-----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, Dwz1tqdQX5CCa7EHWdYC6XdWo4EAk5P3kPCbXhkSgvbJ5XQnMLKtDkarCG4rUUZH 9zQDIRw7XZrJ6v5zIDIVYw== 0000950152-99-007755.txt : 19990924 0000950152-99-007755.hdr.sgml : 19990924 ACCESSION NUMBER: 0000950152-99-007755 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLASSTECH INC CENTRAL INDEX KEY: 0000857565 STANDARD INDUSTRIAL CLASSIFICATION: GLASS, GLASSWARE, PRESSED OR BLOWN [3220] IRS NUMBER: 133440225 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-32185-01 FILM NUMBER: 99715406 BUSINESS ADDRESS: STREET 1: AMPOINT INDUSTRIAL PARK STREET 2: 995 FOURTH STREET CITY: PERRYSBURG STATE: OH ZIP: 43551 BUSINESS PHONE: 4196619500 MAIL ADDRESS: STREET 1: AMPOINT INDUSTRIAL PARK STREET 2: 995 FOURTH STREET CITY: OERRYBURG STATE: OH ZIP: 43551 10-K405 1 GLASSTECH, INC. FORM 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 GLASSTECH, INC. (Exact name of registrant as specified in its charter) Delaware 33-32185-01 13-3440225 - -------- ----------- ---------- (State or other jurisdiction of (Commission (IRS Employer incorporation or organization) file number) Identification No.) Ampoint Industrial Park, 995 Fourth Street, Perrysburg, Ohio 43551 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (419) 661-9500 Securities registered pursuant to Section 12(d) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the common stock of Glasstech, Inc. held by non-affiliates of Glasstech, Inc. is not applicable as the common stock of Glasstech, Inc. is privately held. The number of shares of common stock, $.01 par value, outstanding as of September 17, 1999 was 1,000. DOCUMENTS INCORPORATED BY REFERENCE NONE 2 FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report on Form 10-K (this "Form 10-K") including those contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section and the attached financial statements, in the Company's press releases and in oral statements made by or with the approval of an authorized executive officer of the Company constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. These may include statements projecting, forecasting or estimating Company performance and industry trends. The achievement of the projections, forecasts or estimates is subject to certain risks and uncertainties. Actual results and events may differ materially from those projected, forecasted or estimated. The applicable risks and uncertainties include general economic and industry conditions that affect all international businesses, as well as matters that are specific to the Company and the markets it serves. General risks that may impact the achievement of such forecasts include compliance with new laws and regulations; significant raw material price fluctuations; currency exchange rate fluctuations; business cycles; and political uncertainties. Specific risks to the Company include risk of recession in the international markets and industries in which its products are sold; the concentration of a significant portion of the Company's revenues from customers whose equipment needs are located in the Asia-Pacific region; the concentration of a substantial percentage of the Company's sales with a few major customers, several of whom have significant manufacturing presence in the Asia-Pacific region; timing of new system orders and the timing of payments due on such orders; changes in installation schedules, which could lead to deferral of progress payments or unanticipated production costs; new or emerging technologies from current competitors, customers' in-house engineering departments and others; competition from current competitors, customers' in-house engineering departments and others; and the emergence of a substitute for glass. In light of these and other uncertainties, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's plans and objectives will be achieved. PART I. ITEM 1. BUSINESS. OVERVIEW The Company designs and assembles glass bending and tempering (i.e., strengthening) systems used by glass manufacturers and processors in the conversion of flat glass into safety glass. The Company sells its systems worldwide, primarily to automotive glass manufacturers and processors (the "Automotive Market") and also to architectural glass manufactures and processors (the "Architectural Market"). The Company's systems are designed to meet customers' safety glass production requirements for complexity, accuracy and optical quality while simultaneously enhancing system productivity, flexibility and cost efficiency. For the Automotive Market, the Company has developed bending and tempering systems that meet automobile manufacturers' safety glass specifications for current and future production models. For the Architectural Market, the Company's energy-efficient processing systems are capable of producing high-quality bent or flat glass at output rates tailored to meet customer-specific production requirements. As a result of the long useful life and growing worldwide installed base of its systems, the Company is able to complement its sale of complete systems ("Original Equipment") with the sale of aftermarket products and services consisting of retrofits, tooling (i.e., molds used to shape automotive glass) and replacement parts (the "Aftermarket"). The Company's products feature proprietary technologies that have been developed over the last 25 years and are protected by more than 700 patents and patent application filings worldwide. 2 3 For fiscal year ended June 30, 1999, the Company generated net revenue and EBITDA (as defined in Footnote (d) under the heading "Selected Financial Data") of $50.5 million and $8.2 million, respectively. Original Equipment revenue totaled $28.9 million, or 57.1%, of the Company's total revenue for the same period. The balance of the Company's revenue was generated through Aftermarket sales including retrofits, tooling and replacement part sales intended to maintain or enhance the Company's installed base of systems. A Glasstech system performs a series of processes that bend and strengthen flat glass in the production of safety glass products such as car windows. In each system, flat glass supplied by glass manufacturers is conveyed horizontally on ceramic rollers through a high temperature furnace, a bending module and a quench module (which completes the tempering process by rapidly cooling the heated glass). Microprocessor-based controls regulate temperature, speed and glass location throughout the entire process. In addition, the Company develops its own proprietary software to control the integrated system. The modular design of a Glasstech system readily enables the Company to offer customized systems that meet specific technical requirements of its customers. Such a design also creates equipment retrofit and upgrade opportunities for the Company. The Company works closely with its customers as they identify capacity and functionality requirements for a new system and then throughout the usual 10 to 12 month order, installation and acceptance cycle to ensure satisfaction with their completed system. Systems designed for the Automotive Market are used to form and temper glass for automotive back, side and roof windows, as well as to form and anneal glass used for windshields. Systems designed for the Architectural Market process curved and flat tempered glass which are used for skylights, insulating glass, patio doors, furniture and appliances. The Company has an installed base of approximately 400 systems located in over 45 countries on six continents. BACKGROUND The Company was founded in 1971 to manufacture flat glass tempering systems for the Architectural Market. Building on its success in that market, in 1977 the Company delivered its first bending and tempering system used to produce simple glass shapes for the Automotive Market. Through continued product development programs and technological enhancements, the Company manufactured its first bending and tempering system for complex glass shapes for the Automotive Market in 1985. This system enables the Company's customers to bend and form glass while it is still inside the furnace, which results in enhanced quality, higher yields (i.e., reduced breakage and fewer defects) and more precision in the final shape of the safety glass product. In 1988, and again in 1989, the Company was purchased in separate leveraged buyout transactions. In December 1992, the Company reorganized its senior management. In May 1993, the Company filed for protection under Chapter 11 of the Federal Bankruptcy Code due to an inability to service indebtedness incurred in the 1989 leveraged buyout transaction. While under the protection of Chapter 11, the new management team refocused its business strategy by, among other things, focusing on the sale of a more profitable product mix and on the containment of costs. As a result of these efforts, a reorganization of its senior management and a reorganization of the Company's debt under a bankruptcy plan of reorganization, the Company emerged from Chapter 11 in January 1995. Upon consummation of the Reorganization, the Company's debt holders converted their debt obligations into 100% of the Company's equity, $42.0 million of 10% Senior Notes and the right to receive certain cash payments. In 1997, Glasstech Holding Co ("Holding") and Glasstech Sub Co. ("Sub Co.") were formed to effect the acquisition of the Company by Key Equity Capital Corporation ("KECC"), certain of KECC's affiliates and certain members of management of the Company (collectively, the "Key Equity Group"). The acquisition was consummated on July 2, 1997 pursuant to an Agreement and Plan of Merger, dated as of June 5, 1997, among Holding, Sub Co. and the Company, as amended (the "Merger Agreement"). Under the terms of the Merger Agreement, Sub Co. was merged into the Company, and the Company continued as the surviving corporation 3 4 (the "Merger"). The aggregate consideration for the Merger was $77.9 million (the "Purchase Price"). To finance and complete the Merger (including the payment of related fees and expenses): (i) the Key Equity Group purchased, for $15.0 million, all of the outstanding shares of capital stock of Holding; (ii) Holding purchased, for $15.0 million, all of the outstanding shares of capital stock of Sub Co. (the "Equity Contribution"); (iii) Sub Co. sold 12 3/4% Senior Notes Due 2004 (the "Old Notes") in an aggregate principal amount of $70.0 million and the Company issued 70,000 Warrants (received from Holding) to purchase an aggregate of 877.21 shares of Class A Common Stock of Holding ("Initial Offering"); and (iv) upon completion of the Merger, the Company, as the surviving entity, became the obligor on the Old Notes. The Company also entered into a new revolving credit facility (the "Credit Facility"), which is secured by substantially all of the assets of the Company and provides for borrowings up to $10.0 million (See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for current discussion of the Credit Facility). The foregoing transactions are collectively referred to herein as the "Transactions". Holding has no significant activities other than its investment in the Company. In December 1997, the Company completed an exchange offer under which holders of the Old Notes were offered the opportunity to exchange their Old Notes for the Company's Series B 12 3/4% Senior Notes Due 2004 (the "Senior Notes") that were identical to the Old Notes, except that the Senior Notes were issued in a transaction registered under the Securities Act of 1933, as amended, and are not subject to certain restrictions on transfer contained in the Old Notes and do not provide for any registration rights. Prior to the consummation of the Merger, the Company redeemed its existing indebtedness at a premium, paid certain Transaction-related expenses and remitted any remaining unrestricted cash in excess of $2.0 million to its stockholders. Also, prior to the consummation of the Merger all existing stock options and common stock warrants of the Company were deemed exercised and exchanged for their pro rata share of the Purchase Price. As a result of the Transaction, the financial position and results of operations of the Company subsequent to the Transaction (the "Successor Company") are not necessarily comparable to the financial position and results of operations of the Company prior to the Transaction (the "Predecessor Company"). Amounts reported for financial reporting purposes in fiscal 1998 represent the activity of the Successor Company beginning July 2, 1997. THE MARKET FOR SAFETY GLASS PRODUCTS In the United States, automobile manufacturers purchase most of their safety glass products from independent glass manufacturers and processors, except for DaimlerChrysler Corporation and Ford Motor Company, each of which produces a portion of its safety glass requirements in-house. In Europe and Asia-Pacific, the majority of automobile glass manufacturers purchase safety glass products from independent manufacturers and processors. The Company believes that most of the major glass manufacturers and processors are customers of the Company. Automotive safety glass products are formed into either simple or complex shapes. Simple glass, which is relatively flat and has little curvature, is required to conform to exacting physical dimensions and fracture requirements. Significant bending technology is not required to process this type of glass. Unlike simple glass, complex glass has a high degree of curvature, or "bulge." The more curvature that a piece of glass has, the more likely it is to develop optical distortions unless it is produced to precise specifications. For this reason, it is important that the bending of complex glass be done in a manner that produces consistent, repeatable results subject to minimal process variation. In the Automotive Market, the majority of side, back and roof windows consist of a single piece of 4 5 tempered glass. The majority of windshields are of laminated construction, which requires the insertion of a plastic layer between two pieces of annealed glass. In the Architectural Market, the most common architectural glazing product worldwide is flat tempered glass. Such glass is used for building windows, patio doors, shower enclosures, display cases, furniture glass and appliance glass. The Company believes that a future trend in the Automotive Market will be that of increasing use of additional laminated glass for sidelites and backlites. If this trend materializes, it will mean the use of more glass in cars since laminated glass requires the use of two pieces of glass where one is now used for each sidelite and backlite. If this trend develops, it may increase the need for the Company's equipment. THE SAFETY GLASS PRODUCTION PROCESS The Company's systems process flat glass produced by glass manufacturers into safety glass. The Company designs and assembles Original Equipment systems that bend and temper flat glass for automotive, industrial and architectural applications. The Company also designs and assembles systems that anneal (rather than temper) glass for use in the production of laminated glass for products such as automotive windshields. The basic fabrication process involves placing a piece of glass horizontally on a conveyor of ceramic rollers that transfers the glass through a furnace where it is heated to the desired temperature. If the glass then requires bending, it generally will be bent into either a simple or complex shape. The glass is then moved into the quench where, depending upon the desired end product, it is either tempered or annealed. Heating Process. Traditionally, all Glasstech systems heated glass with electric radiant heat ("ERH"). As an alternative, the Company introduced gas-fired forced convection heat ("FCH") which was developed in conjunction with the Gas Research Institute ("GRI"). FCH is currently available for sale in the Automotive and Architectural Markets and offers customers significant advantages over ERH technology. For example, FCH can be more cost-effective than ERH, because gas often is less expensive than electricity. In addition, FCH can heat glass with special coatings faster and more uniformly than ERH, resulting in lower production costs, faster outputs and higher quality glass. In spite of FCH's significant advantages, not all product applications justify the additional capital expense of an FCH furnace. Accordingly, the Company expects to continue to offer systems with ERH. Bending Process. Glasstech systems generally bend glass into simple and complex shapes through one of three techniques. The gravity-sag technique creates simple shapes by placing a piece of glass on a ring, heating it to its softening point and allowing the shape to form via gravity. The deep bending technique creates complex shapes by placing the glass on a ring mold, heating it and pressing the heated glass against a full surface area mold. The cylindrical bending technique creates simple shapes with a single curve by placing the glass on rollers, heating it and using a set of flexible rollers to curve the glass. Tempering Process. Tempering is the process of strengthening heated glass by cooling it rapidly. Tempered glass is up to five times stronger than untempered glass and, if broken, fractures into small pieces, reducing the risk of injury. Conversely, untempered glass will splinter and produce sharp edges. The process the Company uses to temper safety glass is called "quenching" which involves moving the heated glass into the quench where, through a computer-controlled process, it is cooled with air directed on the surfaces of the glass by an array of nozzles that diffuse air from a large blower or fan. Glass tempered by a Glasstech system meets international fracture standards. Annealing Process. The annealing process is a preparatory step in the process of producing laminated glass, which is used to form most vehicle windshields. The annealing process is similar to the tempering 5 6 process, except that instead of cooling the glass rapidly, it is cooled much more slowly. Annealed glass breaks more easily upon impact and, unlike tempered glass, splinters when broken. To complete the lamination process, glass processors and fabricators layer two pieces of annealed glass, which can be produced by one of the Company's Original Equipment systems, around a piece of plastic such that the annealed glass adheres to the plastic when broken. A laminated glass product breaks relatively easily into a spider web-like pattern without permitting the object creating the impact to break through the glass, and any glass particles remain adhered to the plastic layer, thereby reducing the risk of injury to the vehicle's or building's occupants. PRODUCTS Original Equipment-Automotive. Systems designed and assembled for the Automotive Market process flat glass by bending and tempering it to produce automotive side, back and roof windows and by bending and annealing flat glass in the production of laminated glass for windshields. The Company sells four basic systems, which are primarily differentiated by their bending techniques, to automotive glass manufacturers and processors. - Quick-Sag System. Introduced in the late 1970s, the Company's quick-sag system (the "Quick-Sag System") bends and tempers glass for side, back and roof automotive windows. Using the gravity-sag technique, the Quick-Sag System produces high optical-quality glass in simple shapes. Although this is the Company's oldest system, the Quick-Sag System continues to have applications in markets such as China, South America and other developing markets. Such a system may be retrofitted to provide higher output deep bending or cylindrical bending capabilities if required by the Company's customers. - Deep Bending System. The Company's deep bending system (the "Deep Bending System") was first introduced in 1985 in response to customers' demands for more complex safety glass shapes that could not be produced by the gravity-sag technique used in the Quick-Sag System. By using the deep-bending technique, such systems shape glass with enhanced optical quality to precise tolerances with deep and complex bends for automotive side and back windows. To form different shapes of complex safety glass, the Deep Bending System requires different sets of tooling, which the Company offers as part of its aftermarket business. - Cylindrical Bending System. Introduced in fiscal 1994 to produce accurate, simple cylindrical bends using flexible rollers (rather than tooling), the cylindrical bending system (the "Cylindrical Bending System") produces side and roof vehicle windows that require a simple cylindrical bend. Prior to the introduction of this system, it generally was not cost-effective for the Company to offer a system that produced glass with a simple cylindrical bend because the Company was unable to compete favorably against equipment designed in-house by the Company's customers. With the introduction of the Cylindrical Bending System, however, the Company now offers customers the ability to make faster changeovers by eliminating the tooling requirements typical of its other bending systems. This feature reduces the customers' production costs and maximizes their system performance. - In-line System. Unlike the movement of glass in a Quick-Sag System or a Deep Bending System, in which glass exits from the side of the bending module, the glass in an in-line system (the "In-line System") travels in a straight line throughout the entire process. An In-line System is capable of producing higher quality glass at faster output rates and at lower costs per piece of glass than a side-exit system. The first generation of the In-line System was introduced in 1985. A second generation In-Line System was placed into operation in 1995 for the production of windshield glass. The Company recently introduced an improved version of the In-line System that is capable of producing complex-shaped glass for automotive windshields and back windows. 6 7 Original Equipment-Architectural. Systems designed and assembled for the Architectural Market process flat glass by tempering or by bending and tempering it for applications including residential and commercial construction, furniture, display cases, shower enclosures and appliances. - Flat Glass Tempering Systems. The Company's initial generation of flat glass tempering for architectural applications was introduced in 1971. Current systems can be equipped with either ERH or FCH heating technology. A system with FCH is more expensive initially than one with ERH, but offers significant energy cost savings and output advantages, particularly for reflective or low-emissivity glass. - Bending and Tempering Systems. Initially introduced in 1990 in response to the demand for curved glass from the Architectural Market, these systems are designed to shape glass of varying thicknesses into custom-specified curves. Original Equipment-Other. In 1992, the Company formed Stir-Melter, Inc. ("Stir-Melter"), a wholly owned subsidiary that designs and assembles a glass-melting system that vitrifies (i.e., changes into a glass-like substance by fusion due to heat) hazardous waste for safe disposal. Stir-Melter's systems are rapid glass melters that employ aggressive mechanical stirring action in combination with direct electrical heating. Aftermarket Business. Aftermarket products and services complement the Company's Original Equipment business. Sales in this area consist of the following items: (i) retrofits (extensions or improvements of current systems); (ii) tooling (complete sets of bending and tempering equipment designed to produce specific complex-shaped glass products); (iii) ceramic rollers (used to convey glass through the furnace); (iv) replacement parts for all the individual system components; and (v) technical services. - Retrofits. Retrofits are purchased by customers who want to increase production capacity, extend bending capability, increase system efficiency or take advantage of the latest computer and control system developments. Typical retrofits and improvements include: (i) extensions of heater length to increase capacity; (ii) conversions from automotive simple bending systems to complex bending systems, such as from a Quick-Sag System to a Deep Bending System; (iii) quench upgrades; (iv) conversion of a single-function system to a dual-function system, such as adding a Cylindrical Bending System to a Quick-Sag System; and (v) computer or control upgrades. - Tooling. The Company's customers in the Automotive Market operate complex bending and tempering systems that require part-dedicated tooling equipment to produce individual vehicle window parts that meet precise design and shape specifications. The Company's tooling products generally include: (i) bending molds; (ii) bending rings (to press the glass to the mold); (iii) lift jets (to raise the glass from the conveyor to the mold); (iv) quench rings (to transport the glass from the mold to the quench); and (v) quenching heads (which incorporate nozzles and direct air against the glass surface). - Ceramic Rollers. The Company's roller hearth technology was introduced to eliminate the marks left on glass by older vertical systems that tempered flat glass by hanging it from tongs. The ceramic rollers are used to convey the glass horizontally into and through the furnace and are manufactured to strict specifications in order to reduce distortion or markings on the glass surface. - Replacement Parts. Both proprietary and nonproprietary parts are offered to replace components used in Glasstech systems. Customers are encouraged to purchase an initial consignment of replacement parts when purchasing a new system and to maintain critical parts in inventory throughout the life of their system. 7 8 - Technical Services. The Company's technical services department provides it with an important competitive advantage. The customer service staff provides aftermarket technical support and gathers feedback from customers regarding specific product improvement recommendations for Glasstech systems. PRODUCT DEVELOPMENT The Company's Research and Development ("R&D") effort is a significant factor in maintaining its market and technological leadership. The objective of the Company's R&D effort is to develop new products and to improve existing products to meet present and future market demands. The Company works closely with its customers to identify their current and future needs, enabling it to proactively design creative solutions to meet future industry requirements. Development proposals are submitted to the Company's Executive Technical Committee to be analyzed and assessed. Proposals are authorized only when the committee is satisfied that the proposal meets customer or market needs and the proposed program can be conducted cost-effectively with a reasonable probability of achieving the desired level of profitability. The Company has spent approximately $4.6 million, $4.2 million and $3.4 million (exclusive of expenditures relating to demonstration glass tempering furnaces) in fiscal years 1997, 1998 and 1999, respectively, on the development of new systems or on the improvement of existing systems. MARKETING AND SALES The Company's sales efforts are conducted by personnel operating in the Americas, Europe (including Africa and the Middle East) and Asia-Pacific. The Company's international sales efforts are supplemented by nonexclusive sales agents retained on a commission basis. Commissions are paid only when sales are confirmed and payments have been received from the customer. Glasstech Ltd., a wholly owned subsidiary of the Company, supports the Company's sales efforts in Europe. The Company has installed approximately 400 systems in over 45 countries on six continents. The Company's customers include virtually all major glass manufacturers and processors, such as DaimlerChrysler Corporation, Ford Motor Company, Guardian Industries Corp. and PPG Industries, Inc. in the United States; Compagnie de Saint-Gobain and Pilkington plc in Europe; Asahi Glass Company, Central Glass Company and Nippon Sheet Glass Company in Japan; Hankuk Glass Industry Company and Keumkang Ltd. in Korea; and Shatterprufe (Pty) Limited in South Africa. As part of its marketing process, the Company maintains ongoing customer relationships that enable management to understand its customers' needs for existing and new product capabilities. Due to the size of a Glasstech system, from both a physical and economic perspective, a significant commitment with respect to planning is required on the part of the Company's customers before they order new equipment and subsequently place it into operation. As part of this planning process, the customer involves the Company in discussions that can last up to one or two years before an order is actually placed. At any point in time, the Company and its customers are involved in numerous discussions that occur between their respective management teams, technical staffs and sales/purchasing staffs. 8 9 The customer service staff provides aftermarket technical support and gathers information from customers regarding specific product improvement recommendations for Glasstech systems. Customer service representatives are also available to the Company's customers as consultants on a per diem basis. The Company's technical representatives train the customer's workforce to properly operate its Glasstech system and consult on specific technical issues or production goals. The Company's customer service department has a program that provides customers with 24-hour troubleshooting services via telephone. In-house computers enable the Company to simulate system problems that a customer might experience and provide the customer with prompt solutions. Installation of a Glasstech system typically requires 12 months from the time the customer executes a contract to final acceptance of the system. Completion of aftermarket sales varies with each product and can take anywhere from 24 hours to 10 months to complete. A substantial portion of the Company's revenue historically has been comprised of sales to a limited number of customers. For example, in fiscal years 1997, 1998 and 1999, Asahi Glass Company, Compagnie de Saint-Gobain, DaimlerChrysler Corporation, Ford Motor Company, Nippon Sheet Glass Company and Pilkington plc collectively accounted for 60.6%, 54.8% and 53.8% of total revenue, respectively. In addition; (i) in fiscal 1997, Asahi Glass Company, DaimlerChrysler Corporation, Nippon Sheet Glass Company and Pilkington plc each accounted for more than 10.0% of revenue; (ii) in fiscal 1998, Asahi Glass Company and Ford Motor Company each accounted for more than 10.0% of revenue, and (iii) in fiscal 1999 Asahi Glass Company, Compagnie de Saint-Gobain and Ford Motor Company each accounted for more than 10.0% of revenue. INTERNATIONAL The Company's revenue by geographic region is as follows (dollars in thousands):
PREDECESSOR COMPANY SUCCESSOR COMPANY ------------------- ----------------- YEAR ENDED JUNE 30, YEARS ENDED JUNE 30, ------------------- -------------------- 1997 1998 1999 ------- ------- ------- Asia-Pacific $45,276 $27,654 $14,189 Europe 5,030 11,518 10,338 Latin American 2,616 5,384 1,638 Other 1,242 1,523 385 ------- ------- ------- Total Non-United States Sales 54,164 46,079 26,550 United States 22,269 23,509 23,995 ------- ------- ------- Total Overall Sales $76,433 $69,588 $50,545 ======= ======= =======
The Company generates a substantial portion of its revenue outside of the United States. During fiscal 1997, 1998 and 1999, approximately 59.2%, 39.7% and 28.1% of the Company's net revenue was derived from sales of products to customers located in the Asia-Pacific region (Australia, China, Indonesia, Japan, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, South Korea, Taiwan, and Thailand). Management believes the current economic uncertainties in the Asia-Pacific region indicate that the timing of orders for the Company's products will continue to be adversely affected in fiscal 2000. In fiscal 1998 and 1999, the impact of this situation was somewhat mitigated by offsetting equipment sales to customers in other regions of the world, particularly in Europe. However, given the inherent difficulty in predicting with certainty the timing of contract signings and geographic areas into which equipment will be delivered in fiscal 2000 and beyond, the ultimate severity of the impact of this situation on the Company's financial performance in fiscal 2000 and beyond is impossible to predict. The Company will continue to 9 10 monitor the situation in the Asia-Pacific region. Notwithstanding the current economic conditions in the Asia-Pacific region, the Company believes that given world demographics and long term economic trends, the Asia-Pacific region will continue to represent a significant market for the Company's products and it intends to continue its presence in this area. COMPETITION The principal competitive factors in the Automotive Market are price and system capabilities or specifications. The Company's primary competition in the Automotive Market comes from either (i) the engineering departments of certain of its customers, such as Pilkington plc and Compagnie de Saint-Gobain, which design and build glass processing systems in-house or (ii) glass manufacturers which process safety glass and sell it to automobile manufacturers, such as DaimlerChrysler Corporation and Ford Motor Company, which elect to purchase processed safety glass rather than install their own Glasstech system. In either case, the Company primarily competes against its customers by developing systems with greater capabilities than those currently produced in-house. Management believes that the Company has a significant share of the market for technologically advanced systems used to bend and temper automotive glass into complex shapes and is the only significant independent supplier. In the Architectural Market, there is significant competition among manufacturers of flat glass tempering systems, but less significant competition for bending and tempering systems. The Company's principal competitor in the Architectural Market is Tamglass Oy of Finland, which competes against the Company mainly in the market for flat glass tempering systems. PATENTS AND PROPRIETARY RIGHTS The Company protects its technology by filing patents and patent applications in the U.S. and in major markets worldwide. It is the Company's policy to aggressively pursue patent coverage for significant product developments. The Company holds over 125 patents in the U.S. and more than 375 patents outside the United States. In addition, the Company has more than 225 patent application filings worldwide. Typically, within each Glasstech system, several patents cover various controls, bending processes or other aspects of the equipment. While management does not believe that the loss of any one patent would have a material adverse effect on the Company's business, it believes that the Company's patent position is material in the aggregate. In the ordinary course of business, the Company is required to defend its patented technology from possible or actual infringement that may occur. The Company's patents cover a range of products and product features, including: (i) the Quick-Sag System; (ii) the Company's complex in-furnace bending process (used in both Deep Bending and In-line Systems); (iii) the Cylindrical Bending System; (iv) quenching systems; (v) process controls for systems; and (vi) other aspects of its technologies and equipment. As patents on some of the Company's older technologies, such as the Quick-Sag System, begin to expire, the Company continually applies for, and is generally issued, patents relating to its newer, leading edge technologies. The Company received funding from GRI for the development of the FCH technology. Under an agreement with GRI, GRI retained rights to the resulting U.S. patents. Under the GRI agreement, the Company received two exclusive patent licenses in the U.S. One license permits the Company to use FCH technology in systems that produce flat tempered glass (the "Flat License") and the other license permits the Company to use FCH technology in systems that produce bent glass (the "Bent License"). The exclusivity with respect to the Flat License and Bent License expires in 2000 and 2005, respectively. Subject to certain obligations to exploit FCH technology with respect to the Bent License, the Company will continue to hold nonexclusive licenses for FCH technology for the duration of the underlying patents. Under the terms of the GRI agreement, the Company 10 11 holds the exclusive rights to the FCH patents outside of the U.S. Substantially all Company employees execute technology agreements that have a confidentiality provision and assign patent rights to the Company. Members of senior management have entered into employment agreements that contain noncompete provisions. MATERIALS AND SUPPLY ARRANGEMENTS The Company has reached agreement with many of its suppliers, including most of its major suppliers, which guarantee firm pricing, generally for one year, but do not have purchase volume requirements obligating the Company to purchase certain quantities. Management believes that the Company has made adequate arrangements with backup suppliers to avoid any material adverse effect that would occur if one of its primary suppliers were unable to fill Company orders. In fiscal 1999, the Company did not purchase more than 10% of its materials and supplies from any one supplier. ENVIRONMENTAL MATTERS The Company's operations and properties are subject to a wide variety of increasingly complex and stringent federal, state and local laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials, substances, and wastes, the remediation of contaminated soil and groundwater, and the health and safety of employees (collectively, the "Environmental Laws"). As such, the nature of the Company's operations exposes it to the risk of claims with respect to such matters and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Management believes its operations and properties are in compliance in all material respects with Environmental Laws. Based upon its experience to date, management believes that the future cost of compliance with and liability under existing Environmental Laws will not have a material adverse effect on the Company's business, financial condition or operating results. However, future events, such as the discovery of new information, changes in existing Environmental Laws or their interpretations and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. EMPLOYEES As of June 30, 1999, the Company employed 192 people compared to 273 at June 30, 1998. The Company has no union employees, and no attempt has ever been made to organize its workforce. Management believes that its relations with its employees are good. BACKLOG The Company had a backlog (on a percentage of completion basis) of approximately $12.1 million at June 30, 1999 as compared to approximately $34.8 million at June 30, 1998. The Company expects to complete substantially all of this backlog by the end of fiscal 2000. The Company's backlog at August 31, 1999 was $15,242. 11 12 ITEM 2. PROPERTIES. The Company's facilities are located in Perrysburg, Ohio. The Company leases a 96,800 square foot facility that houses its offices and plant, as well as an adjacent 43,200 square foot facility for production and storage. The 96,800 square foot facility is subject to a five-year lease that will expire on December 31, 1999, after which the Company has an option to extend the lease for two additional five-year periods. The 43,200 square foot building is subject to a two-year lease that will expire on January 31, 2000. The Company also owns an adjacent 108,000 square foot building that house R&D, tooling design, tooling production and demonstration glass tempering furnaces. The Company believes that its current facilities are adequate for its foreseeable needs. ITEM 3. LEGAL PROCEEDINGS. On January 15, 1997, James E. Heider, a former executive officer of the Company, commenced an action against the Company and Mark Christman, the President of the Company, in the Common Pleas Court of Wood County, Ohio, relating to the nonrenewal of his employment agreement. On July 24, 1998, the Company was granted a motion for summary judgement on all counts. Mr. Heider filed an appeal and on July 16, 1999, the Wood County Court of Appeals entered a unanimous decision affirming the summary judgment granted in the Company's favor. Mr. Heider had until August 30, 1999 to file a discretionary appeal to the Ohio Supreme Court. Mr. Heider did not file a discretionary appeal to the Ohio Supreme Court and the Company considers this matter resolved. The Company is subject to other legal proceedings and claims that arise from time to time in the ordinary course of its business. Management believes that the amount of any ultimate liability with respect to these actions will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 12 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS. There is no established public trading market for the common stock of the Company. The sole shareholder of the Company is Holding, a holding company formed for the purpose of acquiring all of the outstanding stock of the Company. Holding has no significant activities other than its investment in the Company. The Company has not declared or paid cash dividends to Holding. The Company anticipates that all of its earnings in the near future will be retained for the development and expansion of its business and, therefore, does not anticipate paying dividends on its common stock in the foreseeable future. Declaration of dividends on the common stock will depend upon levels of indebtedness, future earnings, the operating and financial condition of the Company, its capital requirements and general business conditions, among other things. In addition, the agreements governing the Company's indebtedness contain provisions that restrict the ability of the Company to pay dividends on its common stock. 13 14 ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical consolidated financial and other data of the Company, which have been derived primarily from the Company's audited consolidated financial statements. Amounts reported for financial reporting purposes in fiscal 1998 represent the period from July 2, 1997 to June 30, 1998. The information presented below should be read in conjunction with "Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere in this Form 10-K. All dollar amounts in this section are in thousands.
PREDECESSOR COMPANY REORGANIZED COMPANY SUCCESSOR COMPANY ------------ --------------------------------------- ---------------------- PERIOD FROM PERIOD FROM JULY 1, 1994 JAN. 4, 1995 YEARS ENDED JUNE 30, THROUGH THROUGH ------------------------------------------------ JAN. 3, 1995 JUN. 30, 1995 1996 1997 1998 1999 ------------ ------------- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Net revenue $ 25,948 $ 27,854 $ 62,771 $ 76,433 $ 69,588 $ 50,545 Cost of goods sold 16,576 17,036 39,024 45,603 37,760 31,768 --------- --------- --------- --------- --------- --------- Gross profit 9,372 10,818 23,747 30,830 31,828 18,777 Selling, general and administrative 3,430 5,105 10,724 12,866 11,035 8,632 Research and development 2,082 2,302 4,557 4,594 4,247 3,368 Amortization expense 2,512 1,203 2,407 2,306 4,356 4,243 --------- --------- --------- --------- --------- --------- Operating profit 1,348 2,208 6,059 11,064 12,190 2,534 Interest expense -- (2,077) (4,200) (4,200) (9,643) (9,668) Other income (expense) -net 35 784 1,541 2,263 525 352 --------- --------- --------- --------- --------- --------- Income (loss) before items below 1,383 915 3,400 9,127 3,072 (6,782) Reorganization items (a) (1,164) -- -- -- -- -- Income taxes not payable in cash (b) -- (445) (1,418) (2,551) (2,249) -- Federal income taxes, current -- -- (105) (78) -- -- Extraordinary gain (c) 214,773 -- -- -- -- -- Cumulative effect on prior years of change in method of accounting for non-pension post-retirement benefits (1,906) -- -- -- -- -- --------- --------- --------- --------- --------- --------- Net income (loss) $ 213,086 $ 470 $ 1,877 $ 6,498 $ 823 $ (6,782) ========= ========= ========= ========= ========= ========= OTHER DATA: EBITDA (d) $ 4,625 $ 4,109 $ 9,780 $ 14,829 $ 18,002 $ 8,242 Depreciation and amortization (e) 3,277 1,901 3,721 3,765 5,812 5,708 Capital Expenditures 480 680 2,152 990 349 47 Backlog 31,941 25,931 38,907 30,307 34,848 12,141 CASH FLOW PROVIDED BY (USED IN): Operating activities $ 13,803 $ (1,389) $ 22,521 $ 8,973 $ 7,921 $ (4,403) Investing activities (479) 90 (1,663) (978) (75,521) (57) Financing activities (6,200) (3,797) 125 (5) 80,721 -- BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 18,649 $ 21,725 $ 27,599 $ 39,519 $ 6,538 $ 4,896 Total assets 87,952 83,808 95,977 99,364 102,919 88,662 Total debt 42,000 42,000 42,000 42,000 69,357 69,464 Shareholders' equity (f) 20,174 20,644 22,652 29,232 12,545 5,763
14 15 (a) Reorganization items relate to the period in which the Company was operating under the protection of Chapter 11 of the Bankruptcy Code. (b) Income taxes not payable in cash represent the tax effect of certain acquired temporary differences existing prior to the Transactions and are recorded as a reduction to goodwill. Such amounts existing prior to the Reorganization were recorded as a reduction to reorganization value in excess of amounts allocable to identifiable assets as required by SOP 90-7. (c) An extraordinary gain of $214,773 was recognized on January 3, 1995 because the consideration for the discharge of pre-petition liabilities was less than the carrying value of the recorded liabilities discharged. (d) EBITDA for any period means operating profit plus depreciation and amortization. Management understands that EBITDA is an indicator customarily used by investors to gauge a company's ability to service its interest and principal obligations. EBITDA should not be considered in isolation from, as a substitute for or as being more meaningful than net income, cash flows from operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with generally accepted accounting principles, and should not be construed as an indication of the Company's operating performance or as a measure of liquidity. EBITDA, as presented herein, may be calculated differently by other companies and, as such, EBITDA amounts presented herein may not be comparable to other similarly titled measures of other companies. (e) Depreciation and amortization does not include the amortization of deferred financing costs, which is recorded with interest expense. (f) The Company has not declared or paid any dividends to its shareholders. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL OVERVIEW The Company designs and assembles glass bending and tempering (i.e., strengthening) systems which are used by glass manufacturers and processors in the conversion of flat glass into safety glass. Systems are sold worldwide, primarily to automotive glass manufacturers and processors and, to a lesser extent, to architectural glass manufacturers and processors. Revenues generated by the sale of new systems are referred to below as "Original Equipment." The Company has an installed base of approximately 400 systems in over 45 countries on six continents. As a result of its installed base and the relatively long useful life of a system, the Company also engages in sales of aftermarket products and services (retrofit of systems with upgrades, tooling used to shape glass parts, replacement parts and technical services). Revenues generated by these types of products are referred to below as "Aftermarket." In this MD&A section all dollar amounts are in thousands, unless otherwise indicated. REVENUES For financial reporting purposes, the Company includes in income the ratable portion of profits on uncompleted contracts determined in accordance with the stage of completion measured by the percentage of costs incurred to estimated total costs of each contract (generally, Original Equipment, system retrofits and tooling). Unbilled amounts included in uncompleted contract receivables represent revenues recognized in excess of amounts billed. Billings in excess of costs and estimated earnings on uncompleted contracts represent amounts billed in excess of revenues recognized. Revenue from sales other than contracts (spare parts and engineering services) is recognized when the products are shipped. SELLING EXPENSE The Company maintains an in-house sales staff and uses the services of commissioned agents around the world for the sale of Original Equipment and aftermarket products and services. In addition, the Company maintains a sales and engineering support office in the United Kingdom. The substantial majority of the Company's Original Equipment is sold directly to the largest glass manufacturers and processors in the world or their affiliates. RESEARCH AND DEVELOPMENT The Company believes it is the technological leader in the design and assembly of glass bending systems. The Company works with customers to identify product needs and market requirements. Periodically, the Company enters into joint development agreements with customers. From time to time, the Company allocates a portion of its R&D resources to complete the transition from new product development to new product introduction. When the Company does this, these expenses are charged directly to the contracts relating to the introduction of new products. The Company considers R&D expenses and new product introductions a very integral part of its future success. 16 17 MANAGEMENT'S ESTIMATES RELATED TO ASIA-PACIFIC CONTRACTS In the ordinary course of business, management continually makes estimates on a variety of matters ranging from percentage of completion of products to collectibility of future payments. Due to the economic uncertainties evolving in the Asia-Pacific region toward the end of fiscal 1997, management undertook a careful review of each contract from that region which was still incomplete at June 30, 1997. This review led management to conclude that the then unfolding uncertainty and instability in the Asia-Pacific region placed the collection of the final payments on many of these contracts at significant risk. Accordingly, management increased estimated costs on Asia-Pacific contracts by an amount equal to the final payments due on these contracts. During the course of fiscal 1998, the substantial majority of these contracts were completed in due course. Subsequently, aggressive and diligent collection efforts by management resulted in the eventual collection of the final payments owed on these contracts. In retrospect, the ultimate collection of these payments had the effect of deferring revenue recognition from fiscal 1997 to fiscal 1998, with net revenues, gross profit, operating income, net income and EBITDA being positively impacted in fiscal 1998 approximately as follows: $5,200, $5,200, $4,100, $2,500 and $4,100, respectively. None of operating income, net income nor EBITDA reflected the full impact of the $5,200 net revenue increase, due to the manner in which bonuses were calculated and the changes in effective tax rates. However, the increase in estimated costs for loss exposures related to the Asia-Pacific region contracts at June 30, 1997 had no impact on net cash provided by operating activities since the cash payments were scheduled to be made, and were made, during fiscal 1998, all as originally provided in the underlying contracts. Management believes that the magnitude of the change in estimates described above represented a unique situation attributed to the following factors: (1) at the end of fiscal 1997, contracts in process from the Asia-Pacific region represented a significant percentage of total contracts in process, both in number of contracts and dollar exposure, and (2) the depth of the economic uncertainty in that region at June 30, 1997. Management does not believe that the magnitude of the changes in estimates experienced in fiscal 1998 is likely to recur. No increases in estimated costs of similar magnitude were made either at June 30, 1998 or June 30, 1999. 17 18 RESULTS OF OPERATIONS The following table presents the amounts and the percentage of total net revenue for certain revenue and expense items for the periods indicated:
PREDECESSOR COMPANY SUCCESSOR COMPANY ------------------------- ---------------------------------------- YEARS ENDED JUNE 30 ------------------------------------------------------------------ 1997 1998 1999 ----------------- ----------------- ---------------- Net revenue(a) Original Equipment $50,237 65.7% $48,873 70.2% $28,885 57.1% Aftermarket 26,196 34.3 20,715 29.8 21,660 42.9 ------- ---- ------- ---- ------- ---- Total net revenue 76,433 100.0 69,588 100.0 50,545 100.0 Cost of goods sold(a) 45,603 59.7 37,760 54.3 31,768 62.9 ------- ---- ------- ---- ------- ---- Gross profit 30,830 40.3 31,828 45.7 18,777 37.1 SG&A expense 12,866 16.8 11,035 15.8 8,632 17.1 R&D expense 4,594 6.0 4,247 6.1 3,368 6.6 Amortization expense(b) 2,306 3.0 4,356 6.3 4,243 8.4 ------- ---- ------- ---- ------- ---- Operating profit $11,064 14.5% $12,190 17.5% $ 2,534 5.0% ======= ==== ======= ==== ======= ==== Amortization expense(b) 2,306 3.0 4,356 6.3 4,243 8.4 Depreciation expense 1,459 1.9 1,456 2.1 1,465 2.9 ------- ---- ------- ---- ------- ---- EBITDA $14,829 19.4% $18,002 25.9% $ 8,242 16.3% ======= ==== ======= ==== ======= ====
(a) Contract revenue and cost of goods sold are recognized on a percentage completion basis measured by the percentage of costs incurred to the estimated total costs of each contract. (b) Amortization expense excludes the amortization of deferred financing costs that is included with interest expense. Fiscal Year 1999 Compared with Fiscal Year 1998 Net revenue for fiscal 1999 decreased $19,043, or 27.4%, to $50,545 from $69,588 for fiscal 1998. Original Equipment revenue decreased $19,988, or 40.9%, to $28,885 for fiscal 1999 compared to $48,873 for fiscal 1998. The continuing economic difficulties in the Asia-Pacific and other foreign regions have adversely impacted new contract signings of Original Equipment in fiscal 1999, resulting in a decrease in Original Equipment revenue. Aftermarket revenue increased $945, or 4.6%, to $21,660 for fiscal 1999 from $20,715 for fiscal 1998. The increase in aftermarket revenue was the result of increased tooling revenue partially offset by a decline in retrofit revenue. Tooling and retrofit revenue fluctuate based on customer demands and are influenced by a variety of factors, including economic conditions and the customers' retrofit schedules and the timing of automotive manufacturers' design changes, which may impact the release of tooling orders. A significant portion of the Company's revenue is generated from customers outside of the United States. For fiscal 1999, Original Equipment revenue from foreign customers was $13,698 (47.4% of total Original Equipment revenue) as compared to $31,287 (64.0% of total Original Equipment revenue) for fiscal 1998. The percentage of aftermarket revenue from foreign customers decreased to 59.3% of total aftermarket revenue for fiscal 1999 compared to 71.4% for fiscal 1998. Gross profit decreased $13,051, to $18,777, or a gross margin percentage of 37.1%, for fiscal 1999 compared to $31,828, or a gross margin of 45.7%, for fiscal 1998. The decline in the gross margin is the result of a shift in the current product mix from higher margin automotive contracts to lower margin architectural contracts and developmental (first of a kind) automotive contracts, which generally carry lower margins. In 18 19 addition, although the Company continues to reduce and minimize its production costs (including reductions in workforce and factory overhead) gross margins have decreased, in part, as a result of fixed factory overhead being applied to lower production volume. Selling, general and administrative expenses decreased $2,403, or 21.8%, to $8,632 for fiscal 1999 from $11,035 for fiscal 1998. This decrease was primarily the result of lower incentive compensation costs due to decreased earnings and other cost containment measures implemented, including workforce reductions. Research and development expenses decreased $879, or 20.7%, to $3,368 for fiscal 1999 from $4,247 for fiscal 1999. This decrease was primarily the result of the dedication of certain developmental resources to the completion of certain original equipment contracts and other cost containment measures implemented, including workforce reductions. Operating profit decreased $9,656, or 79.2%, to $2,534 for fiscal 1999 from $12,190 for fiscal 1998. Operating profit, as a percentage of revenue, was 5.0% for fiscal 1999 as compared to 17.5% for fiscal 1998. The decrease in operating profit was the result of the decline in gross profit partially offset by decreases in selling, general and administrative expenses and research and development expenses. No income tax expense or benefit has been provided for fiscal 1999 due to the recorded loss and the uncertainty related to the future realization of such amounts. The effective tax rate for fiscal 1998 was 73.2%. The effective tax rate for fiscal 1998 differs from the Company's statutory tax rate due to the effects of certain amounts not deductible for income tax purposes, consisting primarily of goodwill amortization. As a result of the Transaction, amortization expense related to goodwill increased significantly, resulting in the unusually high effective tax rate for fiscal 1998. Net loss was $6,782 for fiscal 1999 compared to net income of $823 for fiscal 1998. The net loss was the result of the decline in operating profit. EBITDA, which is defined as operating profit plus depreciation and amortization, decreased $9,760, or 54.2%, to $8,242 for fiscal 1999 from $18,002 for fiscal 1998. Fiscal Year 1998 Compared with Fiscal Year 1997 Net revenue for fiscal 1998 decreased $6,845, or 9.0%, to $69,588 from $76,433 for fiscal 1997. Original Equipment revenue decreased $1,364, or 2.7%, to $48,873 for fiscal 1998 compared to $50,237 for fiscal 1997. At the end of fiscal 1997, the Company's backlog of uncompleted contracts contained, both in dollar amount and number of contracts, a significant number of contracts from the Asia-Pacific region. This was due to the economic prosperity enjoyed by that region in fiscal 1996 and, in the case of the Peoples Republic of China, contracts signed by customers in anticipation of the tightening of import duties on the Company's equipment which did, in fact, occur. Economic uncertainties in the Asia-Pacific region, together with the tightening of import duties in the Peoples Republic of China, resulted in a substantial reduction in both contract signings and revenues in the Asia-Pacific region in fiscal 1998. This reduction was somewhat mitigated by offsetting equipment sales to customers in other regions of the world. In addition, the financial uncertainties which enveloped the Asia-Pacific region in late fiscal 1997 caused the Company to change its cost estimates with respect to contracts in the Asia-Pacific region which were in process at the end of fiscal 1997. See "General Overview - Management's Estimates Related to Asia-Pacific Contracts". Aftermarket revenue decreased $5,481, or 20.9%, to $20,715 for fiscal 1998 from $26,196 for fiscal 1997. The decrease in aftermarket revenue was due primarily to a decline in automotive retrofit and tooling revenue which generally fluctuate based on customer demands and are influenced by a variety of factors, including economic conditions and the customers' retrofit schedules and the timing of automotive manufacturers' design changes, which may 19 20 impact the release of tooling orders. A significant portion of the Company's revenue is generated from customers outside of the United States. For fiscal 1998, Original Equipment revenue from foreign customers was $31,287 (64.0% of total Original Equipment revenue) as compared to $37,096 (73.8% of total Original Equipment revenue) for fiscal 1997. The percentage of aftermarket revenue from foreign customers increased to 71.4% of total aftermarket revenue for fiscal 1998 compared to 66.2% for fiscal 1997. Gross profit increased $998, to $31,828, or a gross margin percentage of 45.7%, for fiscal 1998 compared to $30,830, or a gross margin of 40.3%, for fiscal 1997. Selling, general and administrative expenses decreased $1,831, or 14.2%, to $11,035 for fiscal 1998 from $12,866 for fiscal 1997. This decrease was primarily the result of decreases in directors' fees and expenses, personnel recruitment fees and professional fees. Research and development expenses decreased $347, or 7.6%, to $4,247 for fiscal 1998 from $4,594 for fiscal 1997. For fiscal 1998, certain developmental engineering resources were dedicated to the completion of certain original equipment contracts, thereby causing a reduction in research and development expenses. Amortization expense increased $2,050, or 88.9%, to $4,356 for fiscal 1998 from $2,306 for fiscal 1997. The increase in amortization expense resulted from the amortization of goodwill arising from the Transaction. Operating profit increased $1,126, or 10.2%, to $12,190 for fiscal 1998 from $11,064 for fiscal 1997. Operating profit, as a percentage of revenue, was 17.5% for fiscal 1998 as compared to 14.5% for fiscal 1997. The increase in operating profit was the result of the increase in gross profit and decreases in selling, general and administrative expenses and research and development expenses. Interest expense increased $5,443 to $9,643 for fiscal 1998 from $4,200 for fiscal 1997 as a result of the increased debt and a higher interest rate beginning July 2, 1997. Other income, net, which is comprised primarily of interest income, decreased $1,738 to $525 for fiscal 1998 from $2,263 for fiscal 1997 due to reduced cash balances subsequent to July 2, 1997. The Company's effective tax rate for the period ended June 30, 1998 and the year ended June 30, 1997 was 73.2% and 28.8%, respectively. The effective tax rate for fiscal 1998 differs from the Company's statutory tax rate due to the effects of certain amounts not deductible for income tax purposes, consisting primarily of goodwill amortization. As a result of the Transaction, amortization expense related to goodwill has increased significantly, resulting in the increased effective tax rate in the current period. However, due to the Company's current tax position, including available net operating loss carryforwards, no income taxes are currently payable in cash for fiscal 1998. Net income decreased $5,675, or 87.3%, to $823 for the period ended June 30, 1998 compared to $6,498 for the year ended June 30, 1997. This decrease was due to increased interest expense and the increase in the effective tax rate. EBITDA, which is defined as operating profit plus depreciation and amortization, increased $3,173, or 21.4%, to $18,002 for the period ended June 30, 1998 from $14,829 for the year ended June 30, 1997. 20 21 LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity and capital resources were significantly impacted by the Transaction. The Company's primary sources of liquidity are funds provided by operations and amounts available under the Credit Facility. The Senior Notes do not require any principal payments prior to maturity. The Credit Facility is available to fund working capital requirements as needed and to secure standby letters of credit, which totaled $100 at June 30, 1999. The Company had no outstanding borrowings under the Credit Facility at June 30, 1999 and the Credit Facility is secured by substantially all of the assets of the Company. Effective June 29, 1999, the Credit Facility was amended to establish available borrowing levels up to $10,000 (including standby letters of credit) subject to a borrowing base of certain qualifying assets. At August 31, 1999, the borrowing base approximated $7,500. The Company is in compliance with all material covenants in the Senior Notes and Credit Facility as amended. Net cash provided by operating activities can vary significantly from quarter to quarter or year to year due to the number of new system signings and the amount and timing of new system payments. In most instances, progress payments on new system orders are invoiced or received in advance of revenue recognition. When progress payments are invoiced or received in advance of such revenue recognition, the Company increases current liabilities represented by its billings in excess of costs and estimated earnings on uncompleted contracts. When the revenue is earned, the Company recognizes the revenue and reduces the billings in excess of costs and estimated earnings on uncompleted contract balances. Net cash used by operating activities for fiscal 1999 was $4,403, whereas for fiscal 1998, net cash provided by operating activities was $7,921. The decrease in net cash provided by operating activities for fiscal 1999 was due in part to fewer new system signings, the timing of new system payments and to the interest payments totaling $8,925 made on July 1, 1998 and January 1, 1999. Only one interest payment of $4,438 was required for fiscal 1998. The Company has a backlog (on a percentage of completion basis) at June 30, 1999 of approximately $12,141 as compared to $34,848 at June 30, 1998. The Company expects to complete a substantial majority of this backlog within the next 12 months. The Company's backlog at August 31, 1999 was $15,242. Capital expenditures, including demonstration furnaces classified as fixed assets, were $47 for fiscal 1999 compared to $349 for fiscal 1998. Future capital expenditures, excluding demonstration furnaces, used to replace or improve operating equipment and facilities are estimated to be less than $1,000 per year. In addition, the Company intends to make periodic replacements and improvements on demonstration furnaces, which are used for customer demonstrations and research and development purposes. Demonstration furnaces, which outlive their usefulness for customer demonstrations or research and development purposes, or both, may be refurbished and sold or put to other applicable uses. At June 30, 1999, the Company has net operating loss ("NOL") carryforwards for regular and alternative minimum tax purposes of approximately $43,094 and $39,729, respectively, which expire in the years 2009 through 2014. These NOL's are subject to annual usage limitations. Although the Company's ability to generate cash has been affected by the increased interest costs resulting from the Transaction and the decline in contract signings in fiscal 1999, management believes that internally generated funds, together with amounts available under the Credit Facility, will be sufficient to satisfy the Company's operating cash and capital expenditure requirements, make required payments under the Credit Facility and make scheduled interest payments on the Senior Notes. However, the ability of the Company to satisfy its obligations will ultimately be dependent upon the Company's future operating and financial performance, including increasing contract signings, and upon its ability to renew or refinance borrowings or to raise additional equity capital as necessary. The Company's business is subject to rapid 21 22 fluctuations due to changes in the world markets for the end products produced by its equipment (largely in the cyclical markets of automobiles and construction), currency fluctuations, the local economies of those countries where users and potential users of the Company's equipment are located, geopolitical events and other macroeconomic forces largely beyond the ability of the Company to predict or control. Except as discussed below, management is not currently aware of any trends, demands, commitments or uncertainties which will or which are reasonably likely to result in a material change in the Company's liquidity. During fiscal 1997, 1998 and 1999, approximately 59.2%, 39.7% and 28.1% of the Company's net revenue was derived from sales of products to customers located in the Asia-Pacific region (Australia, China, Indonesia, Japan, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, South Korea, Taiwan, and Thailand). Management believes the current economic uncertainties in the Asia-Pacific region indicate that the timing of orders for the Company's products may continue to be adversely affected in fiscal 2000. However, given the inherent difficulty in predicting with certainty the timing of contract signings and geographic areas into which equipment will be delivered in fiscal 2000 and beyond, the continued impact of this situation on the Company's financial performance in fiscal 2000 and beyond is impossible to predict. The Company will continue to monitor the situation in the Asia-Pacific region. Notwithstanding the current economic conditions in the Asia-Pacific region, the Company believes that given world demographics and long term economic trends, the Asia-Pacific region will continue to represent a significant market for the Company's products and it intends to continue its presence in this area. INFLATION Management believes that the Company's operations have not been adversely affected by inflation. YEAR 2000 COMPLIANCE Since March, 1998, the Company has had a committee reviewing issues and problems relating to potential year 2000 problems which may arise because computers, software and firmware programs, applications and information technology systems (the "IT Systems") and items with embedded microchips (the "Non-IT Systems" and, together with the IT Systems, the "Systems") only utilize two digits to refer to a year. The Company has recognized that this year 2000 problem, may cause many of the Systems to fail or perform incorrectly because they will not properly recognize a year that begins with "20" instead of the familiar "19." If a computer system or software application used by the Company or by a third party dealing with the Company fails because of the inability of the system to properly read the year "2000," this failure could have a material adverse effect on the Company. The Company's review and assessment of the year 2000 problem has focused on four primary areas: (i) the Systems and their relationship to the Company's operations, (ii) Glasstech systems currently being used by the Company's customers and currently being sold by the Company, (iii) compliance by the Company's 50 largest suppliers, and (iv) compliance by the suppliers of the Company's building and utility systems. The Company has not incurred, and does not anticipate incurring, material costs related to year 2000 compliance. The Systems The Company has completed its review of the Systems, including both the IT Systems and the Non-IT Systems. In reviewing the Systems, the Company found that some of them were not year 2000 compliant. The Company has purchased and installed upgraded versions of the IT Systems, including the software 22 23 programs used for financial reporting, purchasing, order entry, payroll and product design/development that the Company has been assured are year 2000 compliant by the vendors of those programs. The majority of these upgrades were installed by December 1998 and the final upgrade will occur in October 1999. The Company believes that, with the exception of one of its computer-aided design ("CAD") systems, its manufacturing and design operations are year 2000 compliant. The Company has completed its review of the non-compliant CAD system and is expected to have an upgraded version operational by November 1999. Although there can be no assurance that the Company has identified and corrected, or will identify and correct, every year 2000 problem found in the Systems, the Company believes that it has a comprehensive program in place to identify and correct any such problems. The Company does have contingency plans developed in the event of a failure in any of the systems. Glasstech Systems The Company assessed the year 2000 compliance of the Glasstech systems currently in service. The Company determined that the majority of the Glasstech systems currently in service should continue to operate after the year 2000; however, the internal date function on certain systems may not perform properly, which would require the end-user of a Glasstech system to make certain manual changes to the maintenance reports printed by the system. The Company has identified one type of software within certain Glasstech systems which, if not properly reset, may cause this type of Glasstech system to fail. The Company has addressed the year 2000 problems in all of the Glasstech systems currently being sold, and has put out a service bulletin on the Glasstech systems currently in service to inform customers of the problems. The Company has made software and hardware upgrades available to its customers that address these problems. Suppliers The Company has completed a program to determine the year 2000 compliance efforts of its equipment and raw materials suppliers. The Company sent out questionnaires to its 47 largest suppliers and the Company has received responses from all of these suppliers. This program has not revealed any material problems. Unfortunately, the Company cannot fully control the conduct of its suppliers, and there can be no guarantee year 2000 problems originating with a supplier will not occur. The Company believes that it has made adequate arrangements with backup suppliers to avoid any material adverse effect that would occur if one of its primary suppliers were unable to fill the Company's orders for any reason, including as a result of year 2000 problems. Building and Utility Suppliers The Company has completed reviews of its building and utility systems (gas, electrical, telephone, etc.) for the impact of the year 2000 problem. These suppliers have stated they are year 2000 compliant. If the Company did not receive utility service from certain of these suppliers, the Company may be unable to produce Glasstech systems or take orders for new systems. While the Company continues working diligently with all of its utility suppliers and has no reason to expect that they will not be able to provide service after the year 2000, there can be no assurance that these suppliers will be able to meet the Company's requirements. In the case of these suppliers, an acceptable contingency plan has not yet been developed. Because of the nature of these suppliers and the fact that they are often the only suppliers of a given service available in the Company's geographic region, management believes that it may prove impossible to develop an acceptable contingency plan for certain of the building and utility systems. The failure of any such supplier to fully remediate its systems for year 2000 compliance could cause a shut down of the Company's manufacturing and design facility, which could impact the Company's ability to meet its obligations to supply Glasstech systems to its customers and could have a material adverse affect on the Company. 23 24 ITEM 7(a). MARKET RISK EXPOSURES Based on the Company's current operations and business practices, the Company does not believe that it has any significant exposure to interest rate, foreign currency, commodity price, or equity price market risks. 24 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Auditors.........................................................................26 Consolidated Balance Sheets as of June 30, 1999 and 1998...............................................27 Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997.................28 Consolidated Statements of Shareholder's Equity for the Years Ended June 30, 1999, 1998 and 1997.......29 Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997.................30 Notes to Consolidated Financial Statements.............................................................31
25 26 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholder Glasstech, Inc. We have audited the accompanying consolidated balance sheets of Glasstech, Inc. as of June 30, 1999 and 1998, and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the three years in the period ended June 30, 1999. Our audits also included the Financial Statement Schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 an evaluation of the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As more fully described in the notes to the consolidated financial statements, effective July 2, 1997, the Company was acquired by Glasstech Holding Co. The acquisition was accounted for under the purchase method of accounting for financial reporting purposes. As a result of this acquisition, the consolidated financial statements for the period after the acquisition are presented on a different cost basis than that for the period before the acquisition and, therefore, are not comparable. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Glasstech, Inc. at June 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended the June 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Toledo, Ohio August 13, 1999 26 27 GLASSTECH, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JUNE 30, 1999 1998 ---------------------- (NOTE 1) ASSETS Current assets: Cash and cash equivalents $ 8,661 $ 13,121 Accounts receivable: Contracts: Uncompleted, including unbilled amounts of $1,430 and $6,841 3,602 7,930 Completed 459 931 Trade, less allowance of $40 for doubtful accounts 1,469 1,144 ---------------------- 5,530 10,005 Inventory: Replacement and service parts 1,999 1,656 Furnace contracts and other 1,368 2,017 ---------------------- 3,367 3,673 Prepaid expenses 350 350 ---------------------- Total current assets 17,908 27,149 Property, plant and equipment, net 6,789 6,947 Other assets: Patents, less accumulated amortization of $3,454 and $1,727 14,829 16,556 Goodwill, less accumulated amortization of $5,145 and $2,629 45,280 47,796 Deferred financing costs and other 3,856 4,471 ---------------------- Total other assets 63,965 68,823 ---------------------- $ 88,662 $ 102,919 ====================== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable $ 1,710 $ 4,167 Billings in excess of costs and estimated earnings on uncompleted contracts 3,250 4,309 Accrued liabilities: Interest 4,462 4,462 Salaries and wages 1,702 3,851 Contract costs 795 2,382 Other 1,094 1,440 ---------------------- 8,053 12,135 ---------------------- Total current liabilities 13,013 20,611 Long-term debt 69,464 69,357 Nonpension postretirement benefit obligation 422 406 Shareholder's equity: Common stock $.01 par value; 1,000 shares authorized, issued and outstanding -- -- Additional capital 15,750 15,750 Retained earnings (deficit) (5,959) 823 ---------------------- 9,791 16,573 Shareholder's basis reduction (4,028) (4,028) ---------------------- Total shareholder's equity 5,763 12,545 ---------------------- $ 88,662 $ 102,919 ======================
See accompanying notes. 27 28 GLASSTECH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30, 1999 1998 1997 -------------------------------- SUCCESSOR PREDECESSOR COMPANY COMPANY (NOTE 1) Net revenue $ 50,545 $ 69,588 $ 76,433 Cost of goods sold 31,768 37,760 45,603 -------------------------------- Gross profit 18,777 31,828 30,830 Selling, general and administrative expenses 8,632 11,035 12,866 Research and development expenses 3,368 4,247 4,594 Amortization expense 4,243 4,356 2,306 -------------------------------- Operating profit 2,534 12,190 11,064 Interest expense (9,668) (9,643) (4,200) Other income - net 352 525 2,263 -------------------------------- (Loss) income before income taxes (6,782) 3,072 9,127 Income taxes not payable in cash -- (2,249) (2,551) Federal income taxes, current -- -- (78) -------------------------------- Net (loss) income $ (6,782) $ 823 $ 6,498 ================================
See accompanying notes. 28 29 GLASSTECH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
COMMON STOCK SHAREHOLDER'S RETAINED ----------------------- ADDITIONAL BASIS EARNINGS SHARES AMOUNT CAPITAL REDUCTION (DEFICIT) TOTAL ------------------------------------------------------------------------------ PREDECESSOR COMPANY (NOTE 1) Balance, June 30, 1996 1,000,001 $ 10 $ 20,295 $ -- $ 2,347 $ 22,652 Net income 6,498 6,498 Issuance of common stock 4,118 -- 82 82 ------------------------------------------------------------------------------ Balance, June 30, 1997 1,004,119 $ 10 $ 20,377 $ $ 8,845 $ 29,232 ============================================================================== SUCCESSOR COMPANY (NOTE 1) Issuance of common stock 1,000 $ -- $ 15,750 $ -- $ -- $ 15,750 Shareholders' basis reduction (4,028) (4,028) Net income 823 823 ------------------------------------------------------------------------------ Balance, June 30, 1998 1,000 -- 15,750 (4,028) 823 12,545 Net loss (6,782) (6,782) ------------------------------------------------------------------------------ Balance, June 30, 1999 1,000 $ -- $ 15,750 $ (4,028) $ (5,959) $ 5,763 ==============================================================================
See accompanying notes. 29 30 GLASSTECH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30, 1999 1998 1997 -------------------------------- SUCCESSOR PREDECESSOR COMPANY COMPANY (NOTE 1) OPERATING ACTIVITIES Net (loss) income $ (6,782) $ 823 $ 6,498 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 6,343 6,447 3,764 Accretion of debt discount 107 107 -- Nonpension postretirement benefit obligation expense in excess of payments 17 15 159 Income taxes not payable in cash -- 2,249 2,551 Other -- 7 11 Changes in assets and liabilities affecting operations: Restricted cash -- 1,529 (111) Accounts receivable 4,475 (2,855) 1,397 Inventory (965) 832 (1,697) Prepaid expenses -- 86 (166) Accounts payable (2,457) 480 (450) Billings in excess of costs and estimated earnings on uncompleted contracts (1,058) (6,583) (4,917) Accrued liabilities (4,083) 4,784 1,934 -------------------------------- Net cash (used in) provided by operating activities (4,403) 7,921 8,973 INVESTING ACTIVITIES Additions to property, plant and equipment (47) (349) (990) Net assets purchased -- (74,796) -- Increase in long-term notes receivable -- (656) -- Proceeds on sale of demonstration furnace -- 270 -- Other (10) 10 12 -------------------------------- Net cash used in investing activities (57) (75,521) (978) FINANCING ACTIVITIES Issuance of long-term debt and related warrants -- 70,000 -- Issuance of common stock -- 15,000 82 Deferred financing costs -- (4,279) (87) -------------------------------- Net cash provided by (used in) financing activities -- 80,721 (5) (Decrease) increase in cash and cash equivalents (4,460) 13,121 7,990 Cash and cash equivalents at beginning of year 13,121 -- 43,815 -------------------------------- Cash and cash equivalents at end of year $ 8,661 $ 13,121 $ 51,805 ================================ Supplemental disclosure of cash flow information: Cash paid (received) during the year for the following: Interest $ 8,925 $ 4,438 $ 4,200 ================================ Income taxes $ 21 $ (311) $ 337 ================================
See accompanying notes. 30 31 GLASSTECH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1. BACKGROUND AND BASIS OF PRESENTATION Effective July 2, 1997, Glasstech, Inc. (the "Company") was acquired by Glasstech Holding Co. ("Holding") (the "Transaction"). In connection with the Transaction, Holding, a holding company formed for the purpose of completing the Transaction, formed a wholly owned subsidiary, Glasstech Sub Co. ("Sub Co.") which acquired all of the outstanding stock of the Company. Subsequently, Sub Co. was merged into the Company. Holding has no significant activities other than its investment in the Company. The acquisition was accounted for under the purchase method of accounting for financial reporting purposes and the purchase price of approximately $77,900 has been allocated to the underlying net assets acquired. The Transaction resulted in the Company having substantial goodwill, increased debt and a significant reduction in cash. As a result of the Transaction, the financial position and results of operations of the Company subsequent to the Transaction are not necessarily comparable to the financial position and results of operations of the Company prior to the Transaction. In the accompanying consolidated financial statements, the Company's results of operations prior to the Transaction are indicated as relating to the "Predecessor Company" while the results of operations subsequent to the Transaction are indicated as relating to the "Successor Company." Amounts reported for financial reporting purposes in fiscal 1998 represent the activity of the Successor Company beginning July 2, 1997. In connection with accounting for the Transaction, the Company applied the provisions of Emerging Issues Task Force Issue 88-16 (EITF 88-16), whereby the carryover equity interests of certain shareholders from the Predecessor Company to the Successor Company were recorded at their predecessor basis. As a result, shareholder's equity of the Successor Company has been reduced by $4,028 with a corresponding reduction to the value of goodwill acquired. The Company has two wholly owned subsidiaries, Glasstech Ltd., a corporation in the United Kingdom, and Stir-Melter, Inc., a domestic subsidiary, which are consolidated for financial reporting purposes. All significant intercompany amounts and transactions have been eliminated. The Company designs and manufactures glass bending and tempering equipment and markets and sells such equipment worldwide to both automotive glass fabricators and architectural glass producers. Glasstech Ltd. provides engineering, sales, and service support in Europe, the Middle East, and Africa. Stir-Melter, Inc. designs and markets glass-melting equipment for the treatment of certain waste products. 31 32 2. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION For financial reporting purposes, the Company includes in income the ratable portion of profits on uncompleted contracts determined in accordance with the stage of completion measured by the percentage of costs incurred to estimated total costs of each contract. For income tax purposes, contracts are accounted for on the inventory accrual basis, whereby income is recognized when the customer accepts the equipment. Unbilled amounts included in uncompleted contract accounts receivable represent revenues recognized in excess of amounts billed. Billings in excess of costs and estimated earnings on uncompleted contracts represent amounts billed in excess of revenues recognized. Revenue from sales other than contracts is recognized when the products are shipped. CREDIT PRACTICES Credit terms are granted to customers and periodically revised based on evaluations of the customer's financial condition with collateral generally not being required. In certain instances, letters of credit may be obtained to secure payment. CASH AND CASH EQUIVALENTS The Company considers all unrestricted highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORY Inventory is stated at the lower of cost or market determined by the first-in, first-out (FIFO) method. DEPRECIATION AND AMORTIZATION Depreciation is based on the estimated useful lives of the assets and is generally computed using accelerated methods. Amortization of leasehold improvements is provided on the straight-line basis over the estimated useful lives of the assets or the terms of the leases, whichever is shorter. The useful lives range from 10 to 40 years for building and leasehold improvements; 3 to 12 years for machinery and equipment; 7 to 12 years for demonstration glass tempering furnaces; and 3 to 12 years for office equipment and other. Patents are being amortized on the straight-line basis over their estimated useful lives of 10 to 15 years. Goodwill is being amortized on the straight-line basis over 20 years. Deferred financing costs are being amortized over 7 years, the length of the underlying note agreement. 32 33 2. SIGNIFICANT ACCOUNTING POLICIES--CONTINUED MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. At June 30, 1997, the estimated costs of contracts in the Asia Pacific region included provisions for loss exposures related to final payments that would be due upon completion of such contracts in fiscal year 1998. At the time these estimates were made, the Asia Pacific region was beginning a period of financial instability and uncertainty that placed receipt of these future final contract payments at risk. During fiscal 1998, the Company was successful in the collection of these final contract payments. These changes in estimates in fiscal 1998 resulted in additional contract revenues of $5,200 for the year ended June 30, 1998. The provisions for loss exposures related to the Asia-Pacific region contracts at June 30, 1997 had no impact on net cash provided by operating activities since the cash payments were scheduled to be made, and were made, during fiscal 1998, all as originally provided in the underlying contracts. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133) which establishes new procedures for accounting for derivatives and hedging activities and supersedes and amends a number of existing standards. Statement 133 is effective for fiscal years beginning after June 15, 2000. Statement 133 is not expected to have a significant impact on the Company. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
AS OF JUNE 30 1999 1998 ------------------ Cost: Land $ 110 $ 110 Building and leasehold improvements 2,331 2,329 Machinery and equipment 1,119 1,160 Demonstration glass tempering furnaces 4,360 3,044 Office equipment 1,730 1,693 Other 9 9 ------------------ 9,659 8,345 Less accumulated depreciation and amortization (2,870) (1,398) ------------------ NET PROPERTY, PLANT AND EQUIPMENT $ 6,789 $ 6,947 ==================
33 34 4. NOTES PAYABLE AND LONG-TERM DEBT In connection with the Transaction, the Company issued $70,000 of 12-3/4% Senior Notes due 2004 (the "Old Notes") in a private offering exempt from registration under the Securities Act of 1933, as amended (the "1933 Act"). The offering of the Old Notes was also structured to permit resales under Rule 144 of the 1933 Act. In connection with the issuance of the Old Notes, the Company received from Holding warrants to purchase 877 shares of common stock of Holding valued at $750. These warrants were issued to the initial purchasers of the Old Notes. On December 2, 1997 the Company consummated an exchange offer (the "Exchange Offer") of its $70,000 series B 12-3/4% Senior Notes Due 2004 (the "New Notes"), which were issued in a transaction registered under the 1933 Act, for the Old Notes. The terms of the New Notes are substantially identical to the terms of the Old Notes and as used herein, will be referred to as the "Senior Notes." Interest on the Senior Notes is payable semi-annually on each January 1 and July 1 beginning January 1, 1998. The terms of the Senior Notes do not require any scheduled principal payments prior to maturity. The Company also entered into a revolving credit facility ("Credit Facility") in connection with the Transaction. The Credit Facility provides for interest on outstanding borrowings at the LIBOR rate plus 2.5% (7.71% at June 30, 1999) payable semi-annually. Effective June 29, 1999, the Credit Facility was amended to establish available borrowing levels up to $10,000 (including standby letters of credit) subject to a borrowing base of certain qualifying assets. At June 30, 1999, the borrowing base approximated $10,000. The Credit Facility is available to fund working capital requirements as needed and to secure standby letters of credit, which totaled $100 at June 30, 1999. The Company had no outstanding borrowings under the Credit Facility at June 30, 1999. The Credit Facility is secured by substantially all of the assets of the Company. The Senior Notes and Credit Facility, as amended, contain numerous financial and other covenants which include the maintenance of certain levels of earnings as defined, restrictions on the payment of dividends, the incurrence of additional indebtedness, and as certain types of business activities and investments. The Company believes that it is in material compliance with all such covenants. At June 30, 1999 and 1998, the carrying value of this Company's long-term debt approximated its fair value based on the Company's incremental borrowing rates. 5. EMPLOYEE BENEFIT PLANS The Company has defined contribution retirement plans that cover substantially all employees. Contributions for the Employees' Pension Plan, which are based on participants' compensation, are funded annually, in arrears. Annual expense for this Plan approximated $616, $639 and $604, for the years ended June 30, 1999, 1998 and 1997, respectively. The Company does not match contributions made by employees under the Employees' Savings Plan, a 401(k) plan. In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (Statement 132) for all years presented which supersedes previous disclosure requirements. Statement 132 addresses disclosure issues only and does not change the measurement or recognition of assets or liabilities. Glasstech provides certain retiree healthcare insurance benefits to eligible retired employees. Employees are generally eligible for benefits upon retirement and completion of a specified number of years 34 35 of creditable service. These benefits are provided at the discretion of Glasstech and are subject to revision or termination at any time. The Company funds such costs as they are incurred. 5. EMPLOYEE BENEFIT PLANS-CONTINUED The components of the net periodic postretirement benefit cost for the years ended June 30 are as follows:
1999 1998 1997 --------------------- ------------ SUCCESSOR PREDECESSOR COMPANY COMPANY Service cost (benefits earned during the period) $ 16 $ 16 $ 117 Interest cost on accumulated postretirement benefit obligation 32 31 128 Net amortization and deferral -- -- (55) -------------------------------- NET PERIODIC POSTRETIREMENT BENEFIT COST $ 48 $ 47 $ 190 ================================
The changes in the accumulated postretirement benefit obligation and amounts accrued were as follows:
1999 1998 --------------------------- Change in accumulated postretirement benefit obligation: Benefit obligation, beginning of year $405 $391 Service cost 16 16 Interest cost 32 31 Actuarial loss (gain) 106 (1) Benefits paid (32) (32) --------------------------- BENEFIT OBLIGATION, END OF YEAR $527 $405 =========================== Funded status of plan $527 $405 Unrecognized net (loss) gain (105) 1 --------------------------- ACCRUED BENEFIT OBLIGATION $422 $406 ===========================
The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.0% at June 30, 1999 and 8.25% at June 30, 1998. 35 36 6. FEDERAL INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income tax liabilities and assets at June 30 are as follows:
1999 1998 --------------------- Deferred income tax liabilities: Contract revenues $ (4,664) $ (5,469) Property, plant and equipment (756) (816) Tax basis differences on purchased assets (497) 1,006 --------------------- Total deferred income tax liabilities (5,917) (5,279) Deferred income tax assets: Federal income tax operating loss carryovers 16,376 13,794 Accrued liabilities and reserves 630 1,044 Other 402 321 --------------------- Total deferred income tax assets 17,408 15,159 Less valuation allowance 11,491 9,880 --------------------- Net deferred income tax assets 5,917 5,279 --------------------- TOTAL DEFERRED INCOME TAXES - NET $ -- $ -- =====================
A valuation allowance has been recorded against the Company's deferred income tax assets due to the uncertainties surrounding the realization of any future tax benefit. 36 37 6. FEDERAL INCOME TAX--CONTINUED The consolidated effective income tax rate differs from the statutory U. S. federal tax rate for the following reasons and by the following percentages:
1999 1998 1997 ---------------------------- ------------- SUCCESSOR PREDECESSOR COMPANY COMPANY Statutory U. S. federal tax rate (34.0)% 34.0% 34.0% Increase (reduction) in tax rate resulting from: Amortization of goodwill and excess reorganization value 12.7 32.5 2.2 State income taxes - 4.3 - Effect of increase (reduction) in valuation reserve for deferred income taxes 20.9 - (8.6) Other 0.4 2.4 1.2 ------------------------------------------ EFFECTIVE TAX RATE -% 73.2% 28.8% ==========================================
At June 30, 1999, the Company has net operating loss carryforwards for regular and alternative minimum tax purposes of approximately $43,094 and $39,729, respectively, which expire in the years 2009 through 2014. Such loss carryforwards have annual usage limitations which, if not utilized in a given year, may be utilized in subsequent years. Income taxes not payable in cash represent the tax effect of certain acquired temporary differences and are recorded as a reduction to goodwill. 37 38 7. LEASES The Company leases a manufacturing and office building under a long-term agreement. The minimum annual rental associated with this lease through its expiration on December 31, 1999 is approximately $300. The Company has the option to renew the lease for two additional five-year periods at slightly higher rates. Total rental expense amounted to $300 for each of the three years in the period ended June 30, 1999. 8. GEOGRAPHIC AND CUSTOMER INFORMATION Effective the fourth quarter of 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (Statement 131) which superseded Statement No. 14, "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim and annual financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of Statement 131 did not affect results of operations or financial position. The Company's net revenues from external customers are derived from glass bending and tempering equipment. The Company's net revenues from external customers by geographic areas and customers who represent 10% or more of total sales for 1999, 1998 and 1997 are presented below. Long-lived assets, consisting of property, plant and equipment, patents and goodwill, located outside the United States are not significant.
1999 1998 1997 ------------------------------- ------------- SUCCESSOR PREDECESSOR COMPANY COMPANY Net Revenue by Geographic Location: United States $23,995 $23,509 $22,269 Asia-Pacific 14,189 27,654 45,276 Europe 10,338 11,518 5,030 Latin America 1,638 5,384 2,616 Other 385 1,523 1,242 --------------------------------------------- $50,545 $69,588 $76,433 =============================================
38 39 8. GEOGRAPHIC AND CUSTOMER INFORMATION--CONTINUED
1999 1998 1997 ------------------------------- -------------- SUCCESSOR PREDECESSOR COMPANY COMPANY Major customers percentage of net revenue: Customer A 17.7% 13.4% 12.4% Customer B 17.3 14.9 6.3 Customer C 10.2 9.7 3.7 Customer D 5.4 5.4 14.3 Customer E 3.0 5.6 11.3 Customer F .2 5.8 12.6
9. TRANSACTIONS WITH AFFILIATES Upon consummation of the Transaction and in connection with the related note offering of the Old Notes and the warrants, the Company paid a $1,000 financing fee to Key Equity Capital Corporation ("KECC"), a major shareholder. In addition, the Company also entered into an advisory agreement with KECC at an annual expense of $200 adjusted to $150 effective October 1, 1998. In connection with the Transaction, the Company advanced $656 to Holding. The advances were made to Holding to permit Holding to satisfy certain obligations it entered into in connection with the Transactions. 10. LEGAL PROCEEDINGS On January 15, 1997, James E. Heider, a former executive officer of the Company, commenced an action against the Company and Mark Christman, the President of the Company, in the Common Pleas Court of Wood County, Ohio, relating to the nonrenewal of his employment agreement. On July 24, 1998, the Company was granted a motion for summary judgment on all counts. Mr. Heider filed an appeal and on July 16, 1999, the Wood County Court of Appeals entered a unanimous decision affirming the summary judgment granted in the Company's favor. Mr. Heider has until August 30, 1999 to file a discretionary appeal to the Ohio Supreme Court. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 39 40 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names and ages of the Company's executive officers (the "Executive Management") and the directors of the Company and Holding (the "Directors"). The officers and directors of the Company and Holding are identical and management believes that they will continue to be identical for the foreseeable future.
NAME AGE POSITION ---- --- -------- Mark D. Christman 47 Director, President and Chief Executive Officer John S. Baxter 59 Senior Vice President, Marketing and Sales Kenneth H. Wetmore 52 Vice President, General Counsel and Secretary Ronald A. McMaster, Ph.D. 60 Vice President, Corporate Development Diane S. Tymiak 42 Vice President, Treasurer and Chief Financial Officer Larry E. Elliott 50 Vice President, Manufacturing James P. Schnabel 39 Vice President, Development and Engineering David P. Given 45 Director John A. LeMay 33 Director James M. Papada, III 51 Director Edmund S. Wright 56 Director
Mark D. Christman has been President and Chief Operating Officer of the Company since December 31, 1992. Mr. Christman joined the Company in 1976, and since that time has served in various capacities, including Vice President, Treasurer, Chief Financial Officer and Executive Vice President. Upon the consummation of the Transactions, Mr. Christman was elected Director, President and Chief Executive Officer. John S. Baxter has been Senior Vice President, Marketing and Sales, since 1992. Mr. Baxter joined the Company in 1981 and was Managing Director of Glasstech Ltd. from 1981 to 1992. Prior to joining the Company, Mr. Baxter was employed by Triplex Safety Glass, a subsidiary of Pilkington plc, for five years. From July 1997 to February 1998, Mr. Baxter was a Director. Kenneth H. Wetmore joined the Company in 1988 as General Counsel and was elected Secretary in 1989 and Vice President in 1991. Mr. Wetmore is also President of Stir-Melter, Inc. Prior to joining the Company, Mr. Wetmore was employed by Owens Corning Fiberglas Corp. for 19 years. Ronald A. McMaster, Ph.D. has been Vice President, Corporate Development since 1988. Dr. McMaster joined the Company in 1977 and has served in various capacities, including Vice President, Research and Development and Vice President, Advanced Engineering. Mr. McMaster and Mr. Christman are first cousins. Diane S. Tymiak has been Vice President, Treasurer and Chief Financial Officer since 1993. Ms. Tymiak joined the Company in 1980 and has served in various financial capacities since that time. Larry E. Elliott joined the Company in July 1996 as Vice President and currently serves as Vice President, Manufacturing. Prior to joining the Company, Mr. Elliott was employed by the glass division of Ford Motor Company for 25 years, most recently as Supervisor, Fabrication Facilities Engineering. 40 41 James P. Schnabel was elected Vice President in 1997 and currently serves as Vice President Development and Engineering. Mr. Schnabel joined the Company in 1984 and has served in various engineering capacities with the Company since that time. David P. Given has been President of KECC, a venture capital firm, since 1995. Mr. Given joined KECC as a Vice President in 1990 and serves as a director of several privately-held companies. Upon the consummation of the Transactions, Mr. Given began to serve as Director. John A. LeMay joined KECC, a venture capital firm, as a Vice President in 1998. Prior to joining KECC, Mr. LeMay was employed by the Boston Consulting Group, Inc. and Salomon Brothers, Inc. Mr. LeMay became a Director in May 1999. James M. Papada is Chairman of the Board of Directors and CEO of Technitrol, Inc. (NYSE: TNL), a diversified manufacturer of components for electrical and electronic equipment. From 1978 to 1982 and from 1988 to 1999 Mr. Papada was a partner with the law firm of Stradley, Ronon, Stevens & Young, located in Philadelphia, Pennsylvania. From 1983 to 1988, Mr. Papada was Chief Operating Officer of Hordis Brothers, Inc., the largest independent glass processor/fabricator in the United States. Mr. Papada is also a director of Parra-Chem Southern, Inc. and CTA, Incorporated. Mr. Papada became a Director in February 1998. Edmund S. Wright has been a business consultant since 1995. Prior to that, Mr. Wright was President and CEO of North American Refractory Company from 1981 to 1994, Vice Chairman of NARCO, Canada, Inc. from 1989 to 1994, Chairman of ZIRCOA, Inc. from 1989 to 1994, President of Tri-Star Refractories, Inc. from 1990 to 1994 and Chairman of Dakota Catalyst Products, Inc. from 1995 to 1997. Mr. Wright is also a director of Fairmount Minerals, Inc., Unifrax Corporation, Stonebridge Industries, Inc. and STAM, Inc. Mr. Wright became a Director in February 1998. All Directors hold office until the next annual meeting of shareholders and until their successors have been elected and qualified. Executive Officers serve at the discretion of the Board. Compensation of Directors, not employed by the Company or affiliated with KECC, is $20,000 per year. Under the Stockholders' Agreement (as defined herein), Messrs. Given and LeMay serve as directors as representatives of KECC, and Mr. Christman serves as a director by virtue of his position as President and Chief Executive Officer of the Company and Holding. Mr. LeMay replaced Mr. Jon Kleinke, of KECC, who resigned effective May 1999. 41 42 ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth the compensation received by the Company's Chief Executive Officer and the four other highest paid executive officers (together with the Chief Executive Officer, the "Named Executive Officers") for services to the Company in fiscal years 1999, 1998 and 1997. SUMMARY COMPENSATION TABLE
ANNUAL ALL OTHER COMPENSATION COMPENSATION ------------ ------------ NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS(a) (b) - --------------------------- ----------- ------ -------- --- Mark D. Christman 1999 $289,909 $1,058,000 $13,848 President and Chief Executive Officer.................... 1998 309,634 970,000 13,348 1997 291,110 700,000 12,520 John S. Baxter 1999 226,935 322,000 14,400 Senior Vice President, Marketing and Sales............... 1998 233,254 296,000 13,900 1997 219,516 215,000 12,590 Kenneth H. Wetmore 1999 196,932 170,000 14,076 Vice President, General Counsel and Secretary............ 1998 200,080 136,000 13,481 1997 190,448 115,000 12,590 Larry E. Elliott 1999 160,403 148,000 13,848 Vice President, Manufacturing and Engineering............ 1998 163,275 136,000 17,446 1997 154,160 - 40,179 James P. Schnabel 1999 146,574 148,000 13,632 Vice President, Development.............................. 1998 144,690 136,000 13,132 1997 128,688 32,000 7,513
(a) Represent bonus amounts paid in the fiscal years listed but related to prior year performance. (b) Represents (i) a pension plan contribution equal to 5% of each Named Executive Officer's first $160,000 ($150,000 for 1997) of compensation under the Company's pension plan and (ii) imputed income on life insurance provided by the Company. In 1997, Mr. Elliott also received a moving allowance of $27,662). EMPLOYMENT AGREEMENTS AND ARRANGEMENTS Mr. Christman has entered into a five-year employment agreement with Holding and the Company pursuant to which Mr. Christman serves as the President and Chief Executive Officer of Holding and the Company (the "President"). Mr. Christman is paid a base salary subject to certain cost-of-living adjustments, and receives customary executive benefits. Additionally, pursuant to his agreement and the Stockholders Agreement (as defined herein), he is entitled to receive no less than 40% of all distributions from the Performance Bonus Pool (as defined herein), participate in the Restricted Stock Program (as defined herein), and participate in the Performance Share Program (as defined herein). See "Management Incentive Plans." The employment agreement also contains a noncompetition provision that prohibits Mr. Christman from competing or holding certain ownership interests in other businesses that compete against the Company for the later of five years after the initial date of the agreement or two years following the termination of Mr. Christman's employment (unless Mr. Christman is terminated without cause, in which case no restriction shall apply). The employment agreement is renewable by the Company for one-year successive terms upon completion of the initial five-year term. 42 43 Each of the other members of Executive Management also entered into an employment agreement (each, an "Employment Agreement" and, collectively with the President's employment agreement, the "Employment Agreements") that is substantially similar to Mr. Christman's agreement, but is paid a base salary per year, subject to certain cost-of-living adjustments. MANAGEMENT INCENTIVE PLANS In connection with the Transactions, the Company and Holding have established (i) a performance bonus pool (the "Performance Bonus Pool"); (ii) a restricted stock plan (the "Restricted Stock Program"); and (iii) a performance share program (the "Performance Share Program"), all of which were designed to retain and reward members of Executive Management. No table describing options granted in the last fiscal year has been included, because neither the Company nor Holding has granted any options to Executive Management in the past fiscal year and no options to Executive Management are currently outstanding. Performance Bonus Pool. Each member of Executive Management is eligible to receive a distribution from the Performance Bonus Pool (based upon a calculated EBITDA as defined in the Employment Agreements). Amounts made available by the Company pursuant to the Performance Bonus Pool at the end of each fiscal year are based on the calculated EBITDA of the Company for such fiscal year or the average calculated EBITDA for all fiscal years, whichever is greater (as defined in the Employment Agreements). If calculated EBITDA (which for such purpose will be computed before deducting any fees payable to KECC) is between $14.0 million and $15.0 million as of such fiscal year, then amounts available for distribution pursuant to the Performance Bonus Pool will generally be 5.0% of calculated EBITDA. If calculated EBITDA is more than $15.0 million but not over $16.0 million, then amounts available for distribution pursuant to the Performance Bonus Pool will generally be 7.5% of calculated EBITDA. If calculated EBITDA is more than $16.0 million, then amounts available for distribution pursuant to the Performance Bonus Pool will generally be 10.0% of calculated EBITDA. The Directors, at their discretion, but after consultation with the President, will distribute the Performance Bonus Pool among the members of Executive Management using its discretion; but Mr. Christman, under the terms of his employment agreement, is entitled to receive at least 40% of the Performance Bonus Pool. The Directors are required to distribute the entire amount of the Performance Bonus Pool among some or all members of Executive Management. Restricted Stock Program. Simultaneous with the consummation of the Transactions, Holding and the members of the Key Equity Group entered into a stockholders agreement (the "Stockholders Agreement"), pursuant to which Holding established the Restricted Stock Program. Under the terms of the Restricted Stock Program, members of Executive Management were granted, under their employment agreements, in the aggregate, 1,667 shares of restricted Class C Common Stock (as defined herein) of Holding. The restricted Class C Common Stock may not be sold or otherwise transferred while the restrictions are in effect and may be forfeited to the Company if the recipient leaves the Company before the restrictions lapse. The shares of Class C Common Stock are non-voting and the restrictions will generally lapse in equal amounts over a four-year period. However, all such restrictions will lapse upon a Change of Control (as defined in the Employment Agreements). Performance Share Program. The Performance Share Program was established under the Stockholders Agreement. Under the terms of the Performance Share Program, members of Executive Management purchased shares of Class D Common Stock of Holding (the "Class D Holders") by paying $0.01 in cash and paying for the balance by issuing to Holding promissory notes in consideration therefor and pledging such shares to Holding to secure such debt. Upon the occurrence of a Liquidity Event (as defined herein), a final determination of the number of shares of Class D Common Stock that will be retained by members of Executive Management will be made based upon the achievement by the Key Equity Group of certain goals relating to its return on the Equity Contribution, as adjusted to account for the value attributable to the Warrants. "Liquidity Event" is defined in the Stockholders Agreement as the first to occur of (i) the sale of Holding and (ii) a public offering of any of 43 44 Holding's securities (each, a "Liquidity Event"). The Company will have the right to repurchase shares of Class D Common Stock under certain circumstances upon a termination of employment. EMPLOYEES' PENSION PLAN AND EMPLOYEES' SAVINGS PLAN The Company's Employees' Pension Plan and Employees' Savings Plan cover substantially all of its employees. Under the Employees' Pension Plan, the Company may make annual contributions to the participants equal to 5% of each participant's compensation up to $160,000 ($150,000 for fiscal year 1997). For the fiscal years ended June 30, 1997, 1998 and 1999, the Company's expense under the Employees' Pension Plan approximated $604,000 $639,000 and $616,000, respectively. The Company does not match contributions made by employees under the Employees' Savings Plan, a 401(k) plan. 44 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGMENT. Holding owns 100% of the issued and outstanding common stock of the Company. As of September 17, 1999, the following entities or persons owned the outstanding Common Stock of Holding as set forth below.
CLASS A COMMON STOCK CLASS B COMMON STOCK CLASS C COMMON STOCK CLASS D COMMON STOCK -------------------- -------------------- -------------------- -------------------- NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF NUMBER OF PERCENT OF SHARES(a) OWNERSHIP(b) SHARES(c) OWNERSHIP SHARES OWNERSHIP SHARES OWNERSHIP --------- ------------ --------- --------- ------ --------- ------ --------- Key Equity Capital Corporation 127 Public Square, 28th Floor Cleveland, Ohio 44114-1306(d)(e) 1,550 37.5% 8,405 100.0% -- -- -- -- Key Equity Partners 97 127 Public Square, 28th Floor Cleveland, Ohio 44114-1306(e) -- -- -- -- 3,335 66.7% -- -- David Given(f) 127 Public Square, 28th Floor Cleveland, Ohio 44114-1306 1,550 37.5% 8,405 100.0% 3,335 66.7% -- -- Executive Management(g) Mark D. Christman 1,010 24.4% -- -- 834 16.7% 4,000 40.0% John S. Baxter 175 4.2% -- -- 267 5.3% 1,800 18.0% Kenneth H. Wetmore 125 3.0% -- -- 133 2.7% 1,000 10.0% Ronald A. McMaster, Ph.D. 150 3.6% -- -- 67 1.3% 500 5.0% Diane S. Tymiak 90 2.2% -- -- 100 1.9% 700 7.0% Larry E. Elliot 35 0.9% -- -- 133 2.7% 1,000 10.0% James P. Schnabel 75 1.8% -- -- 133 2.7% 1,000 10.0% Key Equity Group(h) 3,210 77.6% 8,405 100.0% 5,002 100.0% 10,000 100.0% James M. Papada, III 25 0.6% -- -- -- -- -- -- Edmund S. Wright 25 0.6% -- -- -- -- -- -- All officers and directors as a group 3,260 78.8% 8,405 100.0% 5,002 100.0% 10,000 100.0%
(a) Does not include shares of Class A Common Stock issuable upon conversion of Class B Common Stock, or following the occurrence of a Conversion Event, Class C Common Stock. (b) Assumes 877.21 shares of Class A Common Stock issuable pursuant to the Warrants are outstanding. (c) Does not include shares of Class B Common Stock issuable upon conversion of Class A Common Stock. (d) KECC is a wholly owned subsidiary of Key Bank, N.A., which is a wholly owned subsidiary of KeyCorp, a bank holding corporation. (e) Mr. Given is the President and Director of KECC and is a partner of KEP 97. Accordingly, Mr. Given may be deemed to beneficially own the shares owned by KECC and KEP 97. Mr. Given disclaims beneficial ownership of the shares owned by KECC. (f) Includes all the shares of Class A Common Stock and Class B Common Stock owned by KECC and all the shares of Class C Common Stock owned by KEP 97, because as the President and a Director of KECC and a partner of KEP 97, Mr. Given may be deemed to beneficially own all such shares. (g) Simultaneously with the consummation of Transactions, Executive Management purchased 1,660 shares of Class A Common Stock on the same terms and conditions as those shares of Class A Common Stock that are purchased by KECC. In addition, Executive Management received 1,667 shares of Class C Common Stock in connection with the Restricted Stock Plan and up to 10,000 shares of Class D Common Stock that may be earned under the Performance Share Program. (h) The Key Equity Group is comprised of Executive Management, KECC and KEP 97. 45 46 STOCKHOLDERS AGREEMENT Simultaneously with the consummation of the Transactions, members of the Key Equity Group and Holding entered into a Stockholders' Agreement (the "Stockholders Agreement") which, together with the Amended and Restated Certificate of Incorporation of Holding (the "Certificate of Incorporation"), governs the terms of the capital stock of Holding. Classes of Common Stock. The authorized shares of capital stock of Holding (the "Common Stock") consists of: (i) 18,072 authorized shares of Class A Voting Common Stock, $0.01 par value (the "Class A Common Stock"); (ii) 13,070 authorized shares of Class B Non-Voting Common Stock, $0.01 par value (the "Class B Common Stock"); (iii) 5,002 shares of Class C Stock Non-Voting Common Stock, $0.01 par value (the "Class C Common Stock"); and (iv) 10,000 shares of Class D Non-Voting Common Stock, $0.01 par value (the "Class D Common Stock"). The holders of Class A Common Stock have the right to vote on all matters to be voted on by the stockholders of Holding. At every meeting of stockholders of Holding, each holder of Class A Common Stock is entitled to one vote per share. Except as otherwise required by law, a holder of Class B Common Stock, Class C Common Stock or Class D Common Stock has no voting rights with respect to such Common Stock. Control. The Certificate of Incorporation requires Holding to obtain the approval by vote or written consent of 55% of the then outstanding shares of Class A Common Stock, in addition to any other vote required by law, in order to do any of the following: (i) redeem, purchase or otherwise acquire for value any shares of Common Stock or any other shares of its capital stock, except as specifically permitted in the Stockholders Agreement; (ii) authorize or issue, or obligate itself to authorize or issue, additional shares of Common Stock or any other shares of its capital stock except as contemplated in the Certificate of Incorporation or in the Stockholders Agreement; (iii) amend, alter or repeal the Certificate of Incorporation or the By-Laws of Holding (the "By-Laws"); (iv) declare or pay any dividends or make any distributions with respect to any of its capital stock; or (v) except as specifically permitted by the Stockholders Agreement, effect, or obligate itself to effect, any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of Holding or any subsidiary thereof, or any consolidation or merger involving Holding or any subsidiary thereof, or any reclassification or other change of capital stock, or any recapitalization or reorganization or any dissolution, liquidation or winding up of Holding or any subsidiary thereof, except for the merger into Holding of, or the transfer of assets to Holding from, any wholly owned subsidiary. In addition, the Stockholders Agreement provides that Holding will not, and will not permit any of its subsidiaries (including the Company), to take any of the following actions without the written consent of KECC or Key Equity Partners 97, a general partnership comprised of certain affiliates of KECC ("KEP 97"): (i) acquire any assets (other than in the ordinary course of business), capital stock, or any other interest in another business or entity; (ii) sell, lease, transfer, mortgage, pledge, or encumber all or substantially all of its assets; (iii) dispose of any business entity or product line or any division or subsidiary; (iv) enter into any merger, consolidation, reorganization or recapitalization, or any agreement to do any of the foregoing or reclassify any of its equity securities; (v) issue any equity security, or issue any options, warrants, convertible securities, or other rights (contingent or otherwise) to acquire any equity securities, except for shares of Class A Common Stock issued pursuant to the Warrants and the issuance of stock to an employee of Holding or any of its subsidiaries in accordance with a stock purchase or award program plan or the conversion of stock as described in the Certificate of Incorporation; (vi) form or acquire any subsidiary except those now existing; (vii) except as otherwise contemplated by the Stockholders Agreement, declare or pay any dividends or distributions on the Common Stock or other equity securities or redeem or repurchase any Common Stock; (viii) grant its consent to a transfer of stock otherwise prohibited by the Stockholders Agreement; (ix) incur, assume or guaranty any indebtedness for borrowed money in excess of certain amounts in any fiscal year; (x) make any loans or advances to any stockholders or any employees of Holding or any of its subsidiaries other than advances to 46 47 employees in the ordinary course of business which do not exceed certain amounts per year; (xi) make capital expenditures in excess of certain amounts in any fiscal year; (xii) except as otherwise contemplated by the Stockholders Agreement, enter into any transaction with any stockholder or any affiliate of Holding or its subsidiaries or any stockholder that is on terms less favorable to Holding and its subsidiaries than could be obtained from unaffiliated third parties on an arm's-length basis; (xiii) amend its Certificate of Incorporation or By-Laws; or (xiv) enter into any agreement to do any of the foregoing. Conversion. Each holder of Class B Common Stock is entitled at any time and from time to time to convert any or all of the shares of that holder's Class B Common Stock into the same number of shares of Class A Common Stock as provided in the Certificate of Incorporation; each holder of Class A Common Stock is entitled at any time and from time to time to convert any or all of the shares of that holder's Class A Common Stock into the same number of shares of Class B Common Stock as provided in the Certificate of Incorporation; provided that in the case of a conversion from Class B Common Stock, which is non-voting, into Class A Common Stock, which is voting, the holder of shares to be converted would be permitted under applicable law to hold the total number of shares of Class A Common Stock which would be held after giving effect to the conversion. The conversion of the Class B Common Stock held by KECC could result in a change of control of Holding and the Company, since Holding is the sole stockholder of the Company. Each holder of Class C Common Stock is entitled to convert any or all of the shares of that holder's Class C Common Stock into the same number of shares of Class A Common Stock only upon the occurrence of any public offering or public sale of securities of the Corporation (including a public offering registered under the Securities Act and a sale pursuant to Rule 144 of the Securities Act or any similar rule then in effect) (any such offering, a "Conversion Event"). In addition, each holder of Class C Common Stock is entitled to convert shares of Class C Common Stock if such holder reasonably believes that a Conversion Event will be consummated. The Company is obligated, upon written request of the holder of Class C Common Stock, to effect such conversion in a timely manner so as to enable each such holder to participate in such Conversion Event. If any shares of Class C Common Stock are converted into shares of Class A Common Stock in connection with a Conversion Event and such shares of Class A Common Stock are not actually distributed, disposed of or sold pursuant to such Conversion Event, such shares of Class A Common Stock will promptly be converted back into the same number of shares of Class C Common Stock that had been the subject of the request for conversion. Restrictions on Transfer. Generally, the shares of Common Stock are subject to certain restrictions on transfer contained in the Stockholders Agreement. The shares of Common Stock may be transferred among affiliates and immediate family members without restrictions as long as the recipient complies with the provisions of the Stockholders Agreement and the applicable rules and regulations of the Commission. In addition, Holding may repurchase shares of Common Stock from departing members of Executive Management. Preemptive Rights. The holders of Common Stock have a pro rata right to participate in all future offerings of shares of equity securities of Holding or any securities convertible into or exchangeable for or carrying rights or options to purchase any shares or any other equity securities of the Company. Certain Rights of KECC and KEP 97. KECC and KEP 97 have the right, in the future to exercise a right to require Holding to repurchase their shares of Common Stock any time after June 2004. In addition, KECC and KEP 97 also have certain demand registration rights pursuant to which members of Executive Management may also be able to participate. 47 48 ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS. KECC received a financing fee in an amount equal to $1.0 million for its assistance in structuring, arranging and closing the Transactions. The Company arranged for the payment of success bonuses to members of Executive Management in connection with the successful completion of the Transactions. The aggregate amount of such success bonuses was $2.7 million, the allocation of which was as follows: (i) Mark D. Christman received $1,865,000; (ii) John S. Baxter received $280,000; (iii) Kenneth H. Wetmore received $165,000; (iv) Diane S. Tymiak received $165,000; (v) Larry E. Elliott received $95,000; and (vi) James P. Schnabel, Jr. received $95,000. Upon consummation of the Transactions, the Company entered into an advisory agreement with KECC, pursuant to which KECC consults with the Directors and members of Executive Management on such general business and financial matters as may be requested by the Board of Directors, including: (i) corporate strategy; (ii) budgeting of future corporate investment; and (iii) acquisition and divestiture strategies. In exchange for such services, KECC receives an annual fee of $200,000, payable quarterly in arrears. Effective October 1, 1998, this fee was adjusted to $150,000. The Company has advanced to Holding the sum of $656,399. The advances have been made to Holding to permit Holding to satisfy certain obligations it entered into in connection with the Transactions, including, without limitation, obligations to loan funds to members of Executive Management to allow them to satisfy certain tax liabilities. The tax liabilities resulted from the members of Executive Management making certain elections under Section 83(b) of the Code with respect to the shares of Class C Common Stock. 48 49 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) Financial Statements: See Index to Consolidated Financial Statements on page 25 included herein. (a) (2) Financial Statement Schedule: Schedule II--Valuation and Qualifying Accounts on page S-1. All other schedules are omitted as the required information is not applicable or not present in amounts sufficient to require submission of the schedule, or because the information is presented in the consolidated financial statements or related notes. (a) (3) Exhibits: 2.1(a) Agreement and Plan of Merger 2.2(a) Amendment to Agreement and Plan of Merger 3.1(a) Restated Certificate of Incorporation of the Registrant 3.2(a) By-laws of the Registrant 4.1(a) Indenture (including form of Note) 4.2(a) First Supplemental Indenture 10.1(a) Financing and Security Agreement between Bank of America, N.A., (f/k/a NationsBank, N.A.) and the Registrant 10.1.1(b) Second Amendment to Financing and Security Agreement between Bank of America, N.A., (f/k/a NationsBank, N.A. and the Registrant 10.1.2(c) Third Amendment to Financing and Security Agreement between Bank of America, N.A., (f/k/a NationsBank, N.A. and the Registrant 10.2(a) Plant and Office Lease 10.3(a) Warehouse Lease 10.4(a) Advisory Agreement between the Registrant and Key Equity Capital Corporation 10.5(a) Form of Exchange Agent Agreement between United States Trust Company of New York and the Registrant 10.6(a) Employment Agreement among Glasstech Holding Co., the Registrant and John S. Baxter 10.7(a) Employment Agreement among Glasstech Holding Co., the Registrant and Mark D. Christman 10.8(a) Employment Agreement among Glasstech Holding Co., the Registrant and Larry E. Elliott 10.9(a) Employment Agreement among Glasstech Holding Co., the Registrant and Ronald A. McMaster 10.10(a) Employment Agreement among Glasstech Holding Co., the Registrant and James P. Schnabel, Jr. 10.11(a) Employment Agreement among Glasstech Holding Co., the Registrant and Diane S. Tymiak 10.12(a) Employment Agreement among Glasstech Holding Co., the Registrant and Kenneth H. Wetmore 10.13(a) Securities Purchase Agreement between the Registrant, as successor to Glasstech Sub Co., and CIBC Wood Gundy Securities Corp. 10.14(a) Registration Rights Agreement between the Registrant, as successor to Glasstech Sub Co., and CIBC Wood Gundy Securities Corp. 21.1(a) List of Subsidiaries. 27.1(c) Financial Data Schedule (a) Incorporated by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-34391) (the "Form S-4") filed on August 26, 1997. Each of the above exhibits has the same exhibit number in the Form S-4. (b) Incorporated by reference from the Company's Quarterly Report on Form 10-Q filed on February 11, 1999. (c) Filed herewith. (b) Reports on Form 8-K: No reports have been filed during the last quarter of the fiscal year covered by this report on Form 10-K. . 49 50 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. GLASSTECH, INC. Date: September 23, 1999 /s/ Mark D. Christman ------------------------------------ MARK D. CHRISTMAN President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED. Date: September 23, 1999 /s/ Mark D. Christman ---------------------------------------- MARK D. CHRISTMAN Director, President and Chief Executive Officer (Principal Executive Officer) Date: September 23, 1999 /s/ Diane S. Tymiak ---------------------------------------- DIANE S. TYMIAK Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) Date: September 23, 1999 /s/ David P. Given ---------------------------------------- DAVID P. GIVEN Director Date: September 23, 1999 /s/ John LeMay ---------------------------------------- JOHN LEMAY Director Date: September 23, 1999 /s/ James M. Papada, III ---------------------------------------- JAMES M. PAPADA, III Director Date: September 23, 1999 /s/ Edmund S. Wright ---------------------------------------- EDMUND S. WRIGHT Director 50 51 GLASSTECH, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS CHARGED BALANCE BALANCE AT TO AMOUNT AT BEGINNING COSTS AND CHARGED END OF DESCRIPTION OF PERIOD EXPENSES OFF PERIOD ----------- --------- -------- --- ------ (IN THOUSANDS) Year ended June 30, 1999: Allowance for doubtful accounts $ 40 $ -- $ -- $ 40 ====== ========== ========== ====== Accrued contract costs $2,382 $ 1,694 $ 3,281 $ 795 ====== ========== ========== ====== Year ended June 30, 1998: Allowance for doubtful accounts $ 141 $ (101) $ -- $ 40 ====== ========== ========== ====== Accrued contract costs $3,780 $ 1,717 $ 3,115 $2,382 ====== ========== ========== ====== Year ended June 30, 1997: Allowance for doubtful accounts $ 178 $ (37) $ -- $ 141 ====== ========== ========== ====== Accrued contract costs $2,701 $ 3,364 $ 2,285 $3,780 ====== ========== ========== ======
S-1 52 EXHIBIT INDEX 2.1(a) Agreement and Plan of Merger 2.2(a) Amendment to Agreement and Plan of Merger 3.1(a) Restated Certificate of Incorporation of the Registrant 3.2(a) By-laws of the Registrant 4.1(a) Indenture (including form of Note) 4.2(a) First Supplemental Indenture 10.1(a) Financing and Security Agreement between Bank of America, N.A., (f/k/a NationsBank, N.A.) and the Registrant 10.1.1(b) Second Amendment to Financing and Security Agreement between Bank of America, N.A., (f/k/a NationsBank, N.A. and the Registrant 10.1.2(c) Third Amendment to Financing and Security Agreement between Bank of America, N.A., (f/k/a NationsBank, N.A. and the Registrant 10.2(a) Plant and Office Lease 10.3(a) Warehouse Lease 10.4(a) Advisory Agreement between the Registrant and Key Equity Capital Corporation 10.5(a) Form of Exchange Agent Agreement between United States Trust Company of New York and the Registrant 10.6(a) Employment Agreement among Glasstech Holding Co., the Registrant and John S. Baxter 10.7(a) Employment Agreement among Glasstech Holding Co., the Registrant and Mark D. Christman 10.8(a) Employment Agreement among Glasstech Holding Co., the Registrant and Larry E. Elliott 10.9(a) Employment Agreement among Glasstech Holding Co., the Registrant and Ronald A. McMaster 10.10(a) Employment Agreement among Glasstech Holding Co., the Registrant and James P. Schnabel, Jr. 10.11(a) Employment Agreement among Glasstech Holding Co., the Registrant and Diane S. Tymiak 10.12(a) Employment Agreement among Glasstech Holding Co., the Registrant and Kenneth H. Wetmore 10.13(a) Securities Purchase Agreement between the Registrant, as successor to Glasstech Sub Co., and CIBC Wood Gundy Securities Corp. 10.14(a) Registration Rights Agreement between the Registrant, as successor to Glasstech Sub Co., and CIBC Wood Gundy Securities Corp. 21.1(a) List of Subsidiaries. 27.1(c) Financial Data Schedule (a) Incorporated by reference from the Company's Registration Statement on Form S-4 (Registration No. 333-34391) (the "Form S-4") filed on August 26, 1997. Each of the above exhibits has the same exhibit number in the Form S-4. (b) Incorporated by reference from the Company's Quarterly Report on Form 10-Q filed on February 11, 1999. (c) Filed herewith. E-1 EX-10.1.2 2 EXHIBIT 10.1.2 1 EXHIBIT 10.1.2 -------------- THIRD AMENDMENT TO FINANCING AND SECURITY AGREEMENT --------------------------------------------------- THIRD AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this "Agreement") is made as of the 29th day of June, 1999, by GLASSTECH, INC., a corporation organized under the laws of Delaware (the "Borrower"), and BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), formerly "NationsBank, N.A.". RECITALS -------- A. The Borrower and the Lender entered into a Financing and Security Agreement dated July 2, 1997 (the same, as amended by (i) that certain First Amendment to Financing and Security Agreement dated as of October 29, 1997 and (ii) that certain Second Amendment to Financing and Security Agreement dated as of December 31, 1998 and as amended, modified, substituted, extended, and renewed from time to time, the "Financing Agreement"). The Financing Agreement provides for agreements between the Borrower and the Lender with respect to the "Loans" (as defined in the Financing Agreement), including a revolving credit facility in an amount not to exceed $10,000,000. B. The Borrower has requested that the Lender amend certain financial covenants contained in the Financing Agreement. C. The Lender is willing to agree to the Borrower's request on the condition that this Agreement be executed. AGREEMENTS ---------- NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, receipt of which is hereby acknowledged, the Borrower and the Lender agree as follows: 1. The Borrower and the Lender agree that the Recitals above are a part of this Agreement. Unless otherwise expressly defined in this Agreement, terms defined in the Financing Agreement shall have the same meaning under this Agreement. 2. The Borrower represents and warrants to the Lender as follows: (a) The Borrower is a corporation duly organized, and validly existing and in good standing under the laws of the state in which it was organized and is duly qualified to do business as a foreign corporation in good standing in every other state wherein the conduct of its business or the ownership of its property requires such qualification and in which the failure to qualify would materially adversely affect the business, operations or properties of the Borrower and/or its Subsidiaries. 2 (b) The Borrower has the power and authority to execute and deliver this Agreement and perform its obligations hereunder and has taken all necessary and appropriate corporate action to authorize the execution, delivery and performance of this Agreement. (c) The Financing Agreement, as amended by this Agreement, and each of the other Financing Documents remains in full force and effect, and each constitutes the valid and legally binding obligation of the Borrower, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and secured parties, and general principles of equity regardless of whether applied in a proceeding in equity or at law. (d) All of the Borrower's representations and warranties contained in the Financing Agreement are true and correct on and as of the date of the Borrower's execution of this Agreement, except that the representations and warranties which relate to financial statements which are referred to in Section 4.1.11 of the Financing Agreement, shall also be deemed to cover financial statements furnished from time to time to the Lender pursuant to Section 6.1.1 (Financial Statements) of the Financing Agreement. (e) No Event of Default and no event which, with notice, lapse of time or both would constitute an Event of Default, has occurred and is continuing under the Financing Agreement or the other Financing Documents. 3. The definition of "Post Default Rate" in Section 1.1 of the Financing Agreement is hereby deleted in its entirety, and the following is substituted in its place: "Post-Default Rate" means the Base Rate in effect from time to time plus 200 basis points. 4. The following are hereby added as new definitions to Section 1.1 of the Financing Agreement: "Assets" means at any date all assets that, in accordance with GAAP consistently applied, should be classified as assets on a consolidated balance sheet of the Borrower and its Subsidiaries. "Borrowing Base" has the meaning described in Section 2.1.7 (Borrowing Base). "Borrowing Base Deficiency" has the meaning described in 2.1.7 (Borrowing Base). "Borrowing Base Report" has the meaning described in Section 2.1.8 (Borrowing Base Report). -2- 3 "Eligible Inventory" means that portion of the Borrower's parts inventory consisting solely of (i) ceramic roll grinding inventory; (ii) spare parts inventory consisting of parts for which specific, firm purchase orders exist; and (iii) furnace supply inventory consisting of parts of standard manufacture and not specialized for the Borrower's business, to the extent the same such inventory is held by the Borrower for sale in the ordinary course of business, valued at the lowest of the Borrower's net purchase cost or net manufacturing cost, any ceiling prices which may be established by any Law of any Governmental Authority or prevailing market value, excluding, however, any Inventory which consists of: (a) any goods located outside of the United States, (b) any goods located outside of a state in which the Lender has properly and unavoidably perfected its security interests by filing in that state, free and clear of all other Liens, (c) any goods not in the actual possession of the Borrower, except to the extent provided in subsection (d) below, (d) any goods in the possession of a bailee, warehouseman, consignee or similar third party, except to the extent that such bailee, warehouseman, consignee or similar third party has entered into an agreement with the Lender in which such bailee, warehouseman, consignee or similar third party consents and agrees to the Lender's Lien on such goods and to such other terms and conditions as may be required by the Lender, PROVIDED, HOWEVER, that, so long as the Borrower is using its continuing reasonable efforts to obtain such a waiver from its landlord at Ampointe Industrial Complex, Perrysburg, Ohio 43551, the inventory at that location shall not be excluded from the "Eligible Inventory" on account of this clause (d), (e) any goods located on premises leased or rented to the Borrower or otherwise not owned by the Borrower, unless the Lender has received a waiver and consent from the lessor, landlord and/or owner, in form and substance satisfactory to the Lender and from any mortgagee of such lessor, landlord or owner to the extent required by the Lender, (f) any goods the sale or other disposition of which has given rise to a Receivable, (g) any goods which fail to meet all standards and requirements imposed by any Governmental Authority over such goods, their production, storage, use or sale, (h) work-in-process, supplies, displays, packaging and promotional materials, -3- 4 (i) (1) any goods as to which the Lender determines in the reasonable exercise of its discretion at any time are not in good condition or are defective, unmerchantable or obsolete and (2) blank ceramic rolls that have not been sold for over two (2) years and other goods that have not been sold for over one (1) year, and (j) any goods which the Lender in the reasonable exercise of its discretion has deemed to be ineligible because the Lender otherwise considers the collateral value to the Lender to be impaired or its ability to realize such value to be insecure. "Eligible Progress Billing" means the collective reference to accounts of the Borrower arising with respect to the sale of (A) glass bending and tempering/annealing systems or (B) retrofits or component subsystems of such systems, all manufactured by the Borrower, such accounts consisting solely of progress billings due with respect to such systems, retrofits and subsystems that have been shipped to the Account Debtor, but not finally accepted by the Account Debtor. "Eligible Receivable" and "Eligible Receivables" mean, at any time of determination thereof, the unpaid portion of each account (net of any returns, discounts, claims, credits, charges, accrued rebates or other allowances, offsets, deductions, counterclaims, disputes or other defenses and reduced by the aggregate amount of all reserves, limits and deductions reasonably established by the Lender) payable in United States Dollars by the Borrower, provided each account arises (i) following the completion of installation and demonstration of (A) glass bending and tempering/annealing systems or (B) retrofits or component subsystems of such systems, and all other requirements for final payment under the applicable contracts, (ii) from trade receivables arising from sales of inventory relating to or from service of machinery manufactured by the Borrower, or (iii) from Eligible Progress Billings and conforms and continues to conform to the following criteria to the reasonable satisfaction of the Lender: (a) the account arose in the ordinary course of the Borrower's business from a bona fide outright sale of goods by the Borrower (except that in the case of Eligible Progress Billings, such sale may not be complete) or from services performed by the Borrower; (b) the account is a valid, legally enforceable obligation of the Account Debtor and requires no further act on the part of any Person under any circumstances to make the account payable by the Account Debtor, although further performance will be required under contracts related to Eligible Progress Receivables; (c) the account is based upon an enforceable order or contract, written or oral, for goods shipped or for services performed, and the same were shipped or performed in accordance with such order or contract, -4- 5 although further performance will be required under contracts related to Eligible Progress Receivables; (d) if the account arises from the sale of goods, the goods the sale of which gave rise to the account have been shipped or delivered to the Account Debtor on an absolute sale basis (although further performance will be required under contracts related to Eligible Progress Receivables) and not on a bill and hold sale basis, a consignment sale basis, a guaranteed sale basis, a sale or return basis, or on the basis of any other similar understanding; (e) if the account arises from the performance of services, such services have been fully rendered and do not relate to any warranty claim or obligation; (f) the account is evidenced by an invoice or other documentation in form acceptable to the Lender, dated no later than the date of shipment or performance and containing only terms normally offered by the Borrower; (g) the amount shown on the books of the Borrower and on any invoice, certificate, schedule or statement delivered to the Lender is owing to the Borrower and no partial payment has been received unless reflected with that delivery; (h) except with respect to the Account Debtors identified on Schedule 1.1 attached to and made a part of this Agreement, the account is not outstanding more than ninety (90) days from the date of the invoice therefor or past due more than sixty (60) days after its due date, which shall not be later than thirty (30) days after the invoice date; (i) only with respect to the Account Debtors identified on Schedule 1.1 attached to and made a part of this Agreement, the account is not outstanding more than one hundred twenty (120) days from the date of the invoice therefor or past due more than ninety (90) days after its due date, which shall not be later than sixty (60) days after the invoice date; (j) the account is not owing by any Account Debtor for which the Lender has, in accordance with this Agreement, deemed fifty percent (50%) or more of such Account Debtor's other accounts due to the Borrower to be non-Eligible Receivables; (k) the account is not owing by an Account Debtor whose accounts owing to the Borrower in the aggregate exceed in the aggregate the credit limit determined by Lender in its reasonable discretion, but only to the extent such accounts exceed such limit; -5- 6 (l) the Account Debtor has not returned, rejected or refused to retain, or otherwise notified the Borrower of any dispute concerning, or claimed nonconformity of, any of the goods or services from the sale or furnishing of which the account arose; m) the account is not subject to any present or contingent (and no facts exist which are the basis for any future) offset, claim, deduction or counterclaim, dispute or defense in law or equity on the part of such Account Debtor, or any claim for credits, allowances, or adjustments by the Account Debtor because of returned, inferior, or damaged goods or unsatisfactory services, or for any other reason including, without limitation, those arising on account of a breach of any express or implied representation or warranty; (n) the Account Debtor is not a Subsidiary or Affiliate of the Borrower or an employee, officer, director or shareholder of the Borrower or any Subsidiary or Affiliate of the Borrower; (o) except for the Account Debtors identified on SCHEDULE 1.1 or except to the extent the account is secured by a letter of credit that has been assigned to the Lender, is subject to a first Lien security interest in favor of the Lender, and is in the Lender's possession, the Account Debtor is not incorporated or primarily conducting business or otherwise located in any jurisdiction outside of the United States of America; (p) as to which none of the following events has occurred with respect to the Account Debtor on such account: death or judicial declaration of incompetency of an Account Debtor who is an individual; the filing by or against the Account Debtor of a request or petition for liquidation, reorganization, arrangement, adjustment of debts, adjudication as a bankrupt, winding-up, or other relief under the bankruptcy, insolvency, or similar laws of the United States, any state or territory thereof, or any foreign jurisdiction, now or hereafter in effect; the making of any general assignment by the Account Debtor for the benefit of creditors; the appointment of a receiver or trustee for the Account Debtor or for any of the assets of the Account Debtor, including, without limitation, the appointment of or taking possession by a "custodian," as defined in the Federal Bankruptcy Code; the institution by or against the Account Debtor of any other type of insolvency proceeding (under the bankruptcy laws of the United States or otherwise) or of any formal or informal proceeding for the dissolution or liquidation of, settlement of claims against, or winding up of affairs of, the Account Debtor; the sale, assignment, or transfer of all or any material part of the assets of the Account Debtor; the nonpayment generally by the Account Debtor of its debts as they become due; or the cessation of the business of the Account Debtor as a going concern; (q) the Account Debtor is not a Governmental Authority; -6- 7 (r) the Borrower is not indebted in any manner to the Account Debtor (as creditor, lessor, supplier or otherwise), with the exception of customary credits, adjustments and/or discounts given to an Account Debtor by the Borrower in the ordinary course of its business, although further performance will be required under contracts related to Eligible Progress Receivables; (s) the account does not arise from services under or related to any warranty obligation of the Borrower or out of service charges, finance charges or other fees for the time value of money; (t) the account is not evidenced by chattel paper or an instrument of any kind and is not secured by any letter of credit; (u) the title of the Borrower to the account is absolute and is not subject to any prior assignment, claim, Lien, or security interest, except Permitted Liens; (v) no bond or other undertaking by a guarantor or surety has been or is required to be obtained, supporting the Borrower's obligations in respect of the underlying contract; (w) the Borrower has the full and unqualified right and power to assign and grant a security interest in, and Lien on, the account to the Lender as security and collateral for the payment of the Obligations; (x) the account does not arise out of a contract with, or order from, an Account Debtor that, by its terms, forbids or makes void or unenforceable the assignment or grant of a security interest by the Borrower to the Lender of the account arising from such contract or order; (y) the account is subject to a Lien in favor of the Lender, which Lien is perfected as to the account by the filing of financing statements and which Lien upon such filing constitutes a first priority security interest and Lien; (z) the goods giving rise to the account were not, at the time of the sale thereof, subject to any Lien, except those in favor of the Lender; (aa) except for Eligible Progress Billings, no part of the account represents a progress billing or a retainage; (bb) the Lender in the good faith exercise of its discretion has not deemed the account ineligible because of uncertainty as to the creditworthiness of the Account Debtor or because the Lender otherwise considers the collateral value of such account to the Lender to be impaired or its ability to realize such value to be insecure; and (cc) if the Account Debtor is located in a state requiring the filing of a Notice of Business Activities Report or similar report in order to -7- 8 permit the Borrower to seek judicial enforcement in such state of payment of such Account, the Borrower has qualified to do business in such state or has filed a Notice of Business Activities Report or equivalent report for the then current year. "Senior Liabilities" means for any period of determination thereof an amount equal to the total of the aggregate amount of all of the Obligations and other Liabilities other than the Senior Notes. "Tangible Capital Funds" means for any date of determination thereof the total of Tangible Net Worth plus the outstanding principal balance of the Senior Notes. "Tangible Net Worth" means as to the Borrower and its Subsidiaries at any date of determination thereof, the sum at such time of: Net Worth less the total of (a) all Assets which would be classified as intangible assets under GAAP consistently applied, (b) leasehold improvements, (c) applicable reserves, allowances and other similar properly deductible items to the extent such reserves, allowances and other similar properly deductible items have not been previously deducted by the Lender in the calculation of Net Worth, (d) any revaluation or other write-up in book value of assets subsequent to the date of the most recent financial statements delivered to the Lender, and (e) the amount of all loans and advances to, or investments in, any Person, excluding Cash Equivalents and deposit accounts maintained by the Borrower or its Subsidiaries with any financial institution. 5. The third paragraph of Section 2.1.1 of the Financing Agreement is hereby deleted in its entirety, and the following is substituted in its place: During the Revolving Credit Commitment Period, the Lender agrees to make advances under the Revolving Loan requested by the Borrower from time to time provided that after giving effect to the Borrower's request, the outstanding principal balance of the Revolving Loan and of the Letter of Credit Obligations would not exceed the lesser of (a) the Revolving Credit Committed Amount, or (b) the then most current Borrowing Base. 6. Section 2.1.2 of the Financing Agreement is hereby deleted in its entirety, and the following is substituted in its place: The Borrower may borrow, prepay and reborrow under the Revolving Credit Commitment on any Business Day. Advances under the Revolving Loan shall be deposited to a demand deposit account of the Borrower with the Lender (or an Affiliate of the Lender) or shall be otherwise applied as directed by the Borrower, which direction the Lender may require to be in writing. No later than noon (Baltimore time) on the date of the requested borrowing, the Borrower shall give the Lender oral or written notice (a "Loan Notice") of the amount and (if requested by the Lender) the purpose of the requested borrowing. Any oral Loan Notice shall be confirmed in writing by the Borrower within three (3) -8- 9 Business Days after the making of the requested Revolving Loan. In addition, the Borrower hereby irrevocably authorizes the Lender at any time and from time to time, without further request from or notice to the Borrower, to make advances under the Revolving Loan, and to establish, without duplication, reserves against the Borrowing Base, which the Lender, in its reasonable discretion, deems necessary to cover debit balances in the Revolving Loan Account, principal of, and/or interest on, any Loan, any of the Obligations, and/or Enforcement Costs, prior to, on, or after the termination of other advances under this Agreement, regardless of whether the outstanding principal amount of the Revolving Loan which the Lender may make hereunder exceeds the Revolving Credit Committed Amount or the Borrowing Base. 7. Section 2.1.6 (Early Termination Fee) of the Financing Agreement is hereby deleted in its entirety without renumbering. References in the Financing Agreement to the "Early Termination Fee" shall be of no further force or effect. 8. The following are hereby added as new subsections to Section 2.1 of the Financing Agreement: 2.1.7 BORROWING BASE. As used in this Agreement, the term "Borrowing Base" means at any time, an amount equal to the aggregate of (a) eighty five percent (85%) of the amount of Eligible Receivables, PLUS (b) the lesser of $1,000,000 or twenty percent (20%) of the amount of Eligible Inventory, PLUS (c) eighty percent (80%) of the orderly liquidation value of Equipment; PLUS (d) one hundred percent (100%) of the forced liquidation value of the Mortgaged Property; PLUS (e) the lesser of $5,000,000 or twenty-five percent (25%) of the fair market value of the United States Patents subject to the duly recorded Assignment of Patents; MINUS (f) $150,000 times the number of the Borrower's fiscal quarters ending after September 30, 1999 and on or prior to the date of the computation of the Borrowing Base. The values described in clauses (c), (d) and (e) (the appraisal required by clause (e) having not yet been made) shall be determined by appraisals prepared for the Lender from time to time by appraisers satisfactory to the Lender and shall include, without limitation, information required by applicable law and regulation and by the internal policies of the Lenders and shall be subject to internal review by the Lender. At the time of any sale, other disposition or addition of Equipment with a fair market of $100,000 or more that changes the value used in computing clause (c) above, the Borrower shall so notify the Lender, identify the applicable Equipment and the orderly liquidation value thereof (which, in the case of additions, shall be accompanied by an appraisal meeting the requirements of the preceding sentence). The Lender shall thereupon adjust the amount applicable under clause (f) above pro rata based on the changes to Equipment and so notify the Borrower. The Borrowing Base shall be computed based on the Borrowing Base Report most recently delivered to, and accepted by, the Lender in its reasonable discretion. In the event the Borrower shall fail to furnish a Borrowing -9- 10 Base Report required by Section 2.1.8 (Borrowing Base Report), or in the event the Lender reasonably believes that a Borrowing Base Report is no longer accurate, the Lender may, in its sole and absolute discretion exercised from time to time and without limiting its other rights and remedies under this Agreement, continue, suspend the making of or limit advances under the Revolving Loan. The Borrowing Base shall be subject to reduction by the amount of any Receivable or any Inventory which was included in the Borrowing Base but which the Lender determines, in accordance with this Agreement, fails to meet the respective criteria applicable from time to time for Eligible Receivables or Eligible Inventory. If at any time the total of the aggregate principal amount of the Revolving Loan and Outstanding Letter of Credit Obligations exceeds the Borrowing Base, a borrowing base deficiency ("Borrowing Base Deficiency") shall exist. Each time a Borrowing Base Deficiency exists, the Borrower, at the sole and absolute discretion of the Lender exercised from time to time, shall pay the Borrowing Base Deficiency ON DEMAND to the Lender. 2.1.8 BORROWING BASE REPORT. The Borrower will furnish to the Lender a report of the Borrowing Base (each a "Borrowing Base Report"; collectively, the "Borrowing Base Reports") in the form required from time to time by the Lender, appropriately completed and duly signed, (x) no less frequently than MONTHLY (i) as of the last day of October, November and December, 1999 and (ii) as of the last day of each other month during which any amount shall be outstanding under the Revolving Loans in excess of that permitted under the aggregate of clauses (c), (d), and (e) of the definition of "Borrowing Base," and, otherwise, no less frequently than QUARTERLY, and (y) at the time of requesting an advance under the Revolving Loans in excess of that permitted under the aggregate of clauses (c), (d), and (e) of the definition of "Borrowing Base" if no Borrowing Base Report has been furnished as of the end of the month preceding the month in which the advance is requested, and (z) at such other times as may be reasonably requested by the Lender. The Borrowing Base Report shall contain the amount and payments on the Receivables, the value of Inventory, other property components included in the definition of "Borrowing Base" and the calculations of the Borrowing Base, all in such detail, and accompanied by such supporting and other information, as the Lender may from time to time reasonably request. Upon the Lender's reasonable request upon the creation of any Receivables or at such other intervals as the Lender may reasonably require, the Borrower will provide the Lender with: (a) confirmatory assignment schedules; (b) copies of Account Debtor invoices; (c) evidence of shipment or delivery; and (d) such further schedules, documents and/or information regarding any of the Receivables and the Inventory as the Lender may reasonably require. The items to be provided under this subsection shall be in form satisfactory to the Lender, certified as true and correct by a Responsible Officer (or by any other officers or employees of the Borrower whom a Responsible Officer from time to time authorizes in writing to do so), and -10- 11 delivered to the Lender from time to time solely for the Lender's convenience in maintaining records of the Collateral. The failure of the Borrower to deliver any such items to the Lender shall not affect, terminate, modify, or otherwise limit the Liens of the Lender on the Collateral. 2.1.9 MANDATORY PREPAYMENTS OF REVOLVING LOAN. The Borrower shall make the mandatory prepayments (each a "Revolving Loan Mandatory Prepayment" and collectively, the "Revolving Loan Mandatory Prepayments") of the Revolving Loan at any time and from time to time in such amounts requested by the Lender pursuant to Section 2.1.7 (Borrowing Base) of this Agreement in order to cover any Borrowing Base Deficiency. 9. Section 2.2.1 of the Financing Agreement is hereby deleted in its entirety, and the following is substituted in its place: Subject to and upon the provisions of this Agreement, and as a part of the Revolving Credit Commitment, the Borrower may, upon the prior approval of the Lender, obtain standby letters of credit (as the same may from time to time be amended, supplemented or otherwise modified, each a "Letter of Credit" and collectively the "Letters of Credit") from the Lender from time to time from the Closing Date until the Business Day preceding the Revolving Credit Termination Date. The Borrower will not be entitled to obtain a Letter of Credit hereunder unless (a) after giving effect to the request, the outstanding principal balance of the Revolving Loan and of the Letter of Credit Obligations would not exceed the lesser of (i) the Revolving Credit Committed Amount, or (ii) the most current Borrowing Base and (b) the sum of the aggregate face amount of the then outstanding Letters of Credit (including the face amount of the requested Letter of Credit) does not exceed Five Million Dollars ($5,000,000). 10. Section 2.2.2 of the Financing Agreement is hereby deleted in its entirety, and the following is substituted in its place: 2.2.2 LETTER OF CREDIT FEES. At the opening of each Letter of Credit, there shall be due from the Borrower to the Lender, a letter of credit fee (each a "Letter of Credit Fee" and collectively the "Letter of Credit Fees") in an amount equal to 200 basis points per annum of the amount of the Letter of Credit, based on a term beginning with the date of issuance and ending on the expiration date of the Letter of Credit. Such Letter of Credit Fees shall be paid quarterly, in arrears, on the last day of each March, June, September and December. In addition, the Borrower shall pay to the Lender any and all additional issuance, negotiation, processing, transfer or other fees to the extent and as and when required by the provisions of any Letter of Credit Agreement, which shall be no greater than the fees therefor customarily charged by the Lender; such additional fees are included in and a part of the "Fees" payable by the Borrower under the provisions of this Agreement. -11- 12 11. Section 2.3.1(c) of the Financing Agreement is hereby deleted in its entirety, and the following is substituted in its place: (c) The Applicable Margin for (i) LIBOR Loans shall be 250 basis points per annum, and (ii) Base Rate Loans shall be 50 basis points per annum. 12. Section 2.3.5 of the Financing Agreement is hereby deleted in its entirety, and the following is substituted in its place: 2.3.5 PAYMENT OF INTEREST. (a) Unpaid and accrued interest on any advance of the Revolving Loan which consists of a Base Rate Loan shall be paid monthly, in arrears, on the first day of each calendar month, commencing on the first such date after the date of this Agreement, and on the first day of each calendar month thereafter, and at maturity (whether by acceleration, declaration, extension or otherwise). (b) Unpaid and accrued interest on any LIBOR Loan shall be paid (i) monthly, in arrears, on the first day of each calendar month, commencing October 1, 1999, and (ii) on the last Business Day of each Interest Period for such LIBOR Loan and at maturity (whether by acceleration, declaration, extension or otherwise); provided, however that any and all unpaid and accrued interest on any LIBOR Loan prepaid prior to expiration of the then current Interest Period for such LIBOR Loan shall be paid immediately upon prepayment. 13. The following is hereby added to the Financing Agreement as new Section 4.1.25: 4.1.25 COMPLIANCE WITH ELIGIBILITY STANDARDS. To the best of the Borrower's knowledge, each Account, all Inventory and all other property components included in the calculation of the Borrowing Base meet and comply with all of the standards for Eligible Receivables, Eligible Inventory and such other components. With respect to those Accounts which the Lender has deemed Eligible Receivables to the best of the Borrower's knowledge, (a) there are no facts, events or occurrences which in any way impair the validity, collectibility or enforceability thereof or tend to reduce the amount payable thereunder; and (b) there are no proceedings or actions known to the Borrower which are threatened or pending against any Account Debtor which might result in any material adverse change in the Borrowing Base. 14. The following is hereby added to the Financing Agreement as new Section 5.2.5: 5.2.5 BORROWING BASE. The Borrower shall have furnished all Borrowing Base Reports required by Section 2.1.8 (Borrowing Base Report), there shall exist no Borrowing Base Deficiency, and as evidence thereof, the Borrower shall have furnished to the Lender such reports, schedules, certificates, records and other -12- 13 papers as may be reasonably requested by the Lender, and the Borrower shall be in compliance with the provisions of Section 2.1.8 (Borrowing Base Report) both immediately before and immediately after the making of the advance requested. 15. Subsections (c) and (d) of Section 6.1.1 of the Financing Agreement are hereby deleted in its entirety, and the following is substituted in their place: (c) MONTHLY STATEMENTS AND CERTIFICATES. The Borrower shall furnish to the Lender as soon as available, but in no event more than forty-five (45) days after the end of each month that is also the end of a fiscal quarter and not more than thirty (30) days after the end of each other month, a financial statement in reasonable detail satisfactory to the Lender relating to the Borrower and its Subsidiaries, prepared in accordance with GAAP, which financial statement shall include a consolidated balance sheet of the Borrower and its Subsidiaries, as of the end of such month and consolidated statements of income, cash flows and changes in shareholders equity of the Borrower and its Subsidiaries for such month, and (ii) a Compliance Certificate, in substantially the form attached to this Agreement as EXHIBIT C, containing a detailed computation of each financial covenant which is tested at the end of the period reported and a certification that no material change has occurred to the information contained in the Collateral Disclosure List (except as set forth on any schedule attached to the certification), all as prepared and certified by a Responsible Officer of the Borrower and accompanied by a certificate of that officer stating whether any event has occurred which constitutes a Default or an Event of Default hereunder, and, if so, stating the facts with respect thereto. (d) OTHER MONTHLY REPORTS. The Borrower shall furnish to the Lender within thirty (30) days after the end of each month, a report containing the following information: (i) a summary aging schedule of all Receivables by Account Debtor, and accompanied by such supporting information as the Lender may from time to time reasonably request; (ii) a summary aging of all accounts payable; (iii) a listing of all Inventory by component and category, in such detail, and accompanied by such supporting information as the Lender may from time to time reasonably request; and (iv) such other information as the Lender may reasonably request. 16. Section 6.1.15 of the Financing Agreement is hereby deleted in its entirety, and the following is substituted in its place: 6.1.15 FINANCIAL COVENANTS. -13- 14 (a) FIXED CHARGE COVERAGE RATIO. The Borrower will maintain, tested for each four (4) quarter period ending as of the last day of each of the Borrower's fiscal quarters commencing June 30, 1999, a Fixed Charge Coverage Ratio of not less than the following: - ------------------------------------------------------------------------------- Period Ending Ratio - ------------------------------------------------------------------------------- June 30, 1999 0.82 to 1.0 - ------------------------------------------------------------------------------- September 30, 1999 0.55 to 1.0 - ------------------------------------------------------------------------------- December 31, 1999 0.53 to 1.0 - ------------------------------------------------------------------------------- March 31, 2000 0.62 to 1.0 - ------------------------------------------------------------------------------- June 30, 2000 0.81 to 1.0 - ------------------------------------------------------------------------------- September 30, 2000 and thereafter 1.00 to 1.0 - ------------------------------------------------------------------------------- (b) SENIOR LIABILITIES TO TANGIBLE CAPITAL FUNDS. The Borrower will maintain, tested as of the last day of each of the Borrower's fiscal quarters commencing June 30, 1999, a ratio of Senior Liabilities to Tangible Capital Funds of not more than the following: - ------------------------------------------------------------------------------- Period Ending Ratio - ------------------------------------------------------------------------------- June 30, 1999 1.70 to 1.0 - ------------------------------------------------------------------------------- September 30, 1999 1.60 to 1.0 - ------------------------------------------------------------------------------- December 31, 1999 2.24 to 1.0 - ------------------------------------------------------------------------------- March 31 and June 30, 2000 2.00 to 1.0 - ------------------------------------------------------------------------------- September 30 and December 31, 2000; 1.90 to 1.0 March 31 and June 30, 2001 - ------------------------------------------------------------------------------- September 30, 2001 and thereafter 1.35 to 1.0 - ------------------------------------------------------------------------------- 17. Notwithstanding any other provision of this Agreement, the Borrower acknowledges and agrees that the Lender shall have no obligation at any time to include in the Borrowing Base any Patents unless and until the Assignment of Patents has been recorded. 18. The Borrower shall pay at the time this Agreement is executed and delivered all fees, commissions, costs, charges, taxes and other expenses incurred by the Lender and its counsel in connection with this Agreement, including, but not limited to, reasonable fees and expenses of the Lender's counsel and all recording fees, taxes and charges. 19. This Agreement may be executed in any number of duplicate originals or counterparts, each of such duplicate originals or counterparts shall be deemed to be an original -14- 15 and taken together shall constitute but one and the same instrument. The parties agree that their respective signatures may be delivered by facsimile. Any party which chooses to deliver its signature by facsimile agrees to provide a counterpart of this Agreement with its inked signature promptly to each other party. IN WITNESS WHEREOF, the Borrower and the Lender have executed this Agreement under seal as of the date and year first written above.
WITNESS: BANK OF AMERICA, NATIONAL ASSOCIATION, formerly "NationsBank, N.A." /s/ Cherilyn Sauers By: /s/ Melba B. Quizon (SEAL) - ------------------------------ ----------------------------------- Name: Melba B. Quizon Title Vice President WITNESS: GLASSTECH, INC. /s/ Kenneth H. Wetmore By: /s/ Diane S. Tymiak (SEAL) - ------------------------------ ----------------------------------- Name: Diane S.Tymiak Title: Vice President, Treasurer and Chief Financial Officer
-15- 16 Schedule 1.1 The Account Debtors referred to in the clauses (h), (i) and (o) of the definition of "Eligible Receivables" are: Asahi Glass Group Central Glass Group Compaigne de Saint-Gobain Group DaimlerChrysler Group Ford Motor Company Group *Guardian Glass Group *Hankuk Glass Group *Keumkang Chemical Group Nippon Sheet Glass Group PPG Industries Group Pilkington Group provided, however, that an Account Debtor with an "*" by its name shall not qualify for the exceptions under clauses (h), (i) and (o) of the definition of "Eligible Receivables" until the Lender completes its due diligence for that Account Debtor. -16- 17 EXHIBIT C COMPLIANCE CERTIFICATE ---------------------- (QUARTER END AND YEAR END) THIS CERTIFICATE is made as of __________________, _________, by GLASSTECH, INC., a corporation organized under the laws of Delaware (the "Borrower"), BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), formerly "NationsBank, N.A.," pursuant to Section 6.1.1(c) of the Financing and Security Agreement dated October 29, 1997, (as amended by (i) that certain First Amendment to Financing and Security Agreement dated as of October 29, 1997, (ii) that certain Second Amendment to Financing and Security Agreement dated as of December 31, 1998, and (iii) Third Amendment to Financing and Security Agreement dated June 29, 1999, and as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the "Financing Agreement") by and between the Borrower and the Lender. I, ____________________, hereby certify that I am the ______________ of the Borrower and am a Responsible Officer (as that term is defined in the Financing Agreement) authorized to certify to the Lender on behalf the Borrower as follows: 1. This Certificate is given to induce the Lender to make advances to the Borrower under the Financing Agreement. 2. This Certificate accompanies the _____________ financial statements for the period ended ___________________, ____ (the "Current Financials") which the Borrower is furnishing to the Lender pursuant to Section 6.1.1(__) of the Financing Agreement. The Current Financials have been prepared in accordance with GAAP (as that term is defined in the Financing Agreement). 3. As required by Section 6.1.1(__) of the Financing Agreement, I have set forth on Schedule 1 a detailed computation of each financial covenant in Financing Agreement. 4. No change has occurred to the information contained in the Collateral Disclosure List except as set forth on Schedule 2 to this Certificate. By way of example and not limitation, the Collateral Disclosure List, together with Schedule 2, contains a listing of all of the Borrower's Patents, Trademarks, Copyrights (as those terms are defined in the Financing Agreement), all locations (owned, leased, warehouses or otherwise) where any Collateral (as that term is defined in the Financing Agreement) is located, all Subsidiaries (as that term is defined in the Financing Agreement). 5. As of the date hereof, there exists no Default or Event of Default, as defined in the Article 7 of the Financing Agreement, nor any event which, upon notice or the lapse of time, or both, would constitute such an Event of Default. 6. On the date hereof, the representations and warranties contained in Article 4 of the Financing Agreement are true with the same effect as though such representations and warranties had been made on the date hereof, except that the representations and warranties which relate to -17- 18 financial statements which are referred to in Section 4.1.11 of the Financing Agreement, shall also be deemed to cover financial statements furnished from time to time to the Lender pursuant to Section 6.1.1 (Financial Statements) of the Financing Agreement. WITNESS my signature this _____ day of ____________, _______. ------------------------------ Name: Title: -18- 19 EXHIBIT C COMPLIANCE CERTIFICATE (MONTHLY) THIS CERTIFICATE is made as of __________________, _________, by GLASSTECH, INC., a corporation organized under the laws of Delaware (the "Borrower"), BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association (the "Lender"), formerly "NationsBank, N.A.," pursuant to Section 6.1.1(c) of the Financing and Security Agreement dated October 29, 1997, (as amended by (i) that certain First Amendment to Financing and Security Agreement dated as of October 29, 1997, (ii) that certain Second Amendment to Financing and Security Agreement dated as of December 31, 1998, and (iii) Third Amendment to Financing and Security Agreement dated June 29, 1999, and as amended, modified, restated, substituted, extended and renewed at any time and from time to time, the "Financing Agreement") by and between the Borrower and the Lender. I, ____________________, hereby certify that I am the ______________ of the Borrower and am a Responsible Officer (as that term is defined in the Financing Agreement) authorized to certify to the Lender on behalf the Borrower as follows: 1. This Certificate is given to induce the Lender to make advances to the Borrower under the Financing Agreement. 2. This Certificate accompanies the monthly financial statements for the period ended ___________________, ____ (the "Current Financials") which the Borrower is furnishing to the Lender pursuant to Section 6.1.1(c) of the Financing Agreement. The Current Financials have been prepared in accordance with GAAP (as that term is defined in the Financing Agreement). 3. No material change has occurred to the information contained in the Collateral Disclosure List except as set forth on Schedule 2 to this Certificate. 4. As of the date hereof, there exists no Default or Event of Default, as defined in the Article 7 of the Financing Agreement, nor any event which, upon notice or the lapse of time, or both, would constitute such an Event of Default. 5. On the date hereof, the representations and warranties contained in Article 4 of the Financing Agreement are true with the same effect as though such representations and warranties had been made on the date hereof, except that the representations and warranties which relate to financial statements which are referred to in Section 4.1.11 of the Financing Agreement, shall also be deemed to cover financial statements furnished from time to time to the Lender pursuant to Section 6.1.1 (Financial Statements) of the Financing Agreement. -19- 20 WITNESS my signature this _____ day of ____________, _______. ------------------------------ Name: Title: -20- EX-27.1 3 EXHIBIT 27.1
5 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 8,661 0 5,570 (40) 3,367 17,908 9,659 (2,870) 88,662 13,013 69,464 0 0 0 5,763 88,662 50,545 50,545 31,768 31,768 16,243 0 9,668 (6,782) 0 (6,782) 0 0 0 (6,782) 0 0
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