time transaction fee of $2.5 million for these services, and reimbursed Sterling for its expenses. From the transaction fee received at Closing, Sterling paid Gary Rosenthal a fee of $250,000 for consulting services rendered in connection with the Transaction, and AXIA Group and the Company will indemnify Mr. Rosenthal against liabilities related to his services. In addition, through 2008 AXIA Group will pay Sterling an annual management fee of $100,000 in cash and annually grant Sterling AXIA Group Common Stock having a value of $100,000 calculated based upon the latest ESOP valuation price. In addition, each of AXIA Group, and Acquisition Co. has agreed that if any one or more of them or any of their subsidiaries determines within ten years of the date of the closing of the Acquisition to dispose of or acquire any assets or business having a value of $1 million or more (a "Future Corporate Transaction") or to offer its securities for sale publicly or privately to raise any debt or equity financing (a "Future Securities Transaction"), either AXIA Group, Acquisition Co., or the relevant subsidiary will retain Sterling as a consultant with respect to the Transaction, provided a principal, officer or director of Sterling or any of their respective affiliates or family members owns any equity securities of AXIA Group or any of its successors. For any Future Corporate Transaction, Sterling is entitled to receive a fee in the amount of 1% of the aggregate consideration paid or received plus the aggregate amount of any liabilities assumed in connection with an acquisition or disposition and reimbursement of any expenses or fees incurred by Sterling in connection therewith. In addition to the annual management fee discussed above, Sterling received fees of $51,958 and was reimbursed $32,279 in expenses in connection with the acquisitions of Concorde Tool Corporation and Thames Packaging Equipment Company, Ltd. and other matters in 1999. For any Future Securities Transaction, Sterling is entitled to receive a fee in the amount of 0.5% of the aggregate gross selling price of such securities and, regardless of whether such Future Securities Transaction is consummated, Sterling is entitled to receive reimbursements of any expenses or fees incurred by Sterling in connection therewith. The agreement is automatically renewable for successive one-year periods, subject to notice of termination by either Sterling or AXIA Group. 55 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report or incorporated herein by reference: (1) The Consolidated Financial Statements and Financial Statement Schedules of AXIA Incorporated are listed on the Index, page 18 of this Form 10-K. (2) Exhibits required to be filed by Item 601 of Regulation S-K are listed under the caption "Exhibits" below: EXHIBITS
EXHIBIT NO. DESCRIPTION - ------------- ----------- 3.1* Certificate of Incorporation of the Company, as amended 3.2* Bylaws of the Company 4.1* Indenture, as supplemented, dated as of July 22, 1998, by and between the Company and State Street Bank & Trust Company National Bank, as Trustee, with respect to the 10.75% Senior Subordinated Notes due 2008, including the form of the Note. 4.2 First Supplemental Indenture, dated as of January 1, 2000 10.1* Axia Group, Inc. 1998 Stock Awards Plan 10.2* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan to be renames AXIA Incorporated Employee Stock Ownership and 401(k) Plan 10.3* Axia Finance Corp. Employee Stock Ownership Plan and 401(k) Plan Trust Agreement to be renamed AXIA Incorporated Employee Stock Ownership and 401(k) Plan Trust Agreement 10.8* Credit Agreement dated as of July 22, 1998 among Axia Finance Corp., AXIA Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co., Inc. and Paribas 10.9* Security Agreement dated as of July 22, 1998 by and between AXIA Incorporated, Paribas and the Lenders named therein 10.10* Pledge Agreement dated as of July 22, 1998 by and between AXIA Incorporated, Paribas and the Lenders named therein. 10.11* Letter Agreement dated June 23, 1998 by and among The Sterling Group, Inc., Axia Group, Inc., Axia Acquisition Corp. and each of their subsidiaries 10.12* Form of Indemnity Agreement between AXIA Incorporated and each of its officers and directors. 10.13* Form of Tax Sharing Agreement among Axia Group, Inc., Axia Holdings Corp., AXIA Incorporated, Ames Taping Tool Systems, Inc. and TapeTech Tool Co., Inc. 10.14 Amendment to Credit Agreement dated as of December 27, 1999, by and among AXIA Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co. Inc., and Paribas 23.4 Consent of Arthur Andersen LLP
* Filed as an exhibit to the Company's Form S-4 (Registration No. 333-64555) under an exhibit number identical to that described herein and incorporated herein by this reference. (b) Reports on Form 8-K: None 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AXIA INCORPORATED By /s/ Lyle J. Feye ------------------- Lyle J. Feye Vice President, Treasurer, Chief Financial Officer Date: March 24, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Gary L. Rosenthal Chairman, President and Director March 24, 2000 - ---------------------- Gary L. Rosenthal /s/ Lyle J. Feye Vice President Finance, March 24, 2000 - ---------------- Principal Financial Officer Lyle J. Feye Principal Accounting Officer /s/ Susan O. Rheney Director March 24, 2000 - ------------------- Susan O. Rheney /s/ C. Byron Snyder Director March 24, 2000 - ------------------- C. Byron Snyder /s/ James D. Woods Director March 24, 2000 ----------------- James D. Woods 57 EX-4.2 2 FIRST SUPPLEMENTAL INDENTURE EXHIBIT 4.2 FIRST SUPPLEMENTAL INDENTURE, dated as of January 1, 2000, among AXIA INCORPORATED, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 801 Travis Street, Suite 1400, Houston, Texas 77002, STATE STREET BANK AND TRUST COMPANY, a Massachusetts chartered trust company having an office at 225 Asylum Street, Goodwin Square, 23rd Floor, Hartford, Connecticut 06103 (herein called the "Trustee"), and AMES TAPING TOOL SYSTEMS, INC. (herein called "Ames") and TAPETECH TOOL CO., INC. (herein called "TapeTech"), each a corporation duly organized and existing under the laws of the State of Delaware and having its principal office at 801 Travis Street, Suite 1400, Houston, Texas 77002. RECITALS OF THE COMPANY WHEREAS, the Company has heretofore executed and delivered to the Trustee its Indenture, dated as of July 22, 1998 (herein called the "Original Indenture") to provide for the issuance of up to an aggregate principal amount of $150,000,000 of the Company's 10 3/4% Senior Subordinated Notes due July 15, 2008 (the "Notes"); and WHEREAS, there is currently outstanding $100,000,000 aggregate principal amount of the Notes; and WHEREAS, AXIA FINANCE CORP., an original party to the Original Indenture, has merged with and into the Company and no longer exists separately; and WHEREAS, Ames and TapTech are Guarantors; and WHEREAS, Section 10.01 of the Original Indenture provides that, subject to certain limitations, without the consent of any holders of the Notes, the Company, when authorized by a resolution of its Board of Directors, and the Trustee may at any time and from time to time enter into an indenture or indentures supplemental to the Original Indenture; and WHEREAS, the Company's Board of Directors has duly authorized the substance of the modifications of the Original Indenture hereinafter set forth (the "First Supplemental Indenture") and the execution and delivery of this First Supplemental Indenture; and WHEREAS, the respective Boards of Directors of Ames and TapeTech have authorized the execution and delivery of this First Supplemental Indenture; and WHEREAS, the Company, Ames, TapeTech and the Trustee desire to execute this First Supplemental Indenture; and WHEREAS, all things necessary to make this First Supplemental Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: 1. The Original Indenture shall be modified as follows. Brackets indicate maters to be added. SECTION 4.19. Guarantee of Securities by Restricted Subsidiaries, shall be amended to read as follows: In the event the Company (i) organizes or acquires any Restricted Subsidiary [(other than a Foreign Subsidiary)] after the Issue Date that is not a Guarantor or (ii) causes or permits any Foreign Subsidiary that is not a Guarantor to, directly or indirectly, guarantee the payment of any Indebtedness of the Company or any Restricted Subsidiary ("Other Indebtedness") then, in each case the Company shall cause such Restricted Subsidiary to simultaneously execute and deliver a supplemental indenture to this Indenture pursuant to which it will become a Guarantor under this Indenture; provided, however, that in the event a Restricted Subsidiary is acquired in a transaction in which a merger agreement is entered into, such Restricted Subsidiary shall not be required to execute and deliver such supplemental indenture until the consummation of the merger contemplated by any such merger agreement; provided, further, that if such Other Indebtedness is (i) Indebtedness that is ranked pari passu in right of payment with the Securities or the Guarantee of such Restricted Subsidiary, as the case may be, the Guarantee of such Subsidiary shall be pari passu in right of payment with the guarantee of the Other Indebtedness; or (ii) Subordinated Indebtedness, the Guarantee of such Subsidiary shall be senior in right of payment to the guarantee of the Other Indebtedness (which guarantee of such Subordinated Indebtedness shall provide that such guarantee is subordinated to the Guarantees of such Subsidiary to the same extent and in the same manner as the Other Indebtedness is subordinated to the Securities or the Guarantee of such Restricted Subsidiary, as the case may be). 2. Capitalized terms used herein but not defined herein shall have the meanings given to them in the Original Indenture. 3. Except as specifically supplemented and amended by this First Supplemental Indenture, the terms and provisions of the Original Indenture shall remain in full force and effect. 4. The Recitals of the Company preceding Section 1 of this First Supplemental Indenture are statements of the Company, and the Trustee has no responsibility for the accuracy or completeness thereof. 5. This First Supplemental Indenture shall be governed by, and construed in accordance with, the law of the State of New York without giving effect to the conflicts of laws principles thereof. -2- 6. This First Supplemental Indenture may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same First Supplemental Indenture. -3- 6. This First Supplemental Indenture may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same First Supplemental Indenture. -3- IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, all as of the day and year first above written. AXIA INCORPORATED /s/ LYLE J. FEYE By: _______________________________ Lyle J. Feye Vice President and Treasurer STATE STREET BANK AND TRUST COMPANY, as Trustee /s/ ROBERT L. REYNOLDS By: ____________________________ Name: Robert L. Reynolds Title: Vice President AMES TAPING TOOL SYSTEMS, INC. as Guarantor /s/ LYLE J. FEYE By: ____________________________ Lyle J. Feye Vice President TAPETECH TOOL CO., INC. as Guarantor /s/ LYLE J. FEYE By: ____________________________ Lyle J. Feye Vice President 4 EX-10.14 3 AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10.14 AMENDMENT TO CREDIT AGREEMENT THIS AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of December 27, 1999, is by and among AXIA Incorporated, a Delaware corporation (the "Company"), Ames Taping Tool Systems, Inc., a Delaware corporation and Tape Tech Tool Company, Inc., a Delaware corporation (collectively, Ames Taping Tool Systems, Inc. and Tape Tech Tool Co. Inc. are referred to as the "Guarantors"), PARIBAS, a bank organized under the laws of France acting through its Houston Agency ("Paribas") as Agent (Paribas in such capacity, the "Agent") for the Lenders (as such term is defined below), and the banks and other financial institutions listed on the signature pages hereto under the caption "Lender" (collectively, together with all successors and assigns, the "Lenders"). PRELIMINARY STATEMENTS The Company, the Guarantors, Agent and the Lenders are parties to that certain Credit Agreement dated as of July 22, 1998 (the "Credit Agreement"). The Company, the Guarantors, the Agent and the Lenders now desire to amend the Credit Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: AGREEMENT ARTICLE I. DEFINITIONS SECTION 1.01 Certain Defined Terms. Capitalized terms used in this Amendment which are not otherwise defined in this Amendment are used as defined in the Credit Agreement, as amended hereby. ARTICLE II. AMENDMENTS SECTION 2.01 Amendment to Section 1.01: Definition of "Excess Cash Flow". Effective as of the date hereof, the definition of "Excess Cash Flow" contained in Section 1.01 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Excess Cash Flow" means, with respect to the Company and its Subsidiaries determined on a consolidated basis for any fiscal year period ending after the Effective Date, the sum of the following to the extent accruing after the Effective Date, (a) EBITDA for such period, minus (b) the amount equal to (i) actual Capital Expenditures (exclusive of Capitalized Lease Obligations) incurred during such period plus (ii) the amount of Capital Expenditures for such period permitted to be made in the next succeeding fiscal year under Section 8.14(c), minus (iii) the amount of Capital Expenditures carried forward from the prior fiscal year under Section 8.14(c) for such 1 period, minus (c) cash taxes, cash Interest Expense and scheduled payments of principal made under the Term Loan, the Acquisition Loan and the ESOP Loan (but only to the extent that net income for such period was not reduced for any expense incurred by the Company for contributions to the ESOP), minus (d) any dividend or payment permitted under Section 8.07(a)(ii) to the extent not deducted in determining EBITDA for such period, minus (e) scheduled principal payments under Capitalized Lease Obligations made during such period, and minus (f) scheduled principal payments under all other Indebtedness made during such period (but only to the extent that net income for such period was not reduced for any expense incurred by the Company for contributions to any Additional ESOP)." SECTION 2.02 Amendment to Section 2.09 (b) (iii) of the Credit Agreement. Effective as of the date hereof, subclause (iii) of subparagraph (b) of Section 2.09 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "(iii) 50% of Excess Cash Flow less any voluntary prepayment of principal applied to the Term Loan, the Acquisition Loan, and the ESOP Loan for the immediately proceeding fiscal year (such payment to be made on or before each April 15 beginning April 15, 1999);" SECTION 2.03 Amendment to Section 11.01(f) of the Credit Agreement. Effective as of the date hereof, subparagraph (f) of Section 11.01 of the Credit Agreement is hereby amended to delete the reference to "Section 2.08" contained therein and insert in place thereof a reference to "Section 2.09". SECTION 2.04 Amendment to Section 11.02(a) and 11.02(b) of the Credit Agreement. Effective as of the date hereof, subparagraph (a) and subparagraph (b) of Section 11.02 are amended and restated and to read in their entirety as follows: a) If to the Company: 801 Travis Suite 1400 Houston, Texas 77002 Telecopy No: (713) 425-2151 Attention: Lyle Feye b) If to the Agent: 2121 San Jacinto, Suite 930 Dallas, Texas 75201 Telecopy No: (214) 969-0260 Attention: Christopher S. Goodwin with copies to: Paribas 1200 Smith Street, Suite 3100 Houston, Texas 77002 Telecopy No: (713) 659-3832 Attention: Loan Administration 2 and to: Patton Boggs LLP 2001 Ross Avenue, Suite 3000 Dallas, Texas 75201-8001 Telecopy No. (214) 758-1550 Attention: James C. Chadwick, Esq. if to any Lender: To the address specified by such Lender (or the Agent on behalf of such Lender) to the Company ARTICLE III. LIMITED WAIVER SECTION 3.01 Waiver of Conditions Precedent to, and Consent to, Acquisition of Assets of Concorde Tool Acquisition. Agent hereby waives solely with respect to the acquisition by AXIA Incorporated of certain assets of Condcorde Tool Corporation in the terms and conditions specified in Annex I attached hereto (hereinafter referred to as the "Concord Tool Acquisition") the conditions precedent otherwise applicable thereto set forth in Article V of the Credit Agreement. The Agent, the Lenders, the Company and the Guarantors hereby consent and agree that (a) the Concord Tool Acquisition is deemed to be a Permitted Acquisition and (b) the expenditures by the Company for the purchase price specified in the Concord Tool Acquisition shall not constitute a Capital Expenditure. This waiver and consent applies only to the foregoing matters and nothing contained in this Amendment or any other communication between the Agent, the Lenders, the Company or the Guarantors shall be a waiver of any other present or future violation, Default or Event of Default under the Credit Agreement or any other Loan Document (collectively, "Other Violations"). Similarly, nothing contained in this Amendment shall directly or indirectly in any way whatsoever either: (i) impair, prejudice or otherwise adversely affect the Agent's and the Lenders' right at any time to exercise any right, privilege or remedy in connection with the Credit Agreement or any other Loan Document with respect to any Other Violations, (ii) amend or alter any provision of the Credit Agreement or any other Loan Document or any other contract or instrument except as specifically set forth herein, or (iii) constitute any course of dealing or other basis for altering any obligation of the Company or the Guarantors under the Credit Agreement or any other Loan Documents or any right, privilege or remedy of the Agent and the Lenders under the Credit Agreement or any other Loan Document or any other contract or instrument with respect to Other Violations. Nothing in this letter shall be construed to be a waiver or consent by the Agent and the Lenders to any Other Violations. ARTICLE IV. CONDITIONS PRECEDENT SECTION 4.01 Conditions to Effectiveness. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent: (a) The Lenders shall have received (i) this Amendment, duly executed by the Company, the Guarantors, the Agent and the Lenders, (ii) a certificate of the Secretary of the Company acknowledging (A) that the Company's Board of Directors has adopted, approved, consented to and ratified resolutions which authorize the execution, delivery and performance by 3 the Company of this Amendment, and all other Loan Documents to which the Company is or is to be a party, and (B) the names of the officers of the Company authorized to sign this Amendment and each of the other Loan Documents to which the Company is or is to be a party hereunder (including the certificates contemplated herein) together with specimen signatures of such officers, and (iii) such additional documents, instruments and information as the Lenders may reasonably request; (b) The representations and warranties contained herein and in the Credit Agreement and the Loan Documents, as each is amended hereby, shall be true and correct in all material respects as of the date hereof, as if made on the date hereof (except insofar as such representations and warranties relate expressly to an earlier date); (c) After giving effect to this Amendment, no Default or Event of Default shall have occurred and be continuing; and (d) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to the Agent and their legal counsel. ARTICLE V. REPRESENTATIONS AND WARRANTIES SECTION 5.01 Representations and Warranties. The Company hereby represents and warrants to the Agent and the Lenders that (a) the representations and warranties contained in the Credit Agreement, as amended hereby, and in any other Loan Documents are true and correct in all material respects on and as of the date hereof as though made on and as of the date hereof (except insofar as such representations and warranties relate expressly to an earlier date); (b) no Default or Event of Default under the Credit Agreement, as amended hereby, has occurred and is continuing; and (c) the Company is in full compliance with all covenants and agreements contained in the Credit Agreement and in the other Loan Documents, as amended hereby. ARTICLE VI. CONSENT AND CONFIRMATION BY GUARANTORS SECTION 6.01 Consent and Confirmation. Each Guarantor hereby consents and agrees to the terms of the foregoing Amendment, and such Guarantor agrees that its Guaranty shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of such Guarantor enforceable against it in accordance with its terms. Furthermore, each Guarantor hereby agrees and acknowledges that (a) its Guaranty is not subject to any claims, defenses or offsets, (b) nothing contained in the Credit Agreement, this Amendment or any other agreement, instrument or document executed in connection therewith shall adversely affect any right or remedy of Agent or the Lenders under the Guaranty, (c) the execution and delivery of the Amendment shall in no way reduce, impair or discharge any obligations of the Guarantor as guarantor pursuant to the Guaranty and shall not constitute a waiver by Agent or the Lenders of any of Agent's or the Lenders' rights against such Guarantor, (d) by virtue hereof and by virtue of its Guaranty, each Guarantor hereby guarantees to Agent and the Lenders the prompt and full payment and full and faithful performance by the Company of the entirety of the "Obligations" (as defined in each Guaranty) on the terms and conditions set forth therein and any 4 time further modified or amended, (e) such Guarantor's consent is not required to the effectiveness of this Amendment, and (f) no consent by such Guarantor is required for the effectiveness of any future amendment, modification, forbearance or other action with respect to the Credit Agreement. ARTICLE VII. MISCELLANEOUS PROVISIONS SECTION 7.01 Ratification of Credit Agreement and Other Loan Documents. Except as expressly provided herein, the Credit Agreement and all other Loan Documents shall remain unmodified and in full force and effect as supplemented and amended hereby. The Company and the Guarantors hereby affirm all the provisions of the Credit Agreement, as amended hereby, and the Loan Documents. SECTION 7.02 Confirmation of the Security Documents. The Company and the Guarantors hereby acknowledge and confirm that the Collateral (as defined in the Security Documents) continues to secure the Secured Obligations (as defined in the Security Documents), including those arising under the Credit Agreement, as amended hereby. SECTION 7.03 Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 5 IN WITNESS WHEREOF, this Amendment has been executed and is effective as of the date first above written. AXIA AXIA INCORPORATED /s/ LYLE J. FEYE By: ____________________________ Lyle J. Feye Name: __________________________ Title: Vice President _________________________ GUARANTORS AMES TAPING TOOL SYSTEMS, INC. /s/ LYLE J. FEYE By: ____________________________ Lyle J. Feye Name: __________________________ Title: Vice President _________________________ TAPE TECH TOOL CO. INC. /s/ LYLE J. FEYE By: ____________________________ Lyle J. Feye Name: __________________________ Title: Vice President _________________________ AGENT PARIBAS, as Agent /s/ CHRISTOPHER S. GOODWIN By: ____________________________ Christopher S. Goodwin Name: __________________________ Title: Director _________________________ /s/ CHARLES N. ROLFE By: ____________________________ Charles N. Rolfe Name: __________________________ Title: Director _________________________ 6 LENDERS PARIBAS /s/ CHRISTOPHER S. GOODWIN By: ____________________________ Christopher S. Goodwin Name: __________________________ Title: Director _________________________ /s/ CHARLES N. ROLFE By: ____________________________ Charles N. Rolfe Name: __________________________ Title: Director _________________________ THE CIT GROUP/BUSINESS CREDIT, INC. By: ____________________________ Name: __________________________ AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By: ____________________________ Name: __________________________ Title: _________________________ LASALLE NATIONAL BANK By: ____________________________ Name: __________________________ Title: _________________________ NATIONAL BANK OF CANADA By: ____________________________ Name: __________________________ Title: _________________________ By: ____________________________ Name: __________________________ Title: _________________________ 7 EX-23.4 4 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our Report dated February 25, 1998, included in this Form 10-K into the Company's previously filed Registration Statement on Form S-4 (File No. 333-64555). ARTHUR ANDERSEN LLP Chicago, Illinois March 24, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 7,218 0 17,600 0 11,793 41,200 37,085 5,965 198,808 23,755 100,000 0 0 0 33,579 198,808 95,887 131,894 58,713 106,454 289 0 14,475 10,974 5,147 5,827 0 0 0 5,827 0 0
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