-----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, UbQbU7ueg3Mf82kqnZAXGcEuD/hXns78chL3/FYxEGUmCJEcDgtYMaZzxt36UVa2 FAzpf4Faw3WhHlT4/BccbQ== 0000950131-98-001824.txt : 19980323 0000950131-98-001824.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950131-98-001824 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 SROS: NONE 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-K SEC ACT: SEC FILE NUMBER: 001-02321 FILM NUMBER: 98569197 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-K 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, 1997 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 33-78922 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.) 100 West 22nd Street, Suite 134 Lombard, Illinois 60148 (Address of principal executive office) (zip code) Registrant's telephone number, including area code: (630) 629-3360 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: 11% Series B Subordinated Notes due 2001 Guarantee of 11% Series B Subordinated Notes due 2001 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.[ ] PART I Item 1. BUSINESS General AXIA Incorporated, the "Company," is a diversified manufacturer and marketer of (i) formed and coated wire products, material handling and storage equipment, (ii) specialized packaging machinery, and (iii) tools and other products for finishing drywall in new, manufactured, and renovated housing and commercial construction. Ames Taping Tool Systems, Inc. ("ATTS") and TapeTech Tool Co., Inc. ("TapeTech") are wholly-owned subsidiaries of the Company and are guarantors of the Company's 11% Series B Subordinated Notes ("Notes"). ATTS and TapeTech are each a Guarantor ("Guarantor"), and collectively, the "Guarantors." The Company was formed in 1891 as a private partnership to manufacture cold- drawn steel bars used in agricultural machinery, railroad equipment and the automotive industry. The Company was later incorporated as Bliss and Laughlin Steel Co. and in 1932 listed on The New York Stock Exchange. Beginning in 1962, the Company began a program to acquire smaller industrial companies to diversify from the steel business, and in 1982 the Company changed its name to AXIA Incorporated ("AXIA"). In October 1984, AXIA was acquired through a leveraged buyout by affiliates of Merrill Lynch & Co., Inc., certain members of senior management, and other investors. As part of the buyout, the new company sold Bliss and Laughlin Steel Co. Following the buyout, AXIA divested certain operations and acquired others. AXIA effected a recapitalization in 1989, paying a substantial dividend to its stockholders and refinancing the Company's capital structure. In 1992, AXIA sold two of its businesses to The Stanley Works. Today, AXIA is comprised of three business segments: Metal Products Segment, Packaging Products Segment and the Construction Tool Segment (see chart on page 8). On March 15, 1994, AXIA was acquired by Axia Holdings ("Holdings"), a corporation organized by Cortec Group Fund, L.P. as a result of which it was completely recapitalized. For convenience, AXIA prior to its recapitalization is referred to as the "Predecessor Company." On that date, Axia Acquisition Corp. ("Acquisition"), a wholly-owned subsidiary of Holdings, entered into a merger with AXIA in which AXIA was the surviving corporation (the "Transaction"). Description of the Business Segments Metal Products Segment. The Metal Products Segment ("MPS") produces dishwasher racks primarily serving the premium quality dishwasher market, specializes in the custom design and manufacture of high volume bare and coated wire products, and manufactures stackable storage racks and telescoping, flexible, gravity- powered and motorized conveyors for the material handling industry. Revenues from MPS accounted for 39% of AXIA's 1997 revenues. MPS has four plants strategically located near major customers: (i) McKenzie, Tennessee supplying dishracks; (ii) Cleveland, Ohio producing dishdrainers, shower caddies, storage racks, and conveyors, (iii) Beaver Dam, Kentucky manufacturing dishracks, dishrack components, and other coated wire products, and (iv) Clinton, North Carolina producing dishracks. Production of dishracks, dishdrainers, and other formed wire products requires specialized forming and assembly equipment and, in many circumstances, high quality powder coating lines. MPS is an active participant in the dishrack and component design and supply programs for each of its customers. Dishwasher marketing groups continuously push for dishracks with identifiable component features such as adjustable shelves, peg rows and finishing innovations. The customer demands that the machines be engineered for functional advantage, but the prime objective is unique enhancements to attract consumer interest and to provide differentiation of features for price point advantage. MPS manufactures and supplies coated baskets and other components for major domestic brand dishwashers including Maytag, Whirlpool/KitchenAid, Bosch, and General Electric. Dishdrainers and other coated wire products for Rubbermaid have become an increasingly important revenue source. In 1995, MPS initiated the supply of a new design dishdrainer and began coating the entire dishdrainer product line. MPS is working with its customers to provide additional value added services and product enhancements. 1 MPS is also a manufacturer of telescoping, flexible, gravity powered and motorized conveyers (Nestaflex) and portable, stackable storage racks (Nestainer). Nestaflex products are used by retailers for the loading and unloading of tractor trailers at store sites and at distribution centers. They are also used in assembly, packaging and mailing operations. Nestainer rack systems are sold to a variety of customers within the retail, distribution, food, chemical, pharmaceutical and electronics industries for storage and transportation purposes. Packaging Products Segment. The revenues from the Packaging Products Segment ("PPS") accounted for 21% of AXIA's 1997 revenues. PPS is a manufacturer, supplier and marketer of handheld and stationary industrial sewing and sealing units used for bag closing. The bag closing product line includes (i) hand-held or "portable" sewing machines for sealing multi-wall bags, (ii) stationary industrial sewing units and accessories for highly automated packaging facilities, (iii) proprietary devices for closing multi-wall paper bags and (iv) machines for heat sealing plastic bags. This unique equipment utilizes various sewing, hot melt adhesive, double fold and poly sealing technologies. PPS also markets a line of consumable support products such as thread, needles, and tape. PPS products and technology are widely used for packaging chemicals, minerals, agricultural commodities, grocery products, and pet foods. PPS continues to develop other component equipment in a bag filling line, including bag hangers and presenters. PPS' manufacturing facility is located in Statesville, North Carolina. PPS markets its products through independent U.S. and foreign distributors, and four international distribution subsidiaries in Europe and the Far East. The international subsidiaries are located in Belgium, France, the United Kingdom and Singapore, and accounted for 52% of PPS' 1997 revenues. The bag making operations of Mid America Machine Corp. were discontinued in 1995 and MAMCO's assets were sold or licensed. MAMCO accounted for less than 1% of the Company's revenues in that year. Construction Tool Segment. The Construction Tool Segment ("CTS"), which includes subsidiary companies Ames Taping Tools Systems, Inc. ("ATTS"), TapeTech Tool Co., Inc. ("TapeTech"), and Ames Taping Tools of Canada, Limited, is a producer, marketer and distributor of automatic drywall taping and finishing ("ATF") tools which are rented and/or sold to professional interior finishing contractors to finish drywall joints prior to painting, wallpapering and other forms of final treatment. The bulk of CTS' business is rental (as opposed to the sale) of ATF tools. ATTS rents ATF systems through a network of 64 company operated leased retail stores and 52 outlets operated by franchisees located throughout the U.S. and Canada and sells other construction tools and related merchandise in its stores. CTS maintains two repair centers which service ATTS rental tools. Revenues from the CTS business segment accounted for 40% of AXIA's 1997 revenues of which 97% was contributed by ATTS and TapeTech. CTS' end-use customers are local and regional interior finishing contractors. CTS, through the use of its large mailing lists (approximately 25,000 names, of whom 8,000 are active customers in any given month), has developed a direct marketing approach based on telemarketing, direct mail and targeted sales promotions coupled with the efforts of company operated stores and stores operated by franchisees. ATF market penetration is heaviest on the west coast, particularly in California. CTS' goal is to service all of the major housing markets in the U.S. and Canada and to significantly increase its penetration in the eastern region. The overall market for CTS' products is tied principally to new construction, particularly new housing starts. However, CTS' products are also used in commercial and repair/rehabilitation work. To increase the rental of ATF tools, CTS has focused on penetrating those markets where hand taping is predominant and automatic tools have not yet been widely accepted. TapeTech, acquired by the Company in 1982, sells ATF tools under the "TapeTech" and "TapeMaster" brand names. TapeTech tools are sold through approximately 110 independent authorized dealers and distributors, some of which further distribute through sub-dealers. TapeMaster tools are distributed through a network of approximately 49 authorized independent dealers, the majority of which sell the tools to individual customers. ATTS' 64 company operated stores, though primarily oriented to the rental of ATF tools, sell a variety of construction hand tools and drywall supplies including taping knives and finishing tape. The stores also rent and sell larger pieces of equipment, such as dustless sanders, spray rigs and panel lifts. In general, stores are leased for a period of three years or less. 2 Revenue by segment for fiscal years 1997, 1996 and 1995 appears below: AXIA Incorporated Revenue by Product Group (in thousands)
1997 1996 1995 ------- ------- ------- Metal Products Segment Coated & Formed Wire Products $35,268 34% $39,655 38% $42,649 41% Storage Racks & Conveyors 5,285 5 6,014 6 5,365 5 ------- -- ------- -- ------- -- Total MPS 40,553 39 45,669 44 48,014 46 Packaging Products Segment Bag Closing 21,819 21 21,103 20 21,895 21 Bag Making - - 563 1 ------- -- ------- -- ------- -- Total PPS 21,819 21 21,103 20 22,458 22 Construction Tool Segment Tool Rental 27,382 26 25,016 24 22,412 21 Tool & Store Merchandise Sales 15,046 14 12,999 12 11,442 11 ------- -- ------- -- ------- -- Total CTS 42,428 40 38,015 36 33,854 32
Total Revenues $104,800 100% $104,787 100% $104,326 100% ======== --- ======== --- ======== --- The Company's segment data reflects similarity of product lines rather than divisional organization. Management believes the segment format more appropriately reflects similarities of manufacturing processes as well as the shared production facility in Cleveland, Ohio. See Note 13 of the Notes to the Consolidated Financial Statements for additional segment data. Competition MPS competes directly with the dishwasher manufacturer's in-house manufacturing capability. General Electric, Frigidaire, and Whirlpool, dishwasher manufacturers, have dishrack manufacturing capabilities. As MPS is competing against the self-manufacture of its product by larger companies with more extensive financial resources, it competes on quality, flexibility and innovation. Dishrack customers accounted for 23% of the Company's 1997 revenues. MPS' other bare and coated wire products and conveyor and storage rack businesses operate in a highly competitive environment. Price, including freight costs, is very important in the purchase decision process. Competitors have similar products available (see "Customers"). PPS' products typically serve a specific niche market or a specific geographic area. As a result, PPS does not compete with any one company in all its product lines. As PPS offers consumable products that it does not manufacture, such as thread, there are numerous alternative outlets available for the purchase of these items by the customer. 3 CTS' tools are used for the interior finishing of drywall. CTS, therefore, competes with alternate methods of finishing as well as with other ATF tool manufacturers and distributors. CTS' most significant competition is from traditional hand finishing, which CTS believes accounts for 55% of all drywall taping. CTS' stores also operate in a highly competitive environment with respect to the sale of merchandise. These products are also available from contractor supply yards, building material retailers, and other sources. Materials Raw materials and products essential to each of the Company's businesses are available from a number of sources, and the Company is not dependent upon any single source of supply. Historically, the Company has not been affected significantly by shortage of raw materials. Customers Two of MPS' customers accounted for 30% of the Company's 1997 revenues. Together, dishrack customers accounted for approximately 23% of the Company's consolidated revenues for 1997. No material part of any other segment of the Company's business is dependent upon a single customer or a small group of customers. The Company temporarily closed its manufacturing plant in Beaver Dam, Kentucky, in December 1994. The plant had provided dishwasher racks to the General Electric Company's (GEC) Louisville, Kentucky plant since 1978. GEC had advised the Company of its decision not to order dishracks beginning in 1995. In 1996, Whirlpool began to self-manufacture the KitchenAid brand lower racks that were produced at the Company's Canal Winchester, Ohio, plant resulting in the closure of that facility. Dishrack component and service rack volumes for Whirlpool/KitchenAid, serviced by Beaver Dam and Canal Winchester, were consolidated into the Beaver Dam plant which was then reopened in 1996. Additionally in 1996, the Company began re-supplying GEC from this location at revenues substantially lower than levels recorded in 1994. In 1995, Frigidaire advised the Company of their decision to re-enter the dishrack manufacturing business. As a result of this customer's decision to self-manufacture dishracks, the Company's Clinton, North Carolina facility was temporarily deactivated in 1996. New business has been secured for this facility and manufacturing operations were reinstituted in 1997. Frigidaire accounted for 4% of the Company's 1996 revenues. Backlog The Company believes that its order backlog is not material to an understanding of its business, since most products are available from inventory or can be produced in a short period of time. No segment of the Company's business is seasonal to any material extent. Research and Development The Company believes that research and development activities are not material to its businesses. The Company utilizes a number of trademarks and trade names which are well-recognized by its customers. The Company believes that the loss of any one of its patents, trademarks, licenses, franchises and concessions would not have a material impact on any segment of its business. Regulations; Environmental Matters The Company is subject to various federal, state and local laws and regulations governing the use, discharge and disposal of hazardous materials. Compliance with current laws and regulations has not had, and is not expected to 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 (the "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. The NYSDEC has determined that the Company, 4 among others, may be a responsible party through its past ownership of the property. In the notice letter, the NYSDEC requested that the Company agree to enter into negotiations with the NYSDEC to execute a consent decree with respect to the financing by the Company of a remedial investigation, as well as a feasibility study for remedial action. A feasibility study, prepared in 1994 by environmental consultants engaged by the Company, established a range of estimated remediation costs of $.7 million to $2.9 million, plus or minus 30% of those costs, with the most probable method of remediation being at the high end of the range. The Company established an accrual of $3.9 million for the costs of remediation. In 1997, the Company entered into an agreement with the party responsible for an adjoining site, who also has been in the process of addressing concerns raised by NYSDEC, which will transfer responsibility to remediate the formerly- owned property to the party remediating the adjoining site. The Company paid the $520,000 payable under the agreement and has an exposure of up to an additional $120,000 if pond sediment contamination is higher than estimated by the Company's environmental consultants. In the event the party responsible for the remediation of the adjoining site is unable to consummate an agreement with NYSDEC within one year of its agreement with the Company, the Company has the option of the return of its contribution to the remediation of the sites and pursuing its own remediation plan. Should NYSDEC not approve the joint remediation plan for both sites, the agreement can be nullified and funds returned to the Company. The Company has maintained its accruals pending finalization of the remediation plan of the adjoining site. The Company is pursuing contributions from directors and officers of other users of the previously owned property. No estimate can be given as to possible recovery. (See also Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources). Employees As of December 31, 1997, the Company had 977 employees, of which 154 were represented by unions. The Company has two unrelated union contracts which expire in 1999. Foreign subsidiaries accounted for 49 of the Company's total employment. The Company believes that its relations with its employees are satisfactory. Suppliers Management believes that it has good relations with its suppliers and that there are adequate sources of supply for the materials required in the conduct of the Company's businesses. Business Combinations and Dispositions The management of the Company will 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. Management may consider acquisitions, divestitures or the reorganization of any line of its businesses. 5 Financial Information About Foreign and Domestic Operations and Export Sales. See Note 14 to the Company's Consolidated Financial Statements. Directors and Executive Officers of the Registrant The following table sets forth the name, age and position held by the directors, executive officers, and certain significant employees of the Company and the Guarantors.
On 12/31/97 Name Age Position or Office - ---- --- ------------------ Dennis W. Sheehan 63 Director, President and Chief Executive Officer of the Company. Director and Chairman of ATTS and TapeTech. Lyle J. Feye 44 Vice President Finance, Chief Financial Officer and Treasurer of the Company. Vice President and Director of ATTS and TapeTech. David H. Chesney 54 President and General Manager of the Nestaway division. Robert G. Zdravecky 51 President and General Manager of the Ames division and President of ATTS and TapeTech. Ian G. Wilkins 59 President and General Manager of the Fischbein and Flexible Material Handling divisions. T. Richard Fishbein 59 Director of the Company.
Mr. Sheehan and Mr. Fishbein are the only Directors of the Company. Mr. Sheehan and Mr. Feye are the only Directors of each of the Guarantors. The business experience during the last five years and other information relating to each of the executive officers and directors identified above is set forth below: Dennis W. Sheehan Dennis W. Sheehan is Director, President and Chief Executive Officer of the Company and has held these positions since 1984. He joined AXIA in 1977 as Vice President, General Counsel and Secretary. Mr. Sheehan is Director and Chairman of ATTS and TapeTech. Mr. Sheehan serves on the Board of Directors of the following publicly traded company: Allied Healthcare Products, Inc. (Chairman), St. Louis, Missouri, a manufacturer and distributor of healthcare and related products. Lyle J. Feye Lyle J. Feye is Vice President Finance, Chief Financial Officer, and Treasurer of the Company and a Director and Vice President of ATTS and TapeTech. Prior to his election to his present positions with the Company in March 1994, Mr. Feye was Corporate Controller and Assistant Treasurer of the Company for five years. Before joining AXIA, Mr. Feye served in various positions with the Continental Group Inc. (formerly the Continental Can Company) from 1975 to 1988, including division level financial and accounting management. 6 David H. Chesney David H. Chesney is President and General Manager of the Nestaway division and has held these positions since 1991. Prior to joining AXIA, 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 1987 to 1991. 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. Robert G. Zdravecky Robert G. Zdravecky is President and General Manager of the Ames division and President of ATTS and TapeTech, positions he has held since 1993. Mr. Zdravecky first joined AXIA 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 AXIA terminated as a result of the sale of two of AXIA's divisions to The Stanley Works. He rejoined AXIA in 1993 in his current position. Prior to joining AXIA in 1986, Mr. Zdravecky served as Vice President-Marketing and Sales, with Adhesive Engineering Co. from 1981 to 1986. Ian G. Wilkins Ian G. Wilkins is the President and General Manager of the Fischbein and the Flexible Material Handling divisions. Mr. Wilkins joined the Company in May of 1994. Prior to joining the Company, from 1988 to 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, as Vice President of Manufacturing, directed the manufacturing operations of Scott Aviation, a Division of Figgie International, a producer of oxygen equipment and health and safety products. T. Richard Fishbein Mr. Fishbein has been a partner of the Cortec Group from 1987 to present. He also serves as a director of Atco Products, Inc. Mr. Fishbein formerly was Managing Director of Bear, Stearns & Co. Inc. from 1985 to 1987. 7 - ------------------------------------------------------ | AXIA INCORPORATED |------| - ------------------------------------------------------ | | | - ------------------------------------------------------ | | Metal Products Segment | | | - Nestaway Division | | | - Flexible Material Handling Division | | | |------| | | | | | | | | | - ------------------------------------------------------ | | | - ------------------------------------------------------ | | Packaging Products Segment | | | - Fischbein Division | | | - Subsidiaries | | | - Compagnie Fischbein, S.A. (Belgium) |------| | - Fischbein France S.A.R.L. (France) | | | - Fischbein Packaging Pte Ltd. (Singapore) | | | - Fischbein Ltd. (United Kingdom) | | - ------------------------------------------------------ | | | | - ------------------------------------------------------ | | Construction Tool Segment | | | - Ames Division | | | - Subsidiaries | | | - Ames Taping Tool Systems, Inc. |______| | - Ames Taping Tools of Canada Ltd. | | - TapeTech Tool Co., Inc. | | | - ------------------------------------------------------ The chart above details the Company's operation by segment and not by management reporting organization. All subsidiaries are subsidiaries of the Company. 8 Item 2. PROPERTIES Real Estate and Facilities The Company believes it has adequate capacity to meet the current requirements of its customers. The major properties of the Company are listed below. The Company also leases several offices, two repair centers, a warehouse, and 64 stores. These locations are historically leased on a short-term basis of one to five years to provide maximum flexibility. The business conducted at these leased locations is relocatable and no individual lease or location is material to the Company. AXIA INCORPORATED ----------------- Real Estate and Facilities --------------------------
Size in Location Sq. Feet Principal Products/Type Operation - -------- -------- --------------------------------- Garfield Heights, Cleveland, Ohio... 121,000 Fabrication of dishdrainer racks, wire products, (Owned) and storage racks and assembly of material handling conveyers McKenzie, Tennessee................. 79,000 Fabrication of dishracks (Owned) Clinton, North Carolina............. 60,000 Fabrication of dishracks (Owned) Statesville, North Carolina......... 50,000 Assembly and manufacture of industrial (Leased until February 1, 2003) sewing and packaging machines Beaver Dam, Kentucky................ 64,000 Fabrication of dishracks, dishrack components (Owned) and other formed wire products Brussels, Belgium................... 11,000 Assembly and warehousing of packaging (Leased until December 1, 2006) machines Paris, France....................... 5,200 Assembly and distribution of packaging (Owned) machines
Domestic owned U.S. locations listed above are collateral under the Company's bank credit agreement. Item 3. LEGAL PROCEEDINGS The Company is a defendant in a number of lawsuits incidental to its business. Including the environmental matter discussed below, 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 (see Item 1. BUSINESS - Regulations; Environmental Matters and Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources for further discussion of environmental matters). The Company's operations are subject to various federal, state and local environmental laws and regulations. The Company believes that it is in substantial compliance with current laws and regulations. Based on information available at this time, the Company believes that compliance with current laws and regulations has not had, and is not expected to have, a material effect on the Company's financial condition or operating results. 9 In 1991, the New York State Department of Environmental Conservation (the "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. A feasibility study, prepared in 1994 by environmental consultants engaged by the Company, established a range of estimated remediation costs of $.7 million to $2.9 million, plus or minus 30% of those costs, with the most probable method of remediation being at the high end of the range. The Company established an accrual of $3.9 million for the costs of remediation. In 1997, the Company entered into an agreement with the party responsible for an adjoining site, who also has been in the process of addressing concerns raised by NYSDEC, which will transfer responsibility to remediate the formerly- owned property to the party remediating the adjoining site. The Company paid the $520,000 payable under the agreement and has an exposure of up to an additional $120,000 if pond sediment contamination is higher than estimated by the Company's environmental consultants. In the event the party responsible for the remediation of the adjoining site is unable to consummate an agreement with NYSDEC within one year of its agreement with the Company, the Company has the option of the return of its contribution to the remediation of the sites and pursuing its own remediation plan. Should NYSDEC not approve the joint remediation plan for both sites, the agreement can be nullified and funds returned to the Company. The Company has maintained its accruals pending finalization of the remediation plan of the adjoining site. The Company is pursuing contributions from directors and officers of other users of the previously owned property. No estimate can be given as to possible recovery. (See also Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources). Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 10 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Guarantors are wholly-owned by the Company and the Company is wholly-owned by Holdings. There is no established public trading market for the common equity of the Guarantors, the Company, or Holdings. Item 6. SELECTED FINANCIAL DATA AXIA INCORPORATED AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
Predecessor Company ------------------- Year Period Period Year Year Year Ended Ended Ended Ended Ended Ended -------- ------- -------- -------- -------- -------- Dec. 31 Mar. 15 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Income Statement Data: 1993 1994 1994 1995 1996 1997 - --------------------- ------- ------- -------- -------- -------- -------- Net revenues $87,767 $18,593 $ 81,304 $104,326 $104,787 $104,800 Cost of revenues 56,594 11,869 51,662 64,829 61,294 60,144 Charges for environmental matter/(1)/ 1,430 - - - - - Selling, general & administrative expenses 20,728 4,587 17,883 24,181 25,146 25,302 ------- ------- -------- -------- -------- -------- Income from operations $ 9,015 $ 2,137 $ 11,759 $ 15,316 $ 18,347 $ 19,354 Interest expense 7,084 1,500 5,300 6,596 5,123 3,710 Other expense (income) (144) (122) (301) 493 18 37 ------- ------- -------- -------- -------- -------- Income before income taxes and extraordinary item 2,075 759 6,760 8,227 13,206 15,607 Provision for income taxes 861 315 3,116 3,338 5,730 6,412 ------- ------- -------- -------- -------- -------- Income before extraordinary item 1,214 444 3,644 4,889 7,476 9,195 Loss on early extinguishment of debt - - - - 614 772 ------- ------- -------- -------- -------- -------- Net income $ 1,214 $ 444 $ 3,644 $ 4,889 $ 6,862 $ 8,423 ======= ======= ======== ======== ======== ======== Balance Sheet Data: - ------------------ Current assets $23,837 $25,491 $ 25,262 $ 27,012 $ 26,211 $ 26,253 Total assets $67,963 $69,165 $104,397 $103,288 $ 99,331 $ 96,773 Current liabilities $16,717 $17,347 $ 17,390 $ 20,262 $ 18,849 $ 22,429 Long-term debt, less current maturities $45,867 $45,956 $ 52,435 $ 43,507 $ 34,548 $ 20,439 Stockholder's equity (deficit)/(2)/ $(7,408) $(7,058) $ 20,796 $ 25,828 $ 32,118 $ 40,067
/(1)/ Charges related to involvement in an environmental matter and action at a property formerly owned by a predecessor of AXIA (see Note 15 of Notes to the Consolidated Financial Statements). /(2)/ As part of the recapitalization of the Predecessor Company, which occurred on December 21, 1989, AXIA paid a $65,695,000 cash dividend on common stock and recognized a $617,000 premium on the redemption of previously outstanding shares of preferred stock, resulting in a stockholders' deficit at the end of 1989 and the succeeding periods until the acquisition of the Predecessor Company in 1994. 11 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AXIA Incorporated, the "Company," is a diversified manufacturer and marketer of (i) formed and coated wire products, material handling and storage equipment, (ii) specialized packaging machinery, and (iii) tools and other products for finishing drywall. The Company's operations consist of three business segments; Metal Products Segment ("MPS"), Packaging Products Segment ("PPS"), and the Construction Tool Segment ("CTS"). 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. The results presented and management discussion exclude the impact of debt extinguishment costs. In 1997, the Company repurchased and extinguished $9,250,000 in principal of its Senior Subordinated Notes. The Company recorded a charge of $1,251,000, $772,000 net of tax, for the redemption premium, the writeoff of unamortized capitalized financing costs associated with the issuance of the Notes, the applicable original issue discount, and the expenses of the transaction. As a result of the refinancing of its bank debt in 1996, the Company recorded a debt extinguishment charge of $1,024,000 on a pretax basis, $614,000 net of tax, due to the writeoff of the unamortized capitalized financing costs related to the previous bank agreement. The following Table 1 summarizes the Company's Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995 (in thousands): Table 1
Summary Income Statement ------------------------ Years Ended Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 ------------- ------------- ------------- Net revenues $104,800 $104,787 $104,326 Cost of revenues 60,144 61,294 64,829 Selling, general and administrative expenses 25,302 25,146 24,181 -------- -------- -------- Income from operations 19,354 18,347 15,316 Interest expense 3,710 5,123 6,596 Other expense (income) 37 18 493 -------- -------- -------- Income before income taxes and extraordinary item 15,607 13,206 8,227 Provision for income taxes 6,412 5,730 3,338 -------- -------- -------- Income before extraordinary item $ 9,195 $ 7,476 $ 4,889 ======== ======== ========
12 The following Table 2 presents, for the periods indicated, certain items in the Company's Consolidated Statements of Income as a percentage of total net revenues. Table 2
Percentage of Total Net Revenues --------------------------------------------- Years Ended Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 ------------- ------------- ------------- Net Revenues 100.0% 100.0% 100.0% Costs and expenses Cost of revenues 57.4 58.5 62.1 Selling, general and adminis- trative expenses 24.1 24.0 23.2 Interest expense 3.6 4.9 6.3 Other expense (income) - - .5 Provision for income taxes 6.1 5.5 3.2 ----- ----- ----- Income before extraordinary item 8.8% 7.1% 4.7% ===== ===== =====
Table 3 below summarizes the net revenues and income from operations for the years ended December 31, 1997, 1996 and 1995 by business segment (in thousands): Table 3
Business Segment Operating Results --------------------------------------------- Years Ended Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 ------------- ------------- ------------- Net Revenues Metal Products Segment $ 40,553 $ 45,669 $ 48,014 Packaging Products Segment 21,819 21,103 22,458 Construction Tool Segment 42,428 38,015 33,854 -------- -------- -------- Total Net Revenues $104,800 $104,787 $104,326 ======== ======== ======== Income from Operations Metal Products Segment $ 7,260 $ 9,081 $ 8,832 Packaging Products Segment 3,153 2,251 2,191 Construction Tool Segment 11,693 10,157 7,569 Corporate and Eliminations (2,752) (3,142) (3,276) -------- -------- -------- Income from Operations $ 19,354 $ 18,347 $ 15,316 ======== ======== ========
The Company's segment data reflects similarity of product lines rather than divisional organization. Management believes the segment format more appropriately reflects similarities of manufacturing processes as well as the shared production facility in Cleveland, Ohio. 13 Results of Operations 1997 Operations Compared to 1996 Consolidated net revenues increased to $104,800,000 in 1997 from $104,787,000 in 1996. Excluding the loss of a dishrack customer which accounted for $4,289,000 in revenues in 1996, consolidated net revenues grew 4.3% over the prior year period. Revenue growth resulted from the increase in the rental and sales of automatic taping tools and construction merchandise sales through CTS- operated stores. As a result of increased marketing activities, bag closing equipment revenues in Latin America also increased. Currency changes resulted in a reduction in revenues of $1,660,000 from 1996. Cost of revenues decreased 1.9% to $60,144,000 in 1997 from $61,294,000 in 1996. Cost of revenues declined at MPS primarily due to cost savings related to the closure of a leased manufacturing facility. In addition, cost of revenues improved at PPS due to cost reduction programs partially resultant from new cost efficient production equipment acquired in 1996. Revenue growth within CTS contributed to an improvement in the consolidated profit margin. Consolidated selling, general and administrative expenses (SG&A) increased .6% to $25,302,000 in 1997 from $25,146,000 in 1996. This was primarily attributable to a growth in bad debt expense accompanying revenue growth within the construction tool business. Interest expense decreased 27.6% to $3,710,000 in 1997 from $5,123,000 in 1996. In addition to lower debt outstanding, the Company's interest rates were lowered 1.50% on its bank debt as a result of a refinancing which occurred in June 1996 and the repurchase of a portion of its 11% Subordinated Notes utilizing a lower cost bank line of credit. Other expense increased to $37,000 in 1997 compared to $18,000 in 1996. In 1997, the Company recorded a gain on the sale of an investment and interest income on an income tax refund. This income was offset by expenses related to efforts to sell one of the Company's divisions, and the loss incurred on disposal of fixed assets. Income before taxes (IBT) increased 18.2% to $15,607,000 in 1997 from $13,206,000 in 1996. As discussed in the preceding paragraphs, this improvement was principally the result of rental revenue growth and lower interest expense. Income taxes in 1997 were 41.1% of IBT compared to 43.4% in 1996. The Company's effective tax rates decreased due to a reduced estimated effective tax rate for state income taxes and the reduced impact of nondeductible expenses. Metal Products Segment Net revenues decreased 11.2% to $40,553,000 in 1997 from $45,669,000 in 1996. The decrease was primarily attributable to the termination of a supply contract with a dishrack customer which resulted in a decline in revenues of $4,289,000. Cost of revenues decreased 9.2% to $29,657,000 in 1997 from $32,655,000 in 1996. MPS aggressively reduced its over head cost structure by closing its Canal Winchester, Ohio, plant and consolidating revenue volumes into its Beaver Dam, Kentucky, manufacturing facility. Selling, general and administrative expenses decreased 7.6% to $3,636,000 in 1997 from $3,933,000 in 1996. Overhead costs were managed commensurate to volume levels. Income from operations decreased 20.1% to $7,260,000 in 1997 from $9,081,000 in 1996 due to the factors discussed above. Packaging Products Segment Net revenues increased 3.4% to $21,819,000 in 1997 from $21,103,000 in 1996. Currency changes resulted in a reduction in revenues of $1,660,000 in 1997. Revenue growth in bag closing equipment occurred in the U.S., Latin America and Europe. Latin American revenues, in particular, grew $1,119,000 as a result of new marketing programs targeting that geographic region. 14 Cost of revenues increased 0.9% to $13,542,000 in 1997 from $13,423,000 in 1996. The growth was primarily attributable to revenue growth. Profit margins improved due to cost reductions generated by new production equipment acquired in 1996. Selling, general and administrative expenses decreased 5.6% to $5,124,000 in 1997 from $5,429,000 in 1996. PPS recorded lower engineering and marketing costs for new product introductions. In addition, employee recruitment expenses were reduced. As a result of the gross profit margin improvement and reductions in selling, general and administrative expenses discussed in the preceding paragraphs, income from operations increased 40.1% to $3,153,000 in 1997 from $2,251,000 in 1996. Construction Tool Segment Net revenues increased 11.6% to $42,428,000 in 1997 from $38,015,000 in 1996. Revenue growth was attributable to increased tool rentals, merchandise sales, and the sale of automatic taping tools. Cost of revenues increased 11.4% to $16,945,000 in 1997 from $15,216,000 in 1996. The growth in cost of revenues was primarily attributable to revenue growth. Selling, general and administrative expenses increased 9.1% to $13,790,000 in 1997 from $12,642,000 in 1996. The increase was primarily attributable to added marketing programs and an increase in bad debt expense in conjunction with revenue growth. As a result of the changes discussed in the preceding paragraphs, income from operations increased 15.1% to $11,693,000 in 1997 from $10,157,000 in 1996. 1996 Operations Compared to 1995 Consolidated net revenues increased .4% to $104,787,000 in 1996 from $104,326,000 in 1995. Revenue growth was primarily the result of increased rental revenues of automatic taping tools in the Company's CTS business segment. Store merchandise sales also improved at CTS. This revenue growth offset the impact of a termination of a supply contract with a MPS dishrack customer, which resulted in a revenue decline of $3,459,000 from 1995. Cost of revenues decreased 5.5% to $61,294,000 in 1996 from $64,829,000 in 1995. The gross profit margin improvement was primarily attributable to changes in product and customer mix with revenue growth in the higher margin CTS business segment. Margins also improved at MPS and PPS due to cost reductions as discussed below. Consolidated selling, general and administrative expenses (SG&A) increased 4.0% to $25,146,000 in 1996 from $24,181,000 in 1995. This was primarily attributable to additional marketing programs and bad debt expense incurred to support revenue growth within the Company's CTS business segment. Interest expense decreased 22.3% to $5,123,000 in 1996 from $6,596,000 in 1995. In addition to lower debt outstanding, the Company's interest rates were lowered 1.50% on its bank debt as a result of a refinancing which occurred in June 1996. Other expense decreased to $18,000 in 1996 compared to $493,000 in 1995. The Company recorded income in 1996 of $179,000 as a result of a distribution relating to past claims received from the liquidation of an insurance company. In 1995, the Company had recorded unusual charges for the scrapping of taping tools ($148,000) and the consolidation of two tool repair centers ($158,000). Income before taxes (IBT) increased 60.5% to $13,206,000 in 1996 from $8,227,000 in 1995. As discussed in the preceding paragraphs, this improvement was principally the result of rental revenue growth and lower interest expense. Income taxes in 1996 were 43.4% of IBT compared to 40.6% in 1995. The Company's effective tax rates increased for federal, state and foreign taxing authorities. 15 Metal Products Segment Net revenues decreased 4.9% to $45,669,000 in 1996 from $48,014,000 in 1995. The decrease was primarily attributable to the termination of a supply contract with a dishrack customer which resulted in a decline in revenues of $3,459,000. Cost of revenues decreased 7.1% to $32,655,000 in 1996 from $35,150,000 in 1995. The decrease was primarily attributable to the decline in revenues discussed above. Gross profit margins improved for both coated and formed wire products and material handling equipment due primarily to product and customer mix. MPS had incurred nonrecurring expenses in 1995 due to the startup of a new style dishdrainer and the inception of the coating of all dishdrainers. In 1996, MPS recorded lower workers' compensation premiums, real estate and personal property taxes, and post-retirement benefit costs. Selling, general and administrative expenses decreased 2.5% to $3,933,000 in 1996 from $4,032,000 in 1995. The Company recorded lower professional service fees in 1996 including the reversal of $100,000 in legal fees accrued in 1995. As a result of the gross profit margin improvement and reductions in selling, general and administrative expenses discussed in the preceding paragraphs, income from operations increased 2.8% to $9,081,000 in 1996 from $8,832,000 in 1995. Packaging Products Segment Net revenues decreased 6.0% to $21,103,000 in 1996 from $22,458,000 in 1995. In 1995, the Company recorded revenues of $563,000 from the sale of bag making equipment, a product line which was discontinued in that year. The Company also recorded in 1995 additional revenues of $971,000 from the elimination of a one-month lag in financial reporting by its foreign subsidiaries. (The impact on operating income was not material.) Additionally, currency changes resulted in a reduction in revenues of $610,000 in 1996. Cost of revenues decreased 7.8% to $13,423,000 in 1996 from $14,554,000 in 1995. The decrease was primarily attributable to the decline in revenues. New equipment acquisitions in 1995 and 1996 permitted PPS to bring in-house to Statesville, North Carolina, the manufacture of certain components. This and other cost reduction programs improved gross profit margins. Selling, general and administrative expenses decreased 5.0% to $5,429,000 in 1996 from $5,713,000 in 1995. PPS had recorded a nonrecurring bad debt charge of $240,000 in 1995. As a result of the gross profit margin improvement and reductions in selling, general and administrative expenses discussed in the preceding paragraphs, income from operations increased 2.7% to $2,251,000 in 1996 from $2,191,000 in 1995. Construction Tool Segment Net revenues increased 12.3% to $38,015,000 in 1996 from $33,854,000 in 1995. Revenue growth was attributable to increased tool rentals, merchandise sales, and the sale of automatic taping tools. Cost of revenues increased .6% to $15,216,000 in 1996 from $15,125,000 in 1995. The Company recorded improved operating margins due to reduced ongoing repair expenses for rental tools, including lower parts consumption. This included a one-time gain of $329,000 recorded in the fourth quarter as a result of a change in the method of estimating tool repair costs for ATF tools in repair centers and on rent. Selling, general and administrative expenses increased 13.3% to $12,642,000 in 1996 from $11,160,000 in 1995. The increase was primarily attributable to added marketing programs and an increase in bad debt expense in conjunction with revenue growth. As a result of the changes discussed in the preceding paragraphs, income from operations increased 34.2% to $10,157,000 in 1996 from $7,569,000 in 1995. 16 Liquidity and Capital Resources The Company entered into a new bank credit agreement on June 27, 1996, which reduced the interest rate on its variable rate bank loans by 1.25% to 1.50%, depending on the maintaining of certain ratios and Subordinated Note repurchases. The new loan agreement originally consisted of a $25,000,000 term loan and up to $15,000,000 in available funds under a revolving credit loan. The term loan matures in equal quarterly installments with the final payment due on December 31, 2000. The Company negotiated an amendment to the agreement in 1997 to increase the revolving credit loan to $20,000,000. The increase in the revolving credit loan capacity provided the financing for the Company to repurchase and extinguish $9,250,000 in principal of its Subordinated Notes in May 1997. The Company had $4,500,000 outstanding on its revolving credit loan at December 31, 1997. Management believes that this financing provides better financial flexibility and will be sufficient to meet the Company's current expectations through the period of the agreement. The refinancing of the bank credit agreement in 1996 resulted in a writeoff of the unamortized deferred financing costs from the previous loan agreement. This amount, $614,000 net of tax, is identified as an extraordinary item in the Consolidated Statements of Income. The repurchase and extinguishment of the Subordinated Notes in 1997 resulted in a charge of $772,000, net of tax, also identified as an extraordinary item in the Consolidated Statements of Income. The Company has the option of redeeming all or a portion of its Subordinated Notes after March 15, 1997 with a 4.4% premium. This premium declines to 2.2% on March 15, 1998. The Company is negotiating with its banks to repurchase and extinguish an undetermined amount of the Notes in 1998, depending on certain factors, including pricing, the cost of the transaction, and prevailing interest rates. The revolving credit loan will be utilized to facilitate the transaction. At December 31, 1997, the Company had working capital of $3,824,000 compared to working capital of $7,362,000 at December 31, 1996. This decrease in working capital is due to a $4,278,000 increase in current maturities of long-term debt. The Company has classified its Revolving Credit Loan as current. The Revolving Credit Loan balance at December 31, 1997 was $4,500,000. There were no amounts outstanding on this loan at December 31, 1996 and the increase is due to the utilization of this line of credit to extinguish $9,250,000 in Subordinated Notes as discussed above. The Company is not required to pay off this balance prior to 2000. In addition, the Company received a tax refund of $1,266,000 in 1997 which had been included as a prepaid income tax item at December 31, 1996. At December 31, 1997, receivables increased $2,072,000 from December 31, 1996. Inventories also increased $69,000. In 1991, the New York State Department of Environmental Conservation (the "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. A feasibility study, prepared in 1994 by environmental consultants engaged by the Company, established a range of estimated remediation costs of $.7 million to $2.9 million, plus or minus 30% of those costs, with the most probable method of remediation being at the high end of the range. The Company established an accrual of $3.9 million for the costs of remediation. In 1997, the Company entered into an agreement with the party responsible for an adjoining site who also has been in the process of addressing concerns raised by NYSDEC which will transfer responsibility to remediate the formerly-owned property to the party remediating the adjoining site. The Company paid the $520,000 payable under the agreement and has an exposure of up to an additional $120,000 if pond sediment contamination is higher than estimated by the Company's environmental consultants. In the event the party responsible for the remediation of the adjoining site is unable to consummate an agreement with NYSDEC within one year of its agreement with the Company, the Company has the option of the return of its contribution to the remediation of the sites and pursuing its own remediation plan. Should NYSDEC not approve the joint remediation plan for both sites, the agreement can be nullified and funds returned to the Company. The Company has maintained its accruals pending finalization of the remediation plan of the adjoining site. The Company is pursuing contributions from directors and officers of other users of the previously owned property. No estimate can be given as to possible recovery. 17 Liquidity and Capital Resources (cont'd) As a result of dishrack 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 dishrack 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 dishrack components, lower volume dishracks, and other formed and coated wire products. During 1997 and 1996, the Company charged $624,000 and $980,000, 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, 1997, and management believes its current manufacturing operations are properly positioned to service current and future customers. Capital expenditures were $3,475,000 for the year ended December 31, 1997 compared to $3,862,000 for the year ended December 31, 1996. Cash provided by operating activities and credit availability is expected to be sufficient to cover the financing of anticipated capital requirements in future periods. While both the Bank Credit Agreement and the Indenture of AXIA Incorporated, issuer, ("Indenture") governing the Notes, restrict the Company's ability to incur additional indebtedness, management, based upon the budgets prepared by its business segments, believes that its cash flow from operations and its revolving loan capacity will be sufficient to meet its operational requirements, loan maturities and capital needs for 1998 and 1999. The Company was in compliance with all terms and restrictive covenants of its credit agreements as of December 31, 1997. Other Matters In 1997, the Financial Accounting Standards Board issued two new disclosure standards. Results of operations and financial position will be unaffected by implementation of these new standards. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") establishes standards for reporting and display of comprehensive income, its components, and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"), 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. Both of these new standards are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Due to the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, they may have on future financial statement disclosures. With the coming of the year 2000, there has been a great deal of publicity concerning computer hardware's and software's use of two-digit dates which might result in information reporting and equipment failure ("Year 2000"). Management is responsible for identifying the Company's computer systems affected by the Year 2000 issue and developing and executing a compliance plan. Operations within the Metal Products and Construction Tool segments have prepared and/or are in the process of implementing plans to replace current management information systems due to current hardware and software language obsolescence and the need to upgrade system capacities to management requirements. 18 As a result, both business segments expect to be Year 2000 compliant by the end of 1998. The operations within the Packaging Products segment have newer computer hardware and acquired software packages which management expects to upgrade during 1998. The Company has spent approximately $550,000 in 1997 and estimates spending an additional $850,000 in the aggregate in 1998 and 1999 to upgrade its management information systems. This report contains various forward-looking statements, including financial, operating and other projections. There are many factors that could cause actual results to differ materially, such as: adoption of new environmental laws and regulations and changes in the way such laws and regulations are interpreted and enforced; general business conditions, such as the level of competition, changes in demand for the Company's services and the strength of the economy in general. These and other factors are discussed in this report and other documents the Company has filed with the Securities and Exchange Commission. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company called for by this Item 8, together with the report thereon of the independent accountants dated February 25, 1998, are set forth on pages 20 to 45 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, 1997 and December 31, 1996 20 Consolidated Statements of Stockholder's Equity for the periods ended December 31, 1997, December 31, 1996, and December 31, 1995 21 Consolidated Statements of Income for the periods ended December 31, 1997, December 31, 1996, and December 31, 1995 22 Consolidated Statements of Cash Flows for the periods ended December 31, 1997, December 31, 1996, and December 31, 1995 23 Notes to the Consolidated Financial Statements 24-44 Independent Auditors' Report 45
19 AXIA INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND DECEMBER 31, 1996 (Dollars in thousands)
ASSETS 1997 1996 - ------ --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 1,310 $ 1,716 Accounts receivable, net 12,759 10,687 Inventories 9,155 9,086 Prepaid income taxes and other current assets 436 1,695 Deferred income tax assets 2,593 3,027 ------- ------- Total Current Assets $26,253 $26,211 ------- ------- PLANT AND EQUIPMENT, AT COST: Land $ 508 $ 521 Buildings and improvements 6,620 6,509 Machinery and equipment 24,741 23,149 Equipment leased to others 7,139 6,040 ------- ------- $39,008 $36,219 Less: Accumulated depreciation 14,938 11,346 ------- ------- Net Plant and Equipment $24,070 $24,873 ------- ------- OTHER ASSETS: Goodwill, net $33,505 $34,679 Intangible assets, net 703 377 Deferred charges, net 12,182 12,213 Investment in affiliate - 900 Other assets 60 78 ------- ------- Total Other Assets $46,450 $48,247 ------- ------- TOTAL ASSETS $96,773 $99,331 ======= ======= LIABILITIES AND STOCKHOLDER'S EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $10,925 $ 6,647 Accounts payable 4,021 3,655 Accrued liabilities 7,219 8,547 Accrued income taxes 264 - ------- ------- Total Current Liabilities $22,429 $18,849 ------- ------- NON-CURRENT LIABILITIES: Long-term debt, less current maturities $20,439 $34,548 Other non-current liabilities 10,883 11,050 Deferred income taxes 2,955 2,766 ------- ------- Total Non-Current Liabilities $34,277 $48,364 ------- ------- STOCKHOLDER'S EQUITY: Common stock, $.01 par value 100 shares issued and outstanding $ - $ - Additional paid-in capital 16,723 16,723 Retained earnings 23,818 15,395 Additional minimum pension liability (182) (324) Cumulative translation adjustment (292) 324 ------- ------- Total Stockholder's Equity $40,067 $32,118 ------- ------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $96,773 $99,331 ======= =======
The accompanying Notes to the Consolidated Financial Statements are an integral part of these balance sheets. 20 AXIA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE PERIODS ENDED DEC. 31, 1997, DEC. 31, 1996, AND DEC. 31, 1995 (Dollars in thousands)
Additional Minimum Common Stock Paid-in Retained Pension Translation Par Capital Earnings Liability Adjustments ------------ ---------- -------- --------- ----------- BALANCE, Dec. 31, 1994 $- $16,848 $ 3,644 $ - $ 304 === ======= ======= ===== ===== Net income - - - 4,889 - Stock repurchase - (125) - - - Cumulative translation adjustment - - - - 322 Other - - - (54) - --- ------- ------- ----- ----- BALANCE, Dec. 31, 1995 $- $16,723 $ 8,533 $ (54) $ 626 === ======= ======= ===== ===== Net income - - 6,862 - - Cumulative translation adjustment - - - - (302) Other - - - (270) - --- ------- ------- ----- ----- BALANCE, Dec. 31, 1996 $- $16,723 $15,395 $(324) $ 324 === ======= ======= ===== ===== Net income - - 8,423 - - Cumulative translation adjustment - - - - (616) Other - - - 142 - --- ------- ------- ----- ----- BALANCE, Dec. 31, 1997 $- $16,723 $23,818 $(182) $(292) === ======= ======= ===== =====
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. 21 AXIA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS ENDED DEC. 31, 1997, DEC. 31, 1996, AND DEC. 31, 1995 (Dollars in thousands)
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Net sales $ 77,418 $ 79,771 $ 81,914 Net rentals 27,382 25,016 22,412 -------- -------- -------- Net revenues $104,800 $104,787 $104,326 Cost of sales 50,518 52,434 55,171 Cost of rentals 9,626 8,860 9,658 Selling, general and administrative expenses 25,302 25,146 24,181 -------- -------- -------- Income from operations $ 19,354 $ 18,347 $ 15,316 Interest expense 3,710 5,123 6,596 Interest income (367) (39) (44) Other expense (income), net 404 57 537 -------- -------- -------- Income before income taxes and extraordinary item $ 15,607 $ 13,206 $ 8,227 Provision for income taxes 6,412 5,730 3,338 -------- -------- -------- Income before extraordinary item $ 9,195 $ 7,476 $ 4,889 Extraordinary item: Loss on early extinguishment of debt, net of income taxes of $479 and $410, respectively (see Notes 5 and 7) 772 614 - -------- -------- -------- Net Income $ 8,423 $ 6,862 $ 4,889 ======== ======== ========
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. 22 AXIA INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED DEC. 31, 1997, DEC. 31, 1996, AND DEC. 31, 1995 (Dollars in thousands)
Jan. 1, 1997 Jan. 1, 1996 Jan. 1, 1995 to to to Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,423 $ 6,862 $ 4,889 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 5,099 6,716 6,380 Extraordinary item-write off of deferred financing costs and original issue discount 826 1,024 - Deferred income tax provision (benefit) 623 398 753 Loss (gain) on disposal of fixed assets 159 14 184 Gain on sale of investment (559) - - Provision for losses on accounts receivable 2,169 1,499 1,049 Provision for obsolescence of inventories 79 592 (20) Credit to pension expense (231) (275) (166) Changes in assets and liabilities: Accounts receivable (4,557) (15) (1,291) Inventories (426) (501) (1,146) Accounts payable 442 (433) 651 Accrued liabilities (1,244) (437) (308) Other current assets (14) 270 (706) Income taxes payable 1,532 (151) 569 Other non-current assets (642) (176) (408) Other non-current liabilities 51 25 (479) -------- -------- ------- Net Cash Provided by Operating Activities $ 11,730 $ 15,412 $ 9,951 CASH FLOWS FROM INVESTING ACTIVITIES: Cash used for capital expenditures (3,475) (3,862) (3,853) Proceeds from sale of fixed assets 357 55 281 Proceeds from sale of investment 1,459 - - -------- -------- ------- Net Cash (Used in) Investing Activities $ (1,659) $ (3,807) $(3,572) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from other long-term debt 944 25,411 296 Payments of other long-term debt (15,931) (34,566) (7,374) Net increase in Revolving Credit Loan 4,500 - - Payments of deferred financing costs - (426) - Other equity transactions 37 (301) (166) -------- -------- ------- Net Cash (Used in) Financing Activities $(10,450) $ (9,882) $(7,244) EFFECT OF EXCHANGE RATE CHANGES ON CASH (27) (52) 38 -------- -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (406) $ 1,671 $ (827) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,716 45 872 -------- -------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,310 $ 1,716 $ 45 ======== ======== =======
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. 23 AXIA INCORPORATED AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1 Nature of Business AXIA Incorporated, the "Company," is a diversified manufacturer and marketer of (i) formed and coated wire products, material handling and storage equipment, (ii) specialized packaging machinery, and (iii) tools and other products for finishing drywall in new, manufactured, and renovated housing and commercial construction. On March 15, 1994, AXIA Incorporated (the "Predecessor Company") was acquired as part of a merger with a newly-formed company, Axia Acquisition Corp. ("Acquisition"), a Delaware corporation, with the surviving corporation continuing under the name AXIA Incorporated (the "Company", including reference to the Predecessor Company where appropriate). The Company is 100% owned by Axia Holdings Corporation ("Holdings"). Due to the substantial change in controlling interest in the Company, the Company reflected a complete change in its accounting basis of its assets and liabilities from Predecessor Company historical cost to estimated fair value as of March 15, 1994. NOTE 2 SIGNIFICANT ACCOUNTING POLICIES 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 AXIA INCORPORATED AND SUBSIDIARIES (the "Company"). All significant intercompany items are 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. Gains and losses resulting from foreign currency transactions, which are not material, are included in the Consolidated Statements of Income. 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. 24 NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (cont'd) Plant and Equipment Depreciation is provided over the following useful lives: Buildings and improvements........ 2-30 years Machinery and equipment........... 3-12 years Equipment leased to others........ 5-7 years 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. 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. 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 No. 109, "Accounting for Income Taxes" (SFAS 109), 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. 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 16 years. Goodwill represents the excess purchase price paid over the estimated fair value of the net assets acquired in the March 15, 1994 merger discussed Note 1. Goodwill is stated net of amortization and is being amortized on a straight-line basis for a period of not more than 40 years (see Note 5). Subsequent to its acquisition, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted operating income (before goodwill amortization) over the remaining life of the goodwill in measuring whether the goodwill is recoverable. 25 NOTE 2 SIGNIFICANT ACCOUNTING POLICIES (cont'd) New Accounting Pronouncements In 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The adoption of SFAS 121 did not have a material impact on the financial position or results of operations of the Company. In 1997, the Financial Accounting Standards Board issued two new disclosure standards. Results of operations and financial position will be unaffected by implementation of these new standards. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") establishes standards for reporting and display of comprehensive income, its components, and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"), 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. Both of these new standards are effective for financial statements for periods beginning after December 15, 1997, and require comparative information for earlier years to be restated. Due to the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, they may have on future financial statement disclosures. NOTE 3 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):
December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Balance, beginning of period $ 1,491 $ 1,140 $ 942 Additions, charged to income 2,169 1,499 1,049 Deductions, write-off of uncollectible accounts, net of recoveries (1,814) (1,148) (851) ------- ------- ------ Balance, end of period $ 1,846 $ 1,491 $1,140 ======= ======= ======
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. 26 NOTE 4 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 $528,000 and $546,000 as of December 31, 1997 and 1996, respectively, consist of (in thousands):
December 31, December 31, 1997 1996 ------------ ------------ Raw materials $4,146 $4,653 Work in process 1,058 854 Finished goods 3,951 3,579 ------ ------ Total inventories $9,155 $9,086 ====== ======
NOTE 5 GOODWILL, INTANGIBLE ASSETS AND DEFERRED CHARGES Goodwill, intangible assets and deferred charges consist of the following (in thousands):
December 31, December 31, 1997 1996 ------------ ------------ Goodwill $37,072 $37,380 Less amortization 3,567 2,701 ------- ------- Goodwill, net $33,505 $34,679 ======= ======= Patents $ 496 $ 529 Customer lists 223 223 Computer software 711 310 Other intangibles 340 301 ------- ------- Subtotal $ 1,770 $ 1,363 Less amortization 1,067 986 ------- ------- Intangible assets, net $ 703 $ 377 ======= ======= Prepaid pension costs $ 8,049 $ 7,690 Life insurance deposits 3,467 3,297 Deferred financing costs 1,040 1,632 Other deferred charges 161 147 ------- ------- Subtotal $12,717 $12,766 Less amortization 535 553 ------- ------- Deferred charges, net $12,182 $12,213 ======= =======
Total amortization expense related to the above assets was $1,236,000, $1,842,000 and $2,113,000 for the periods ended December 31, 1997, 1996, and 1995, respectively. As a result of the early extinguishment of debt as discussed in Note 7, the Company wrote off $314,000 and $1,024,000 of unamortized deferred financing costs in 1997 and 1996, respectively. 27 NOTE 6 ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
December 31, December 31, 1997 1996 ------------ ------------ Salaries, wages, vacations and payroll taxes $ 2,588 $ 2,445 Insurance 1,546 1,509 Other current liabilities 3,085 4,593 ------- ------- Total accrued liabilities $ 7,219 $ 8,547 ======= ======= NOTE 7 LONG-TERM DEBT Long-term debt, inclusive of capitalized lease obligations which are not material, is as follows (in thousands): December 31, December 31, 1997 1996 ------------ ------------ 11.00% Senior Subordinated Notes $ 9,749 $18,343 Term Loan 15,732 22,222 Revolving Credit Loan 4,500 - Other 1,383 630 ------- ------- Total Debt 31,364 41,195 Less: Current maturities 10,925 6,647 ------- ------- Total Long-Term Debt $20,439 $34,548 ======= =======
The Senior Subordinated Notes above are stated net of unamortized discounts of $501,000 and $1,157,000 as of December 31, 1997 and 1996, respectively. The carrying amount of the Term Loan approximates its fair value as the term notes bear interest at floating rates. The fair value of the Senior Subordinated Notes at December 31, 1997 was $10,701,000 as determined by market quotations. Other debt consists of a revolving line of credit for the Company's European operations and capitalized lease financing. Bank Credit Agreement On June 27, 1996, 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 $25,000,000 and a non-amortizing revolving credit loan ("Revolving Credit Loan") of up to $15,000,000, including up to $1,000,000 of letters of credit. The Company recorded a pre-tax charge of $1,024,000 representing the writeoff of unamortized deferred loan costs from its previous bank financing agreement. This charge, net of tax, is reflected as an extraordinary item in the accompanying Consolidated Statements of Income for the period ended December 31, 1996. The Bank Credit Agreement was amended in March 1997 to increase the Revolving Credit Loan availability to $20,000,000. Under the Bank Credit Agreement, the loans may, at the option of the Company, be either Base Rate borrowings, Eurodollar borrowings or a combination thereof. Base Rate borrowings bear interest at the prime rate or the Federal Funds rate plus 1.00%, whichever is higher, and Eurodollar borrowings bear interest at a rate of LIBOR plus 1.50%. In certain events defined in the agreement, the Eurodollar borrowing interest rate may be increased to LIBOR plus 1.75%. The Company pays a fee of .38% per annum on the unused balance of the line of credit. The Company can repay any borrowings at any time without penalty. The weighted average interest rates on all amounts outstanding under the Bank 28 NOTE 7 LONG-TERM DEBT (cont'd) Credit Agreement as of December 31, 1997 was 7.56%. Substantially all of the assets of the Company, ATTS, and TapeTech act as collateral under the Bank Credit Agreement. Subsequent to a scheduled mandatory Term Loan payment of $210,000 in February 1998 due to an asset sale, the Term Loan will have scheduled maturities of $1,294,000 quarterly, maturing with a final payment of $1,288,000 on December 31, 2000. The Revolving Credit Loan also terminates on December 31, 2000. Interest payments are generally due quarterly. The Company is required to prepay portions of the Term Loan in the event of a major asset sale, as defined in the Bank Credit Agreement. 11.00% Senior Subordinated Notes The 11.00% Senior Subordinated Notes were issued pursuant to a trust indenture (the "Indenture") between the Company, certain guarantors and a trustee bank and were sold to a group of private investors. Interest on the notes is payable semi-annually and the notes mature on March 15, 2001. The notes may be redeemed, at the Company's option, in full or in part, at a decreasing premium rate of 104.4% declining to 102.2% at March 15, 1998. A change of control of the Company, as defined, would require the Company to offer to redeem all notes at a 101% premium. In July 1994, the Company filed a Registration Statement with the Securities and Exchange Commission to register the Senior Subordinated Notes under the Securities Act of 1933. The Notes are guaranteed by all of the Company's domestic subsidiaries. See Note 17 for further information regarding these guarantees. In May 1997, the Company exercised its option to redeem and extinguish $9,250,000 of its Senior Subordinated Notes. The Company recorded a pretax charge of $1,251,000 representing the aforementioned redemption premium, the writeoff of capitalized financing costs associated with the original issuance of the notes, the applicable original issue discount, and legal expenses, agent fees, and other costs of the transaction. The charge, net of tax, is reflected as an extraordinary item in the accompanying Consolidated Statement of Income for the period ended December 31, 1997. Restrictive Loan Covenants The Bank Credit Agreement and the Indenture contain certain covenants which, among other things and all as defined in the applicable agreement, require the Company to maintain a minimum net worth, current ratio, interest coverage ratio, and fixed charge coverage ratio, and maximum leverage ratio of indebtedness to net worth. In addition, the Company may not create or incur certain types of additional debt or liens, declare dividends except as defined, or make capital expenditures or other restricted payments, as defined, during the term of the agreements in excess of varying amounts, as defined. The Company was in compliance with its loan covenants as of December 31, 1997. Scheduled Principal Payments Scheduled payments of principal of long-term debt outstanding at December 31, 1997, including capitalized lease obligations, are (in thousands):
December 31, 1997 ----------------------------------------- Revolving Senior Term Credit Subordinated Loan Loan Notes Other ------- --------- ------------ ------- 1998 $ 5,386 $4,500 $ - $1,039 1999 5,176 - - 139 2000 5,170 - - 135 2001 - - 9,749 70 ------- ------ ------ ------ Total $15,732 $4,500 $9,749 $1,383 ======= ====== ====== ======
29 NOTE 7 LONG-TERM DEBT (cont'd) The scheduled maturities above include a prepayment in 1998 of $210,000 related to the sale of assets as required in the Bank Credit Agreement. The amounts outstanding under revolving credit agreements are recorded as current maturities in the accompanying Consolidated Balance Sheets. The Company made the following interest payments for the periods ended December 31, 1997, December 31, 1996, and December 31, 1995 (in thousands):
December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Interest payments $3,551 $4,399 $5,780
NOTE 8 CAPITAL STOCK Subsequent to the merger and acquisition on March 15, 1994, the Company has 100 shares of common stock, par value $.01 per share, authorized, issued and outstanding, all of which are owned by Holdings. NOTE 9 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, December 31, Current Assets 1997 1996 - -------------- ------------ ------------ Inventory valuation $ 601 $ 652 Bad debt reserves 706 570 Insurance accruals 466 464 Rental tool repair 203 168 Environmental accrual 6 209 Facility realignment - 239 Tax accruals 50 76 Other, net 561 649 ------- ------- Total deferred tax asset $ 2,593 $ 3,027 ======= ======= Deferred Income Tax Assets (Liabilities) December 31, December 31, Noncurrent Assets (Liabilities) 1997 1996 - ------------------------------- ------------ ------------ Depreciation & amortization $(3,890) $(3,666) Pension plans (2,879) (2,661) Insurance accruals 382 420 Tax accruals 212 76 Post-retirement benefits (ex. pensions) 1,548 1,464 Environmental accrual 1,415 1,339 Other, net 257 262 ------- ------- Total deferred tax (liability), net $(2,955) $(2,766) ======= =======
30 NOTE 9 INCOME TAXES (cont'd) The components of the income tax provision, excluding the amount attributable to the extraordinary item, are as follows (in thousands):
December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ U.S. and state taxes payable $5,013 $4,700 $1,899 Foreign taxes payable 776 632 686 ------ ------ ------ Taxes currently payable $5,789 $5,332 $2,585 Deferred taxes, net 623 398 753 ------ ------ ------ Total provision $6,412 $5,730 $3,338 ====== ====== ======
A reconciliation between the statutory and the effective income tax rates, excluding the amount attributable to the extraordinary item, is as follows:
December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Statutory income tax rate 34.0% 34.0% 34.0% Non-deductible amortization 3.5 3.7 4.0 State income taxes, net of federal income tax benefit 2.5 3.1 2.2 Other, net 1.1 2.6 .4 ----- ----- ----- Effective income tax rate 41.1% 43.4% 40.6% ===== ===== =====
The Company made the following income tax payments, net of refunds, during the periods ended December 31, 1997, December 31, 1996, and December 31, 1995 (in thousands):
December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Income taxes paid (refunded) $3,795 $4,691 $2,561
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 NOTE 10 PENSION 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. The components of pension expense (credits) are as follows (in thousands):
December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Normal cost $ 1,127 $ 983 $ 799 Interest on beginning of period projected benefit obligation 1,726 1,679 1,680 Return on fund assets (3,095) (2,944) (2,581) Net amortization and deferrals 11 7 (4) Effect of curtailment - - (60) ------- ------- ------- Total credit to pension expense $ (231) $ (275) $ (166) ======= ======= =======
In 1995, the Company recorded a gain of $60,000 on the curtailment of an hourly pension plan as a result of the closure of a production facility. 32 NOTE 10 PENSION PLANS (cont'd.) A summary of the benefit obligations and plan assets is shown in the table below (in thousands):
December 31, December 31, 1997 1996 ------------------ ------------------ (A) (B) (A) (B) Actuarial present value of benefit obligations: Vested benefits $ 23,071 $ 3,910 $ 19,380 $ 3,644 Nonvested benefits 917 54 782 22 -------- ------- -------- ------- Accumulated benefit obligation $ 23,988 $ 3,964 $ 20,162 $ 3,666 Effect of projected future compensation levels 1,227 - 1,382 - -------- ------- -------- ------- Projected benefit obligation $ 25,215 $ 3,964 $ 21,544 $ 3,666 Less: Plan assets at fair value (33,460) (3,536) (29,077) (3,067) -------- ------- -------- ------- Plan assets (in excess)/less than projected benefit obligation $ (8,245) 428 $ (7,533) $ 599 Unrecognized prior service cost - (32) - (35) Unrecognized net actuarial (loss) gain 288 (295) (47) (524) Adjustment required to recognize minimum liability - 327 - 559 -------- ------- -------- ------- Net (asset) liability $ (7,957) $ 428 $ (7,580) $ 599 ======== ======= ======== =======
(A) Plans with Assets in excess of Accumulated Benefits (B) Plans with Accumulated Benefits in excess of Assets At December 31, 1997, the Company has recorded pension assets of $8,049,000 and liabilities of $520,000 in the Consolidated Balance Sheets. Calculations of 1997, 1996 and 1995 pension expense under the provisions of SFAS No. 87 assumed a settlement rate of 7.00%, 7.25% and 7.25%, respectively, and a long-term rate of return on plan assets of 10.0% for all years. 33 NOTE 11 POST-RETIREMENT BENEFITS OTHER THAN PENSIONS The Company sponsors three defined benefit post-retirement plans. The Company entered into employment agreements with 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 other provides 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, 1997 and 1996 (in thousands):
December 31, December 31, 1997 1996 ------------- ------------- Accumulated post-retirement benefit obligation: Retirees $(3,353) $(3,231) Fully eligible active plan participants (488) (421) Other active plan participants (262) (233) ------- ------- Total post-retirement benefit obligation $(4,103) $(3,885) Plan assets at fair value - - Accumulated post-retirement benefit obligation in excess of plan assets $(4,103) $(3,885) ------- ------- Accrued post-retirement benefit cost $(4,103) $(3,885) ======= ======= Net periodic post-retirement benefit cost included the following components: Service cost - benefits attributed to service during the period $ 85 $ (104) Interest cost on accumulated post-retirement benefit obligation 224 265 ------- ------- Net periodic post-retirement benefit cost $ 309 $ 161 ======= =======
The Company entered into Salary Continuation Agreements with certain 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 current salary or salary at the date of retirement. The total post-retirement benefit obligation of this benefit program included in the table above is $3,544,000 and $3,398,000 at December 31, 1997 and 1996, respectively. 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. The Company, in accordance with a union contract, provides prescription drug benefits at one of its plants. For measurement purposes, a 7 percent annual rate of increase in the per capita cost of covered prescription drug benefits was assumed for 1997 and 1996 and for each year thereafter. 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, 1997 by approximately $78,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for the year then ended by approximately $7,900. The discount rate used in determining the accumulated post-retirement benefit obligation was 8.5% in 1997 and 1996. 34 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):
December 31, 1997 ------------ 1998 $1,983 1999 1,293 2000 891 2001 644 2002 537 Subsequent years 1,185 ------ Total $6,533 ======
The Company incurred the following expense for operating leases for the periods ended December 31, 1997, December 31, 1996, and December 31, 1995 (in thousands):
December 31, December 31, December 31, 1997 1996 1995 ------------ ------------ ------------ Lease expense $2,369 $2,339 $2,298
NOTE 13 BUSINESS SEGMENTS The Company currently conducts its operations through three business segments: Metal Products Segment ("MPS"), Packaging Products Segment ("PPS") and Construction Tool Segment ("CTS"). MPS manufactures dishwasher baskets and other formed and coated wire products, conveyors, and stackable storage racks. PPS produces industrial packaging equipment and systems, and CTS manufactures, sells or rents a broad line of construction tools and equipment, and drywall tape and taping tool systems for finishing gypsum wallboard. One of the Metal Products Segment's dishrack customers accounted for 20%, 19% and 20% of the Company's revenues for 1997, 1996 and 1995, respectively. Dishrack customers, as a group, accounted for 23%, 27% and 32% of the Company's revenues for 1997, 1996 and 1995, respectively. Another customer of the Metal Products Segment who purchases dishdrainers and other products accounted for 10%, 11% and 8% of the Company's revenues for 1997, 1996 and 1995, respectively. The Metal Products Segment competes directly with the dishwasher manufacturer's in-house manufacturing capability. Frigidaire, General Electric and Whirlpool, major dishwasher manufacturers, have dishrack manufacturing capability. Because MPS is competing against the self-manufacture of its product by larger companies with more extensive financial resources, MPS competes on quality, flexibility and innovation. As a result of dishrack 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 for dishracks by a new 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 dishrack components, lower volume dishracks, and other formed and coated wire products. During 1997 and 1996, the Company charged $624,000 and $980,000, 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, 1997, and management believes its current manufacturing operations are properly positioned to service current and future customers. 35 NOTE 13 BUSINESS SEGMENTS (cont'd) A summary of segment data for the periods ended December 31, 1997, 1996, and 1995 is as follows (in thousands):
Metal Packaging Construction Corporate Products Products Tool and Segment Segment Segment Eliminations Consolidated -------- --------- ------------ ------------ ------------ Period ended December 31, 1997: Net revenues $40,553 $21,819 $42,428 $ - $104,800 Income from operations 7,260 3,153 11,693 (2,752) 19,354 Identifiable assets 40,960 16,054 27,969 11,790 96,773 Depreciation and amortization 2,179 644 1,860 416 5,099 Capital expenditures 1,394 265 1,813 3 3,475 ======= ======= ======= ======= ======== Period ended December 31, 1996: Net revenues $45,669 $21,103 $38,015 $ - $104,787 Income from operations 9,081 2,251 10,157 (3,142) 18,347 Identifiable assets 41,244 16,024 26,476 15,587 99,331 Depreciation and amortization 3,581 596 1,789 750 6,716 Capital expenditures 255 719 2,807 81 3,862 ======= ======= ======= ======= ======== Period ended December 31, 1995: Net revenues $48,014 $22,458 $33,854 $ - $104,326 Income from operations 8,832 2,191 7,569 (3,276) 15,316 Identifiable assets 46,996 16,371 24,071 15,850 103,288 Depreciation and amortization 3,409 439 1,484 1,048 6,380 Capital expenditures 2,055 500 1,297 1 3,853 ======= ======= ======= ======= ========
36 NOTE 14 GEOGRAPHICAL DATA The Company conducts the majority of its business within the United States. The Packaging Products Segment has operations in various other countries, primarily in Europe and Singapore. The Construction Tool Segment also conducts business in Canada. Activity in any single country or area outside of the United States is not material. Export sales outside of the United States to unaffiliated customers are less than 10% of sales. A summary of geographical data for the periods ended December 31, 1997, 1996, and 1995 is as follows (in thousands):
Corporate and Domestic Foreign Eliminations Consolidated -------- ------- ------------ ------------ Period ended December 31, 1997: Net revenues $92,265 $12,535 $ - $104,800 Income from operations 20,387 1,719 (2,752) 19,354 Identifiable assets 79,327 5,656 11,790 96,773 Depreciation and amortization 4,610 73 416 5,099 Capital expenditures 3,323 149 $ 3 $ 3,475 ======= ======= ======= ======== Period ended December 31, 1996: Net revenues $91,307 $13,480 $ - $104,787 Income from operations 19,877 1,612 (3,142) 18,347 Identifiable assets 77,775 5,969 15,587 99,331 Depreciation and amortization 5,896 70 750 6,716 Capital expenditures 3,697 84 81 3,862 ======= ======= ======= ======== Period ended December 31, 1995: Net revenues $89,613 $14,713 $ - $104,326 Income from operations 16,458 2,134 (3,276) 15,316 Identifiable assets 81,053 6,385 15,850 103,288 Depreciation and amortization 5,258 74 1,048 6,380 Capital expenditures 3,790 62 1 3,853 ======= ======= ======= ========
37 NOTE 15 CONTINGENCY The Company is subject to various federal, state and local laws and regulations governing the use, discharge and disposal of hazardous materials. Including the item discussed below, compliance with current laws and regulations has not had, and is not expected to have, a material adverse effect on the Company's financial condition or operating results. In 1991, the New York State Department of Environmental Conservation (the "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. A feasibility study, prepared in 1994 by environmental consultants engaged by the Company, established a range of estimated remediation costs of $.7 million to $2.9 million, plus or minus 30% of those costs, with the most probable method of remediation being at the high end of the range. The Company established an accrual of $3.9 million for the costs of remediation. In 1997, the Company entered into an agreement with the party responsible for an adjoining site who also have been in the process of addressing concerns raised by NYSDEC which will transfer responsibility to remediate the formerly- owned property to the party remediating the adjoining site. The Company paid the $520,000 payable under the agreement and has an exposure of up to an additional $120,000 if pond sediment contamination is higher than estimated by the Company's environmental consultants. In the event the party responsible for the remediation of the adjoining site is unable to consummate an agreement with NYSDEC within one year of its agreement with the Company, the Company has the option of the return of its contribution to the remediation of the sites and pursuing its own remediation plan. Should NYSDEC not approve the joint remediation plan for both sites, the agreement can be nullified and funds returned to the Company. The Company has maintained its accruals pending finalization of the remediation plan of the adjoining site. The Company is pursuing contributions from directors and officers of other users of the previously owned property. No estimate can be given as to possible recovery. NOTE 16 RELATED PARTY TRANSACTIONS The Company is wholly-owned by Holdings. The Company has entered into an agreement with beneficial owners of Holdings shares as described herein. The Company believes that the services provided are on terms at least as favorable to the Company as it could obtain from unaffiliated third parties. The Company has entered into a Management Agreement (the "Management Agreement") with Cortec Capital Corporation ("CCC"), a beneficial owner of 59.1% of Holdings, for certain management and financial services. Pursuant to the Management Agreement, CCC will provide the Company with professional and administrative advice in areas relating to the Company's business, including finance, budgeting, risk management, business planning, manufacturing, sales, marketing, staffing levels and acquisitions. CCC will receive a quarterly fee of 1% of the Company's net sales, not to exceed $125,000. The Management Agreement continues until March 31, 2001, and thereafter for successive one year periods unless terminated by either party. Total fees and reimbursed expenses for these services were $500,551, $504,959 and $458,662 in 1997, 1996 and 1995, respectively, and are included in selling, general and administrative expenses in the Consolidated Statements of Income. 38 NOTE 17 SUBSIDIARY GUARANTEES 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 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. 39 CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1997 (Dollars in thousands)
Parent and its Guarantor Non-guarantor Consolidated Divisions Subsidiaries Subsidiaries Eliminations Totals ---------- ------------ ------------ ------------ ------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ (88) $ 925 $ 420 $ 53 $ 1,310 Accounts receivable, net 5,121 5,018 3,110 (490) 12,759 Inventories 6,175 1,641 1,789 (450) 9,155 Prepaid income taxes and other current assets 208 144 84 - 436 Deferred income tax assets 2,593 - - - 2,593 ------- ------- ------ -------- ------- Total Current Assets $14,009 $ 7,728 $5,403 $ (887) $26,253 ------- ------- ------ -------- ------- PLANT AND EQUIPMENT, AT COST: Land $ 508 $ - $ - $ - $ 508 Buildings and improvements 6,293 18 309 - 6,620 Machinery and equipment 23,703 571 467 - 24,741 Equipment leased to others 7,128 - 11 - 7,139 ------- ------- ------ -------- ------- $37,632 $ 589 $ 787 $ - $39,008 Less: Accumulated depreciation 13,994 395 549 - 14,938 ------- ------- ------ -------- ------- Net Plant and Equipment $23,638 $ 194 $ 238 $ - $24,070 ------- ------- ------ -------- ------- OTHER ASSETS: Goodwill, net $30,922 $ 2,571 $ 12 $ - $33,505 Intangible assets, net 678 25 - - 703 Deferred charges, net 11,187 992 3 - 12,182 Investment in wholly-owned subsidiaries 16,038 - - (16,038) - Investment in affiliates - - - - - Other assets 60 - - - 60 ------- ------- ------ -------- ------- Total Other Assets $58,885 $ 3,588 $ 15 $(16,038) $46,450 ------- ------- ------ -------- ------- TOTAL ASSETS $96,532 $11,510 $5,656 $(16,925) $96,773 ======= ======= ====== ======== ======= LIABILITIES AND STOCKHOLDER'S EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $10,565 $ 36 $ 324 $ - $10,925 Accounts payable 3,124 410 924 (437) 4,021 Accrued liabilities 5,920 950 349 - 7,219 Accrued income taxes 138 - 126 - 264 Advance account 1,726 (937) (789) - - ------- ------- ------ -------- ------- Total Current Liabilities $21,473 $ 459 $ 934 $ (437) $22,429 ------- ------- ------ -------- ------- NON-CURRENT LIABILITIES: Long-term debt, less current maturities $20,414 $ 25 $ - $ - $20,439 Other non-current liabilities 10,883 - - - 10,883 Deferred income taxes 2,955 - - - 2,955 ------- ------- ------ -------- ------- Total Non-Current Liabilities $34,252 $ 25 $ - $ - $34,277 ------- ------- ------ -------- ------- STOCKHOLDER'S EQUITY (DEFICIT): Common stock and additional paid-in capital $16,723 $ 5,098 $1,770 $ (6,868) $16,723 Retained earnings 24,266 5,928 3,244 (9,620) 23,818 Additional minimum pension liability (182) - - - (182) Cumulative translation adjustment - - (292) - (292) ------- ------- ------ -------- ------- Total Stockholder's Equity (Deficit) $40,807 $11,026 $4,722 $(16,488) $40,067 ------- ------- ------ -------- ------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) $96,532 $11,510 $5,656 $(16,925) $96,773 ======= ======= ====== ======== =======
40 CONSOLIDATING STATEMENT OF INCOME 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 $ 40,916 $ 8,683 $ 7,300 $ (6,381) $ 50,518 Cost of rentals 3,156 20,895 621 (15,046) 9,626 Selling, general and administrative expenses 14,344 8,063 2,895 - 25,302 -------- ------- ------- -------- -------- Income 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 before income taxes $ 13,706 $ 3,354 $ 1,322 $ (2,775) $ 15,607 Provision for income taxes 4,558 1,295 559 - 6,412 -------- ------- ------- -------- -------- Income before extraordinary item $ 9,148 $ 2,059 $ 763 $ (2,775) $ 9,195 ======== ======= ======= ======== ========
CONSOLIDATING STATEMENT OF CASH FLOWS 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 FLOW 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 (DECREASE) INCREASE 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 ======== ======= ======= ======== ========
41 CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1996 (Dollars in thousands)
Parent and its Guarantor Non-guarantor Consolidated Divisions Subsidiaries Subsidiaries Eliminations Totals --------- ------------ ------------- ------------ ------------ ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 407 $ 507 $ 802 $ - $ 1,716 Accounts receivable, net 3,681 4,673 2,472 (139) 10,687 Inventories 5,892 1,422 2,268 (496) 9,086 Prepaid income taxes and other current assets 1,513 127 55 - 1,695 Deferred income tax assets 3,027 - - - 3,027 ------- ------- ------ -------- ------- Total Current Assets $14,520 $ 6,729 $5,597 $ (635) $26,211 ------- ------- ------ -------- ------- PLANT AND EQUIPMENT, AT COST: Land $ 521 $ - $ - $ - $ 521 Buildings and improvements 6,200 18 291 - 6,509 Machinery and equipment 22,419 500 230 - 23,149 Equipment leased to others 6,026 - 14 - 6,040 ------- ------- ------ -------- ------- $35,166 $ 518 $ 535 $ - $36,219 Less: Accumulated depreciation 10,860 305 181 - 11,346 ------- ------- ------ -------- ------- Net Plant and Equipment $24,306 $ 213 $ 354 $ - $24,873 ------- ------- ------ ------------ ------- OTHER ASSETS: Goodwill, net $32,037 $ 2,642 $ - $ - $34,679 Intangible assets, net 330 47 - - 377 Deferred charges, net 11,271 924 18 - 12,213 Investment in wholly-owned subsidiaries 13,829 - - (13,829) - Investment in affiliates 900 - - - 900 Other assets 78 - - - 78 ------- ------- ------ -------- ------- Total Other Assets $58,445 $ 3,613 $ 18 $(13,829) $48,247 ------- ------- ------ -------- ------- TOTAL ASSETS $97,271 $10,555 $5,969 $(14,464) $99,331 ======= ======= ====== ======== ======= LIABILITIES AND STOCKHOLDER'S EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt $ 6,606 $ 41 $ - $ - $ 6,647 Accounts payable 2,610 466 718 (139) 3,655 Accrued liabilities 7,250 588 709 - 8,547 Accrued income taxes (30) - 30 - - Advance account 255 449 (704) - - ------- ------- ------ -------- ------- Total Current Liabilities $16,691 $ 1,544 $ 753 $ (139) $18,849 ------- ------- ------ -------- ------- NON-CURRENT LIABILITIES: Long-term debt, less current maturities $34,504 $ 44 $ - $ - $34,548 Other non-current liabilities 11,050 - - - 11,050 Deferred income taxes 2,766 - - - 2,766 ------- ------- ------ -------- ------- Total Non-Current Liabilities $48,320 $ 44 $ - $ - $48,364 ------- ------- ------ ------------ ------- STOCKHOLDER'S EQUITY (DEFICIT): Common stock and additional paid-in capital $16,723 $ 5,098 $2,000 $ (7,098) $16,723 Retained earnings 15,861 3,869 2,892 (7,227) 15,395 Additional minimum pension liability (324) - - - (324) Cumulative translation adjustment - - 324 - 324 ------- ------- ------ -------- ------- Total Stockholder's Equity (Deficit) $32,260 $ 8,967 $5,216 $(14,325) $32,118 ------- ------- ------ -------- ------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) $97,271 $10,555 $5,969 $(14,464) $99,331 ======= ======= ====== ======== =======
42 CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (Dollars in thousands)
Parent and its Guarantor Non-guarantor Consolidated Divisions Subsidiaries Subsidiaries Eliminations Totals ---------- ------------ ------------- ------------- ------------ Net sales $61,031 $12,995 $12,523 $ (6,778) $ 79,771 Net rentals 13,768 24,037 957 (13,746) 25,016 ------- ------- ------- -------- -------- Net revenues $74,799 $37,032 $13,480 $(20,524) $104,787 Cost of sales $43,560 $ 7,860 $ 7,729 $ (6,715) $ 52,434 Cost of rentals 2,589 19,404 613 (13,746) 8,860 Selling, general and administrative expenses 14,602 7,018 3,526 - 25,146 ------- ------- ------- -------- -------- Income from operations $14,048 $ 2,750 $ 1,612 $ (63) $ 18,347 Interest expense 5,100 9 14 - 5,123 Intercompany interest expense (income) (80) 80 - - - Other expense (income), net (2,598) 41 224 2,351 18 ------- ------- ------- -------- -------- Income before income taxes $11,626 $ 2,620 $ 1,374 $ (2,414) $ 13,206 Provision for income taxes 3,955 1,210 565 - 5,730 ------- ------- ------- -------- -------- Income before extraordinary item $ 7,671 $ 1,410 $ 809 $ (2,414) $ 7,476 ======= ======= ======= ======== ========
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (Dollars in thousands)
Parent and its Guarantor Non-guarantor Consolidated Divisions Subsidiaries Subsidiaries Eliminations Totals ---------- ------------- ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 14,036 $1,034 $ 342 $ - $ 15,412 CASH FLOW FROM INVESTING ACTIVITIES: Cash used for capital expenditures (3,675) (103) (84) - (3,862) Proceeds from sale of fixed assets 55 - - - 55 -------- ------ ----- ------------- -------- Net Cash Used In Investing Activities $ (3,620) $ (103) $ (84) $ - $ (3,807) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in Revolving Credit Loan - - - - - Proceeds from other long-term debt 25,375 36 - - 25,411 Payments of other long-term debt (34,532) (34) - - (34,566) Dividends received from (paid by) subsidiaries 191 - (191) - - Payments of deferred financing costs (426) - - - (426) Net increase (decrease) in advance account 673 (680) 7 - - Other equity transactions (300) - (1) - (301) -------- ------ ----- ------------- -------- Net Cash Used In Financing Activities $ (9,019) $ (678) $(185) $ - $ (9,882) EFFECT OF EXCHANGE RATE CHANGES ON CASH - - (52) - (52) -------- ------ ----- ------------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ 1,397 $ 253 $ 21 $ - $ 1,671 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (990) 254 781 - 45 -------- ------ ----- ------------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 407 $ 507 $ 802 $ - $ 1,716 ======== ====== ===== ============= ========
43 CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (Dollars in thousands)
Parent and its Guarantor Non-guarantor Consolidated Divisions Subsidiaries Subsidiaries Eliminations Totals --------- ------------ ------------- ------------ ------------ Net sales $62,211 $11,840 $13,736 $ (5,873) $ 81,914 Net rentals 12,179 21,394 977 (12,138) 22,412 ------- ------- ------- -------- -------- Net revenues $74,390 $33,234 $14,713 $(18,011) $104,326 Cost of sales $45,780 $ 6,985 $ 8,395 $ (5,989) $ 55,171 Cost of rentals 3,488 17,843 465 (12,138) 9,658 Selling, general and administrative expenses 14,410 6,052 3,719 -- 24,181 ------- ------- ------- -------- -------- Income from operations $10,712 $ 2,354 $ 2,134 $ 116 $ 15,316 Interest expense 6,556 9 31 -- 6,596 Intercompany interest expense (income) (145) 145 -- -- -- Other expense (income), net (2,149) 182 394 2,066 493 ------- ------- ------- -------- -------- Income before income taxes $ 6,450 $ 2,018 $ 1,709 $ (1,950) $ 8,227 Provision for income taxes 1,677 975 686 -- 3,338 ------- ------- ------- -------- -------- Net income $ 4,773 $ 1,043 $ 1,023 $ (1,950) $ 4,889 ======= ======= ======= ======== ========
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 (Dollars in thousands)
Parent and its Guarantor Non-guarantor Consolidated Divisions Subsidiaries Subsidiaries Eliminations Totals --------- ------------ ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES $ 7,741 $ 546 $ 1,664 $ -- $ 9,951 CASH FLOW FROM INVESTING ACTIVITIES: Cash used for capital expenditures (3,560) (234) (59) -- (3,853) Proceeds from sale of fixed assets 243 38 -- -- 281 ------- ------- ------- -------- -------- Net Cash Used In Investing Activities $(3,317) $ (196) $ (59) $ -- $ (3,572) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in Revolving Credit Loan -- -- -- -- -- Proceeds from other long-term debt 213 83 -- -- 296 Payments of other long-term debt (7,374) -- -- -- (7,374) Dividends received from (paid by) subsidiaries 4,195 (3,171) (1,024) -- -- Net increase (decrease) in advance account (2,316) 2,488 (172) -- -- Other equity transactions (201) 23 12 -- (166) ------- ------- ------- -------- -------- Net Cash Used In Financing Activities $(5,483) $ (577) $(1,184) $ -- $ (7,244) EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- 38 -- 38 ------- ------- ------- -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $(1,059) $ (227) $ 459 $ -- $ (827) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 69 481 322 -- 872 ------- ------- ------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ (990) $ 254 $ 781 $ -- $ 45 ======= ======= ======= ======== ========
44 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Stockholders and Board of Directors of AXIA Incorporated: We have audited the accompanying consolidated balance sheets of AXIA INCORPORATED (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 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 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois February 25, 1998 45 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 The following table provides certain summary information with respect to compensation paid to or accrued by the Company on behalf of the Company's Chief Executive Officer and the four other most highly compensated executive officers of the Company for the year ended December 31, 1997: Summary Compensation Table
Annual Compensation ------------------------------------- Other Annual Name and Position Held (1) Salary Bonus (2) Compensation (3) - -------------------------- -------- -------- ---------------- Dennis W. Sheehan 1997 $336,000 $200,000 $19,837 President/CEO 1996 $336,000 $200,000 $19,626 1995 $336,000 $100,000 $20,143 Lyle J. Feye 1997 $140,500 $ 45,000 $10,210 Vice President Finance 1996 $134,208 $ 45,000 $10,183 & Treasurer 1995 $127,709 $ 28,000 $10,150 Robert G. Zdravecky 1997 $171,500 $ 62,640 $11,766 President & General Manager, 1996 $163,333 $ 67,500 $11,664 Ames division, ATTS 1995 $154,165 $ 22,100 $10,767 & TapeTech David H. Chesney 1997 $166,900 $ 25,000 $ 9,317 President & General Manager, 1996 $158,875 $114,000 $ 9,202 Nestaway division 1995 $152,502 $ 67,900 $ 8,731 Ian G. Wilkins 1997 $163,083 $ 48,000 $ 8,611 President & General Manager, 1996 $155,250 $ 52,000 $ 9,339 Fischbein & Flexible Material 1995 $145,835 $ 22,100 $ 9,145 Handling divisions
- --------------------------- (1) Since 1994, these individuals did not receive any restricted stock awards or options. (2) The Company provides a bonus plan with bonus payments to be made in cash. (3) Includes payments for life insurance and automobile allowance. There are no independent directors of the Company and therefore no directors receive remuneration for their services in that capacity. 46 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, 1997, the number of years of credited service for the indicated persons are: Mr. Sheehan, 19.08 years; Mr. Feye, 8.33 years; Mr. Zdravecky, 9.08 years, Mr. Chesney, 5.83 years and Mr. Wilkins, 2.58 years. 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: Pension Table
Years of Service --------------------------------------------- Remuneration 10 15 20 25 30 ------------ ------- ------- ------- -------- -------- $125,000 $22,568 $33,852 $45,136 $ 56,420 $ 67,704 $150,000 27,568 41,352 55,136 68,920 82,704 $175,000 32,568 48,852 65,136 81,420 97,704 $200,000 37,568 56,352 75,136 93,920 112,704 $225,000 42,568 63,852 85,136 106,420 127,704
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 $6,287 for 1997. Salary Continuation (Death Benefit) In order to attract and encourage key executives to remain with the Company, the Company instituted a salary continuation (death benefit) program which provides certain key executives with a death benefit, contingent upon employment or service as a consultant with the Company until retirement or death. 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 percent of the executive's current annual salary or salary at date of retirement. The Company may terminate the death benefit program and the agreement with any executive at any time prior to the executive's death, disability or retirement, except that, during the three year period following certain events involving a "change of control" of the Company, only a portion of those benefits may be terminated. 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 1997 with respect to Mr. Sheehan, was approximately $53,839; 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. Mr. Sheehan is the only active executive covered by this program. 47 Termination of Employment and Change in Control Agreements The Company has an employment agreement with Mr. Sheehan. Mr. Sheehan's agreement is for a five-year term commencing June 15, 1993. The agreement provides for an annual base salary that is subject to annual upward adjustment at the discretion of the Company. Such salary for 1997 is reflected in the Summary Compensation Table. Unless the employee is terminated for cause, or the employee voluntarily terminates his employment, upon termination of employment, the Company is obligated to make severance payments. For Mr. Sheehan, such severance payments shall be equal to his base salary for the duration of the agreement, or twelve months, whichever is longer. 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 base annual salary and percentage eligibility 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 directors. Stock Options Holdings has granted stock options to certain employees who have the option to purchase restricted shares of common stock of Holdings in the aggregate of approximately 4% of the common stock on a fully diluted basis. Bonus Agreement The Company has entered into a bonus agreement with certain executive officers which provides for a cash bonus in the event that a defined internal rate of return is achieved on the original investments made on the date of the Transaction. The bonus is payable upon the sale of all or substantially all of the shares of common stock of Holdings and for the assets of Holdings. The bonus amount for each executive is equal to 1% of the aggregate cash purchase price paid for the shares or the amount distributed to shareholders as a liquidation dividend upon the sale of the assets of Holdings, net of all related transaction expenses. 48 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Guarantors are wholly-owned by the Company and the Company is wholly-owned by Holdings. The following sets forth the beneficial ownership of the common stock of Holdings as of December 31, 1997, by (a) each person who is known by Holdings to beneficially own more than 5% of such common stock, (b) each of the Company's and the Guarantors' directors and executive officers, and (c) all directors and executive officers of the Company and the Guarantors as a group.
Title of Class Number of Shares Percent of of Common Stock Beneficial Owner Beneficially Owned Total Shares (1) - --------------- ----------------------------------- ------------------ ---------------- A Cortec Group Fund, L.P. (2) 354,483 59.1% 200 Park Avenue New York, New York 10028 A Donaldson, Lufkin and Jenrette (3) 77,987 13.0% Securities Corporation 140 Broadway New York, New York 10005 A Dennis W. Sheehan (4) 50,859 8.5% c/o AXIA Incorporated 100 West 22nd Street, Suite 134 Lombard, Illinois 60148 A Lyle J. Feye (6) 2,659 .4% c/o AXIA Incorporated 100 West 22nd Street, Suite 134 Lombard, Illinois 60148 A Robert G. Zdravecky (7) 1,912 .3% c/o AXIA Incorporated 100 West 22nd Street, Suite 134 Lombard, Illinois 60148 A T. Richard Fishbein (5) 13,293 2.2% c/o Cortec Group Inc. 200 Park Avenue New York, New York 10028 All officers and directors 68,723 11.5% as a group (4 persons)
(1) Gives effect to the conversion of outstanding Class B Common Stock into Class A Common Stock. Prior to such conversion, Cortec Group Fund, L.P. ("Cortec"), Donaldson, Lufkin & Jenrette Securities Corporation, Dennis W. Sheehan and all directors and officers as a group own beneficially 64.9%, 14.3%, 9.3%, and 12.6%, respectively, of the outstanding Class A Common Stock consisting of 546,400 shares. All of the 53,173 shares of Class B Common Stock are owned by Indosuez Axia Holding, Partners. Class B Common Stock is non-voting stock, and, subject to limitations described in this note, is fully convertible at any time at the option of the holder into an equal number of shares of Class A Common Stock. Upon a conversion of all of the Class B Common Stock, such shares would constitute 8.9% of the total Class A Common Stock. Paragraph C(ii) of Holdings' certificate of incorporation provides that no holder of non-voting common stock may convert any such shares into voting common stock to the extent that, as a result of such conversion, such holder and its affiliates, directly or indirectly, would own, control or have the power to vote a greater number of shares of voting common stock than such holder and its affiliates are permitted to own, control or have the power to vote under any law, rule, 49 regulation or other requirement of any governmental authority applicable to such holder or its affiliates. Indosuez Axia Holding, Partners has advised Holdings that it is subject to the provisions of Regulation Y of the Board of Governors of the Federal Reserve System, which restricts it from owning more than 5% of any class of voting securities. An affiliate of Indosuez Axia Holding, Partners is the Agent for the Bank Facilities. (2) Includes the 311,946 shares of Common Stock owned by Cortec and the 42,537 shares beneficially owned by certain officers and employees of Cortec Capital Corp., the general partner of Cortec, including persons who serve as directors of Holdings. See "Stockholders Agreements" below. Cortec Capital Corp., the general partner of Cortec disclaims beneficial ownership of Cortec's shares, except to the extent of its percentage ownership of the partnership. (3) Includes shares held by DLJ First ESC L.L.C., DLJ Capital Corporation and employees of DLJ or its affiliates. (4) Mr. Sheehan is Chairman, President and Chief Executive Officer of the Company. (5) Mr. Fishbein is a Director of the Company and a partner in Cortec. The number of shares presented includes 886 shares owned by Mr. Fishbein's daughter, but does not include the 311,946 shares owned by the Cortec Group Fund or 29,244 shares beneficially owned by certain officers and employees of Cortec Capital Corp., or its affiliates. (6) Mr. Feye is Vice President, Chief Financial Officer, and Treasurer of the Company. (7) Mr. Zdravecky is President and General Manager of the Ames division and President of ATTS and TapeTech. Stockholders Agreements Holdings and the holders of the common stock of Holdings ("Holdings Common Stock") have entered into various stockholders agreements for the purpose of regulating certain aspects of the relationships of such stockholders. In general, the stockholders agreements have provisions which relate to certain registration rights, "tag-along" obligations and "drag-along" rights. Pursuant to the stockholders agreements, Cortec Group Fund, L.P. ("Cortec") has granted all stockholders except those stockholders whose Holdings Common Stock is beneficially owned by Cortec, "tag-along" rights pursuant to which such holders will have the option of participating in a sale by Cortec (other than sales to affiliates of Cortec) of Holdings Common Stock on terms and conditions substantially similar to the terms and conditions agreed to by Cortec. With respect to certain employee stockholders (including the director of the Company), the "tag-along" provision is applicable in connection with a sale of any or all of the Holdings Common Stock owned by Cortec. With respect to the other stockholders, the provision is applicable only upon a sale by Cortec of 20% or more of its Holdings Common Stock. The stockholders agreements also provide that if Cortec desires to sell all of its Holdings Common Stock, Cortec can require the other stockholders to sell their Holdings Common Stock simultaneously with and, on the same terms as, the sale by Cortec. The stockholders agreements for holders whose Holdings Common Stock is beneficially owned by Cortec provides that, until March 15, 2004, each such holder will vote its shares in the same manner that Cortec votes its shares. Certain officers of Cortec have been appointed as proxy to vote such stock in accordance with the terms of the agreement. The stockholders agreements with certain employees (including the director of the Company) also contain provisions (i) restricting the transfer of Holdings Common Stock, (ii) granting a right of first offer to Holdings to purchase its Common Stock, and (iii) granting certain "piggy-back" registration rights. 50 Finally, the stockholders agreements entered into with certain stockholders (other than the employees and the stockholders whose Holdings Common Stock is beneficially owned by Cortec) grants certain registration rights under the Securities Act. Certain stockholders are granted the right to demand registration of the sale of their Holdings Common Stock after the earlier of (i) March 15, 1999 and (ii) 270 days after the completion of an initial public offering of the Holdings Common Stock subject to a specified minimum percentage of the outstanding Holdings Common Stock being included in such demand registration. Each stockholder may participate ("piggy-back") in registrations initiated by Holdings or other stockholders, subject to potential volume limitations. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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. Transaction Fees In connection with the Transaction, the Company and Holdings paid Cortec Capital Corp. ("CCC") a transaction fee of $784,525 and reimbursed it for out- of-pocket expenses of $235,282 incurred in connection with the Transaction. Services performed by CCC included negotiations of the terms of the Agreement and Plan of Merger, dated as of January 31, 1994, between Acquisition and the Company, arranging for and negotiating the terms of the Senior Debt financing and performing all of the due diligence associated with the merger, including environmental and tax due diligence. Donaldson, Lufkin & Jenrette Securities Corporation, a beneficial owner of 13.0% of Holdings, and Bank Indosuez, a beneficial owner of 8.9% of Holdings, also received transaction fees of $840,000 and $1,590,000, respectively, and reimbursement of expenses of $40,000 and $9,011, respectively. Management Agreement The Company has entered into a Management Agreement (the "Management Agreement") with CCC for certain management and financial services. Pursuant to the Management Agreement, CCC will provide the Company with professional and administrative advice in areas relating to the Company's business, including finance, budgeting, risk management, business planning, manufacturing, sales, marketing, staffing levels and acquisitions. CCC is the general partner of Cortec, which is the beneficial owner of 59.1% of Holdings. CCC will receive a quarterly fee of 1% of the Company's net sales, not to exceed $125,000. The Management Agreement continues until March 31, 2001, and thereafter for successive one year periods unless terminated by either party. Subsequent to the Transaction, the Company paid or accrued $458,662, $504,959 and $500,551 for 1995, 1996 and 1997, respectively, for fees and reimbursed expenses under the Management Agreement. 51 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 19, 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 Restated Certificate of Incorporation of AXIA Incorporated./(1)/ 3.2 By-Laws of AXIA Incorporated./(1)/ 3.3 Certificate of Incorporation of Ames Taping Tool Systems, Inc./(1)/ 3.4 By-Laws of Ames Taping Tool Systems, Inc./(1)/ 3.7 Certificate of Incorporation of TapeTech Tool Co., Inc./(1)/ 3.8 By-Laws of TapeTech Tool Co., Inc./(1)/ 4.1 AXIA Incorporated, Issuer, Ames Taping Tool Systems Inc., TapeTech Tool Co., Inc., Mid America Machine Corp., Guarantors, Series A and Series B 11% Series Subordinated Notes Due 2001, Indenture, dated as of March 15, 1994./(1)/ 4.2 Purchase Agreement 21,000 Units Consisting of $21,000,000 Principal Amount of 11% Subordinated Notes due 2001 of AXIA Incorporated and 63,000 Shares of Class A Common Stock of Axia Holdings Corp., March 15, 1994./(1)/ 4.3 A/B Exchange Registration Rights Agreement, dated as of March 15, 1994 by, and among, AXIA Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co., Inc., Mid America Machine Corp., and Each of the Purchasers Listed on the Signature Pages of the Purchasers Agreement./(1)/ 4.5 Specimen Certificate of 11% Series B Senior Notes due 2001 (the Exchange Notes)./(1)/ 4.7 Guarantee of Exchange Notes./(1)/ 4.7.1 Release of Guarantee Mid America Machine Corp./(4)/ 10.1 AXIA Management Agreement, dated as of March 15, 1994 by, and among, AXIA Incorporated and Cortec Capital Corporation./(2)/ 10.4 Lease Agreement between G.L. Building Company and AXIA Incorporated executed as of January 8, 1993./(2)/ 10.5 Form of Employee Bonus Agreement./(2)/ 10.6 Form of Stock Option Agreement./(2)/ 52 10.7 Form of the Stock Purchase Agreement./(2)/ 10.8 Form of Employment and Non-competition Agreement./(2)/ 10.10 Exec-U-Care Medical Reimbursement Insurance./(2)/ 10.11 Key Employee Posthumous Salary Continuation Plan./(2)/ 10.12 AXIA Incorporated Management Incentive Compensation Plan./(2)/ 10.15 Purchasing Partnering Agreement between Maytag-Jackson Dishwash Products and Nestaway, Division of AXIA Incorporated, dated November 15, 1995./(4)/ 10.15.1 First Amendment to the Purchasing Partnering Agreement dated September 11, 1997. 10.16 Loan Agreement dated as of June 27, 1996, among AXIA Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co., Inc., as Borrowers, and the Lenders named herein as Lenders, and American National Bank & Trust Co. of Chicago, as Agent and Lender./(5)/ 10.17 First Amendment to Loan Agreement dated as of March 10, 1997 among AXIA Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co., Inc., and the Lenders named in the Loan Agreement./(6)/ 10.18 Second Amendment to Loan Agreement dated September 11, 1997, among AXIA Incorporated, Ames Taping Tool Systems, Inc., TapeTech Tool Co., Inc., and the Lenders named in the Loan Agreement./(7)/ 21.1 Subsidiaries of the Registrant./(1)/ 23.1 Consent of Kaye, Scholer, Fierman, Hays & Handler (included in Exhibit 5.1)./(3)/ 23.3 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. 99.1 Form of Letter of Transmittal./(2)/ 99.2 Form of Notice of Guaranteed Delivery./(2)/ (b) Reports on Form 8-K. No reports on Form 8-K were filed during the three months ended December 31, 1997. /(1)/ Previously filed as an exhibit to Registration Statement No. 33-78922 filed with the Securities and Exchange Commission on May 13, 1994. /(2)/ Previously filed as an exhibit to Amendment No. 1 to Registration Statement No. 33-78922 filed with the Securities and Exchange Commission on May 24, 1994. /(3)/ Previously filed as an exhibit to Amendment No. 2 to Registration Statement No. 33-78922 filed with the Securities and Exchange Commission on June 30, 1994. /(4)/ Previously filed as an exhibit to the Company's Form 10-K for the period ended December 31, 1995 filed with the Securities and Exchange Commission on March 29, 1996. /(5)/ Previously filed as an exhibit to the Company's Form 10-Q for the period ended June 30, 1996 filed with the Securities and Exchange Commission on August 12, 1996. 53 /(6)/ Previously filed as an exhibit to the Company's Form 10-Q for the period ended June 30, 1997 filed with the Securities and Exchange Commission on August 11, 1997. /(7)/ Previously filed as an exhibit to the Company's Form 10-Q for the period ended September 30, 1997 filed with the Securities and Exchange Commission on November 10, 1997. 54 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 Vice President, Treasurer, Chief Financial Officer Date: March 16, 1998 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/ Chairman, President and Chief March 16, 1998 - ------------------- Executive Officer and Director Dennis W. Sheehan /s/ Vice President Finance, March 16, 1998 - ------------------- Principal Financial Officer, Lyle J. Feye and Principal Accounting Officer /s/ Director March 16, 1998 - ------------------- T. Richard Fishbein 55 EX-10.15.1 2 1ST AMD TO PURCHASING PARTNERING AGMT - 09/11/97 Exhibit 10.15.1 FIRST AMENDMENT TO AGREEMENT NESTAWAY DIVISION OF AXIA INCORPORATED ("Seller") and MAYTAG CORPORATION ("Buyer") mutually desire their Purchasing Partnering Agreement (the "Agreement" effective January 1, 1996) concerning dishwasher racks be amended as follows (hereinafter the "Amendment"). This Amendment shall be effective as of the date of signing (the "Effective Date"). Page 2, Section III of the Agreement is amended to strike the following: "In the event, during any 12 month period beginning January 1, 1998 (the "second period") Purchaser's orders with Seller are less than the Purchasing Goal, Seller may continue the relationship on the terms stated herein, or terminate this Agreement with six (6) months written notice. The preceding sentence states the sole recourse of Seller for any inability by Purchaser to meet the stated Purchasing Goal." Page 2, Section IV of the Agreement is deleted in its entirety and the following shall be inserted in its place: "The Agreement, as amended from time to time, shall expire as of the close of business on December 31, 2003 unless earlier terminated as provided in the Agreement." Page 3, Section VII (l) of the Agreement is changed to read as follows: "Nestaway will change the dishrack selling prices to Maytag from the prices in effect on Sept. 8, 1997 as follows: A. Reduces selling prices by as of the Effective date. B. Nestaway will reduce its selling prices thru providing cost reductions each year beginning in 1998. A minimum annual reduction in selling price is guaranteed. Page 4, Section IX of the Agreement is changed by deleting the existing language in its entirety and replacing it with the following: "For each year during the time of this Agreement, or any extension thereof, Seller will pay Purchaser a volume rebate on the annual net shipment of Racks to Maytag Jackson Dishwashing Products for its McKenzie, TN plant. A rebate in the amount of per Rack will be paid on all Racks shipped above an annual volume based on per day for days, or racks. Payment of the earned discount will be made prior to March first of the following year." Signed this 11th day of September, 1997. NESTAWAY DIVISION AXIA INCORPORATED By /s/ David H. Chesney 9/17/97 -------------------------------- David H. Chesney President & General Manager MAYTAG CORPORATION By /s/ B.C. Fowler -------------------------------- B.C. Fowler Vice President & General Manager Jackson Dishwashing Products EX-23.3 3 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.3 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. 33-78922). ARTHUR ANDERSEN LLP Chicago, Illinois March 16, 1998 56 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1,310 0 14,605 1,846 9,155 26,253 39,008 14,938 96,773 22,429 9,749 0 0 16,723 23,344 96,773 77,418 104,800 50,518 85,446 404 0 3,710 15,607 6,412 9,195 0 772 0 8,423 0 0
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