ITEM 1. DESCRIPTION OF BUSINESS
As a result of the sale of its vinyl building products business, window fabrication business and San Leon hydrocarbon waste recycling center (see "Recent Business Developments" below), Bird Corporation's current manufacturing operation consists of one primary business unit - roofing manufacturing and sales and marketing. Products currently manufactured at Bird Corporation's roofing facility include asphalt shingles and roll roofing for commercial and residential use. These products are marketed through independent wholesalers, including wholesalers whose primary customers are roofing contractors. All references herein to the "Company" or "Bird" refer to Bird Corporation and its subsidiaries unless otherwise indicated by the context.
RECENT BUSINESS DEVELOPMENTS
There have been a number of significant developments in the business of the Company since December 31, 1994, including the following:
_ On March 14, 1996, the Company signed a definitive agreement with CertainTeed Corporation, a subsidiary of Saint-Gobain Corporation, providing for CertainTeed to acquire in a merger transaction all of the Company's outstanding common, preferred and preference shares.
CertainTeed will pay $7.50 per share for the common stock. As of March 1, 1996 there were approximately 4.1 million shares of Bird common stock outstanding.
The Bird/CertainTeed merger provides for the acquisition or redemption of all outstanding 5% cumulative preferred stock at their liquidation preference of $110.00 per share and all outstanding $1.85 cumulative convertible preference stock for $20.00 per share. Payment for preferred and preference stock will include any previously accrued but unpaid dividends. The total consideration for the transaction exceeds $50 million, including common and preferred equity plus debt.
Completion of the transaction is subject to approval by Bird's shareholders, appropriate governmental approvals and other customary conditions.
_ On November 29, 1995, the Company sold all of the outstanding capital stock of Bird Environmental Gulf Coast, Inc. ("BEGCI") which owned the Company's interest in the San Leon, Texas based hydrocarbon waste recycling center, to GTS Duratek, Inc. ("Purchaser") for a purchase price of $1.00. In addition, BETI agreed to pay the Purchaser the amount by
which BEGCI's current liabilities exceeded its current assets at August 31, 1995, which was approximately $1.3 million. The sale of the recycling center completes the Company's withdrawal from the environmental remediation and recycling industry. The resulting loss of $11,252,000 is reflected as discontinued operations in the Company's consolidated statements of operations.
_ On September 26, 1994, the Company announced that it had signed a definitive agreement to sell the assets of its vinyl building products manufacturing operation located in Bardstown, Kentucky to Jannock, Inc. ("Jannock"). This transaction also included an option to purchase the Company's interest in Kensington Partners ("Kensington"), a window fabrication business. At a special meeting of the shareholders held in Dedham, Massachusetts on March 7, 1995, the shareholders of the Company voted to sell the assets of the Company's vinyl building products operation to Jannock essentially in accordance with the terms and conditions as outlined in the definitive agreement between the Company and Jannock dated September 23, 1994. On March 8, 1995, the sale was closed for a gross purchase price of $47.5 million which was reduced to approximately $42.5 million by post-closing working capital adjustments. The sale included the assumption by the purchaser of certain specified liabilities of the vinyl business. Proceeds from the sale were used to reduce bank debt. Net of adjustments, the Company's gain on this sale totaled $20,579,000 million and is reflected as discontinued business activity income in the consolidated statements of operations.
_ On June 2, 1995, the Company sold all of the outstanding capital stock of Bird-Kensington Holding Corp. ("Bird-Kensington"), which owned the Company's interest in Kensington to Jannock, Inc. The sale was consummated pursuant to the exercise by Jannock of an option granted under the Asset Purchase Agreement dated as of September 23, 1994 (as amended by amendments dated as of January 24, 1995, January 31, 1995, and April 27, 1995). The purchase price consisted of cash in the amount of $2,780,000 and the assumption of certain liabilities related to the Kensington business. Cash proceeds of $1 million were used to acquire the minority partner's interest in Kensington. In addition, $4,090,000 was invested by the Company in Bird-Kensington, as a condition of the sale, to enable Kensington to pay certain liabilities and to meet equity requirements as stipulated in the Asset Purchase Agreement. The sale resulted in a loss of $1,959,000 and is reflected as discontinued business activity expense in the Company's consolidated statements of operations.
HOUSING GROUP
Asphalt roofing products are manufactured and sold at the Company's facilities in Norwood, Massachusetts. Asphalt shingles and roll roofing are produced by coating a fiberglass mat with a mixture of hot asphalt and crushed rock filler and covering the coated mat with Company-manufactured roofing granules. The Company's facilities include a roofing manufacturing facility, a granule plant, a quarry, an asphalt plant and a private landfill for the Company's use.
The Company's Housing Group produced vinyl siding products at its plant in Bardstown, Kentucky prior to the sale of such facility in March 1995. Additionally, the Company sold its interest in Kensington, its joint venture in the replacement window fabrication business in June 1995. The Housing Group also carried on a distribution business through wholesale building materials distributors based in New England, New York, Kentucky, Texas, Louisiana, and Arizona until such businesses were sold in August and November 1994.
Net sales of the components of the Housing Group as a percentage of consolidated net sales of the Company were as follows: sales of asphalt roofing products, 80% in 1995, 31% in 1994 and 23% in 1993; sales of vinyl products, 20% in 1995, 24% in 1994 and 20% in 1993; and sales through building materials distribution centers (including roofing and vinyl products manufactured by the Company), 45% in 1994 and 57% in 1993.
The principal geographic markets for the Company's manufactured roofing products, due to limitations imposed by freight costs, are the northeastern United States. The building materials business is seasonal to the extent that outside repair and remodeling and new construction decline during the winter months. To reduce the impact of this seasonal factor, the Company generally employs what it believes to be an industry-wide practice of "winter dating", pursuant to which extended or discounted payment terms are offered to credit-worthy customers who order and accept delivery of roofing products during specified periods of time in the slow season.
RAW MATERIALS
The principal raw materials used in the manufacture of asphalt roofing products are fiberglass mat, asphalt saturants and coatings and crushed granules. The Company's requirements for fiberglass mat are met primarily under a Glass Mat Supply Agreement with one vendor which expires on December 31, 1996. Fiberglass mat is also generally available in adequate quantities from a number of outside suppliers. Asphalt saturants and coatings were, until recently, purchased from a major oil refinery. These materials are also available from other sources at a higher delivered cost. After the refinery's discontinuation of its production of asphalt in April 1994, the Company relied on a number of alternative sources for this raw material. Since completion of construction of an asphalt plant in January 1995, the Company has been able to process asphalt at its
roofing facility, thereby reducing its costs and decreasing the potential for temporary interruptions in its manufacturing operations. The Company believes that it can produce all of its current granule requirements at its granule plant and quarry.
BACKLOG
Order backlog is not a meaningful measure of the Company's building materials business because there are fewer sales during the last quarter of the fiscal year and the order-to-shipment cycle is relatively short. Additionally, it is very rare, at any time, to require more than 30 days from the receipt of a product order to delivery of the product.
COMPETITION
The building materials business is, to a large degree, a commodities-type business and is highly competitive with respect to price, delivery terms and consistent product quality. Many of the Company's competitors are larger and financially stronger than the Company, but none is dominant in any of its markets.
The strengths of the Company's asphalt roofing business arise, in part, from the unique marketing programs the Company directs toward its indirect customer base, professional roofing contractors, combined with an industry-wide reputation for providing quality products with a high level of service. The Company's comprehensive contractor marketing program is designed to support the position of the Company's contractors in the industry. Such marketing programs include a special system for in-home sales promotions. Pursuant to its exclusive certification program, the Company also certifies contractors who have recorded three (3) successful years in business, who provide the Company with names of customers for quality checks, sign a letter of ethics, have a good credit history, warrant their workmanship for two (2) years and attend annual training meetings. Contractors must be recertified every two years. Certified contractors are supplied with a wide array of marketing materials, including customized sample cases, special mailers and custom job site signs.
INTELLECTUAL PROPERTY
The Company owns a number of trademarks, as well as significant technology and know-how, which it utilizes in connection with its asphalt roofing business. The Company believes that its trademarks are strong and well recognized in the industry.
COMPLIANCE WITH CERTAIN ENVIRONMENTAL LAWS
The Company has expended, and expects to continue to expend, funds to comply with federal, state and local provisions and orders which
relate to the environment. Based on the information available to the Company at this time, the Company believes that the effect of compliance with these provisions on the capital expenditures, earnings and competitive position of the Company is not material. Litigation and other proceedings involving environmental matters are described under the heading "Environmental Matters" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Item 3, "Legal Proceedings".
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
While the Company formerly operated in two major business segments, its housing segment and its environmental segment, the Company no longer operates its environmental segment. Financial information about the industrial segments in which the Company operates, for the three years ended December 31, 1995, appear in Note 12 of the Notes to Consolidated Financial Statements which are included herein.
EMPLOYEES
At December 31, 1995, the Company employed 174 people.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are located at its plant in Norwood, Massachusetts. The Company believes that its plant and facilities, as described below, are suitable and adequate for its current and anticipated business. Operating capacity can be increased by additional man hours, changing product mix, and/or minimal capital investment should the need arise. The Company's facilities are well maintained, in sound operating condition, and in regular use.
ROOFING MANUFACTURING FACILITY
The Company owns its asphalt roofing manufacturing facility in Norwood, Massachusetts. The Norwood plant includes the roofing manufacturing facility, a granule plant and an asphalt plant. The Company's quarry is located in Wrentham, Massachusetts, and its private landfill is located in Walpole, Massachusetts. The Company leases an industrial laminator and certain other equipment which were fabricated for use in its roofing plant. The laminator lease expires in 1998. The Company completed the construction of an asphalt oxidizer plant at the Norwood premises in January 1995 to ensure a continuous supply of asphalt. The Company also leases an asphalt storage tank and terminal facilities in Providence, Rhode Island.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company monitors its compliance with environmental regulations on an ongoing basis. The Company's general counsel receives environmental site assessments from the operating managers responsible for site environmental compliance. Appropriate action is undertaken where needed. When environmental claims are asserted against the Company, the claims are evaluated by the Company's general counsel and operating management in conjunction with external legal counsel and environmental engineers as necessary, and action is taken with respect to all known sites, as appropriate. The Company is currently engaged in proceedings relating to or has received notice of the following environmental matters:
On March 15, 1994 the Company received a draft of an Administrative Consent Order and Notice of Noncompliance from the Massachusetts Department of Environmental Protection ("DEP") concerning operations at its Norwood, Massachusetts manufacturing facility and associated rock granule processing facility. The draft alleges that the Company was not in compliance with regulations of the DEP relating to air emissions, granule plant operation, and labeling, handling and storage of certain hazardous waste. The draft proposes certain corrective action on the part of the Company as well as payment of civil administrative penalties. On June 10, 1994, the Company's roofing division entered into an administrative consent order and notice of noncompliance with respect to the alleged violations. The consent order requires the Company to undertake certain modifications and corrective actions with respect to certain hazardous waste handling and storage facilities at the Norwood facility, to conduct an environmental audit of its operations at such facility and to undertake various modifications of air pollution control equipment. On May 13, 1994, the Company paid an administrative penalty of $30,000. The Company estimated that the cost of corrective action to be taken by it in accordance with the consent order would be approximately $100,000. The majority of the corrective actions were completed in 1995.
On March 25, 1994, the Company received a notice from the United States Environmental Protection Agency (the "EPA") regarding a site inspection prioritization report prepared by the DEP. The notice alleges a potential release of hazardous substances into the environment at the Company's former mill site in East Walpole, Massachusetts. The EPA has reserved the right to conduct further site tests on the location. A site assessment performed on the mill site for the Company by its environmental consultants, GZA GeoEnvironmental Inc. ("GZA"), showed no environmental cleanup was necessary. This report was submitted to the DEP in July 1995. In the opinion of management and based on management's and GZA's understanding that the alleged releases are in de minimis quantities, this matter should not have a material adverse effect on the Company's financial position or on the results of its operations.
On June 21, 1994, the Arizona Department of Environmental Quality ("ADEQ") issued a notice of violation ("NV") to Southwest Roofing
Supply, a previously owned division of the Company ("Southwest"), which directed Southwest to conduct a site investigation of property formerly leased by Southwest. A consent order between the ADEQ and the Company was issued on September 23, 1994. Pursuant to the consent order, the Company agreed to submit a work plan with a view to remediating the soil and groundwater that may have been contaminated by leaks from an underground storage tank previously removed by the Company. The Company's management believes that the remediation cost to the Company will be in the range of $200,000 to $700,000. As of December 31, 1995, the Company has provided a reserve of $450,000 for the estimated cost of cleanup. The Company anticipates that $200,000 will be reimbursed to the Company by the ADEQ in accordance with Arizona law and regulation.
In 1986, the Company, along with numerous other companies, was named by the EPA and other governmental agencies responsible for regulation of the environment as a Potentially Responsible Person ("PRP") pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. Paragraph 9601, et seq. ("CERCLA") in connection with hazardous substances at a site known as the Fulton Terminal Superfund site located in Fulton, Oswego County, New York. On September 28, 1990, the Company and a number of other PRPs reached a negotiated settlement with the EPA pursuant to which the settling PRPs agreed to pay the costs of certain expenses in connection with the proceedings and to pay certain other expenses, including the costs and expenses of administering a trust fund to be established by the settling PRPs. The settlement agreement is embodied in a consent decree lodged with the United States District Court for the Western District of New York and fixed the Company's proportionate share of the total expenses. The ultimate cost to the Company of the remedial work and other expenses covered by the settlement agreement is estimated to be between $1 million to $2 million payable over a period of 3 to 15 years (depending upon the duration of remediation efforts). At December 31, 1995, the Company has provided a reserve of approximately $1 million to cover the estimated cost of the Company's remaining proportionate share (i.e., 17%) of the ultimate total cost of cleanup. Under a cost-sharing arrangement set forth in a consent decree with the EPA, the other PRPs have agreed to incur 83% of the aggregate cost of remediation of this site.
The Company has been named as a PRP with respect to certain other sites which are being investigated by federal or state agencies responsible for regulation of the environment. As a consequence of its status as a PRP, the Company may be jointly and severally liable for all of the potential monetary sanctions and remediation costs applicable to each site. In assessing the potential liability of the Company at each site, management has considered, among other things, the aggregate potential cleanup costs of each site; the apparent involvement of the Company at each site and its prospective share of the remediation costs attributable thereto; the number of PRPs identified with respect to each site and their financial ability to contribute their proportionate shares of the remediation costs for such site; the availability of insurance coverage for the Company's
involvement at each site and the likelihood that such coverage may be contested; and whether and to what extent potential sources of contribution from other PRPs or indemnification by insurance companies constitute reliable sources of recovery for the Company. Similar consideration has been given in determining the exposure and potential liability of the Company in connection with other significant legal proceedings to which the Company is a party. On the basis of such consideration, management has determined that such environmental matters will not have a material adverse effect on the Company's financial position or results of operations. The Company has provided an aggregate reserve amounting to approximately $300,000 for its estimated share of the ultimate cost of clean-up for claims arising from other such sites (without taking into account any potential indemnification or recovery from third parties).
The Company's roofing facility at Norwood, Massachusetts is one of 4,000 sites on the DEP List of Confirmed Disposal Sites. The DEP significantly revised the regulations that govern the reporting, assessment and remediation of hazardous waste sites in Massachusetts. The new Massachusetts Contingency Plan ("MCP") however, does not alter the ultimate liability for any remediation that may be necessary at the Norwood facility. Under the new MCP, the roofing facility was listed on the August 1993 "Transition List of Confirmed Disposal Sites and Locations to be Investigated."
A site assessment of the Norwood facility was performed for the Company by its environmental consultants GZA GeoEnvironmental, Inc. because the Company was on the DEP List of Confirmed Disposal Sites. The Company was required to complete certain additional remedial activities described in the new MCP on or before August 2, 1996. The Phase I and Phase II plan was completed in 1995 and submitted to the DEP in January 1996. In the opinion of management, no additional material costs will be incurred.
Since 1981 Bird has been named as a defendant in approximately 550 product liability cases throughout the United States by persons claiming to have suffered asbestos-related diseases as a result of alleged exposure to asbestos used in products manufactured and sold by Bird. Approximately 140 of these cases are currently pending and costs of approximately $2 million in the aggregate have been incurred in the defense of these claims since 1981. Employers Insurance of Wausau ("Wausau") has accepted the defense of these cases under an agreement for sharing of the costs of defense, settlements and judgments, if any. At December 31, 1995, the Company has recorded a reserve of $950,000 to cover the estimated cost of these claims. In light of the nature and merits of the claims alleged, in the opinion of management, the resolution of these remaining claims will not have a material adverse effect on the results of operations or financial condition of the Company.
In 1992, a subsidiary of the Company, Bird Atlantic Corporation, formerly Atlantic Building Products Corporation ("ABPCO"), commenced an action against a former vendor, alleging violation of an exclusive distributorship without adequate and fair compensation to ABPCO. A jury trial was held in November 1995 in the Superior Court of Plymouth
County, Massachusetts. The jury found in favor of ABPCO and judgement was entered on January 26, 1996 in the principal amount of approximately $1.8 million. The award, with interest accruing at 12% per annum, is expected to be in excess of $3 million and will not be reported as income until collected. The defendant has appealed the judgement.
INSURANCE AND PRODUCT LIABILITY CLAIMS
On June 1, 1993, Wausau commenced action in the Superior Court for Norfolk County, Massachusetts, against Bird seeking a declaratory judgment that certain built-up roofing and glass shingle claims made against Bird were not covered by liability insurance policies issued by Wausau. Bird asserts that the claims are covered and has answered the complaint. A trial is scheduled for 1997. In the opinion of management, the above matter will not have a material adverse effect on the Company's financial position or results of operations.
The Company is also exposed to a number of other asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management, the resolution of such claims will not have a material adverse effect on the Company's financial position or results of operations.
The Company is a defendant in a number of suits alleging product defects, the outcome of which management believes will not in the aggregate have a material impact on the Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter ended December 31, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Company as of
March 8, 1996, the date from which they have served as officers and their present positions with the Company are as follows:
Richard C. Maloof 50 January 1985 President and Chief Operating Officer
Frank S. Anthony 49 May 1984 Vice President, General Counsel and Corporate Secretary
Mr. Maloof joined the Company in October 1971. He has held various positions such as Senior Roofing Engineer, Manufacturing Manager - Pacific Division, Vice President of Manufacturing and President of the Roofing Division. Mr. Maloof holds an engineering degree. He was elected President and COO in May 1995 and was also elected to the Board of Directors in 1995. Mr. Anthony is an attorney and prior to joining Bird served in the law department of Westinghouse Electric Corporation from 1976 to 1983.
These officers are appointed annually at an organizational meeting of the Board of Directors immediately following the annual meeting of stockholders. There are no family relationships among any of the officers of the Company nor are any of the officers related to any member of the Board of Directors.
The Company had an employment agreement with George Haufler, the former CEO, which was terminated on January 25, 1994. In December 1993, the Company entered into an employment contract and a severance agreement with Joseph Vecchiolla, successor to Mr. Haufler. The Company has also entered into agreements with its two executive officers. Mr. Anthony's agreement superseded his earlier severance agreement and provides that severance benefits are payable to him on March 31, 1996. The agreement automatically converts to an oral agreement on the same terms and conditions terminable by either party on 60 days notice. Mr. Maloof's agreement provides severance benefits to him after a change in control of the Company. These agreements are described in the Company's definitive proxy statement for its 1996 Annual Meeting which is to be filed with the Commission by April 30, 1996 and is incorporated herein by reference.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS COMMON STOCK INFORMATION
The Company had 2,123 common shareholders of record at December 31, 1995.
The common stock is quoted in the National Market System under the NASDAQ symbol BIRD. The range of high and low prices for the common stock as reported by NASDAQ for the periods indicated is set forth below.
The Company paid no cash dividends on its common stock during 1995 or 1994.
Under the terms of the Loan Agreement between the Company and Fleet Capital, the Company has agreed that it will refrain from paying cash dividends on its common stock or its $1.85 cumulative preference stock, without prior approval from the Bank.
The Company is in arrears in the payment of four dividends on its preference stock. The Articles of Organization of the Company provide that as long as any arrearage on the payment of dividends on the Company's 5% preferred stock exists, no dividends may be declared or paid on any other class of stock of the Company and further provides that in the event that full cumulative dividends on the preference stock have not been declared and paid, the Company may not declare or pay any dividends or make any distributions on, or purchase, redeem, or otherwise acquire, its common stock until full cumulative dividends on the preference stock have been declared and paid or set aside for payment.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth certain financial data and are qualified in their entirety by the more detailed Consolidated Financial Statements and information included elsewhere herein:
SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA
SELECTED CONSOLIDATED BALANCE SHEET DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROPOSED MERGER
On March 14, 1996, the Company signed a definitive agreement with CertainTeed Corporation, a subsidiary of Saint-Gobain Corporation, providing for CertainTeed to acquire in a merger transaction all of the Company's outstanding common, preferred and preference shares.
Upon the effective date of the merger, each share of the Company's outstanding common stock, par value $1 per share, will be converted into the right to receive an amount in cash equal to $7.50. The Company's outstanding 5% cumulative preferred stock, par value $100 per share, will remain issued and outstanding upon the effective date of the merger and will be called for redemption and retirement as soon as practicable thereafter at a price equal to $110, plus all accrued and unpaid dividends thereon as of the date of redemption and retirement. Each share of the Company's outstanding $1.85 cumulative convertible preference stock, par value $1 per share, will be converted into the right to receive $20 plus all accrued and unpaid dividends thereon as of the effective date of the merger.
Completion of the merger is subject to approval by the Company's shareholders and appropriate governmental authorities. The merger is not subject to a financing contingency. The Company's Board of Directors has received a fairness opinion from its investment bankers regarding the merger. The closing of the merger is anticipated at the end of the second quarter, following distribution of proxy materials to the Company's shareholders and approval at a special meeting.
FINANCIAL CONDITION
Prior to November 30, 1994, the Company's external financial needs were satisfied by borrowing under the Second and Third Amended Credit Agreements with The First National Bank of Boston, Philadelphia National Bank incorporated as Corestates Bank, N.A. and The Bank of Tokyo Trust Company.
On November 30, 1994, Bird Incorporated entered into a three year $39 million Loan Agreement with Fleet Capital Corporation ("Fleet Capital"), previously Barclays Business Credit, Inc. and Shawmut Capital Corporation. At the end of the three year period, the Loan Agreement will be automatically renewed for successive one year periods unless terminated specifically in writing. The Loan Agreement consisted of a $24 million revolving credit commitment and two equal term loans (Term loan A and Term loan B, as defined in the Loan Agreement) totaling $15 million. On March 8, 1995 the Company sold the assets of its vinyl siding operation to Jannock, Inc. for $47.5 million
which was reduced to approximately $42.5 million by post-closing working capital adjustments. The proceeds from the sale were used to reduce bank debt. Concurrent with the sale, Fleet Capital executed the First Amendment to the Loan Agreement amending the amount of the facility to $20 million consisting of a $15 million revolving credit commitment and a $5 million term loan. At December 31, 1995, $5 million of debt was outstanding. On January 10, 1996, the Company paid down the term loan so that the outstanding principal balance equaled $2.5 million. Up to $5 million of the revolving credit facility can be used for letters of credit. Letters of credit outstanding as of December 31, 1995 totaled $2,233,000 compared to $2,927,000 as of December 31, 1994.
Borrowings by Bird Incorporated under the Loan Agreement are guaranteed by the Company and the Company's other subsidiaries and are secured by substantially all of the assets of the Company and its subsidiaries. The revolving credit line availability is determined with reference to a percentage of accounts receivable and inventory which are pledged to the lender. During the period January 1 through April 30, the Loan Agreement provides a $2 million over advance on accounts receivable and inventories in order to assist the Company in assuring adequate funding of any seasonal build up of accounts receivable which may occur under sales programs offered during the winter months. Currently, the availability calculation does not allow borrowings to the full extent of the revolving credit commitment, due to the seasonality of the building materials manufacturing business. As of March 15, 1996, an aggregate of $7,683,000 was available to the Company under the terms of the revolving credit facility under the Loan Agreement.
The Loan Agreement contains financial and operating covenants which, among other things, (i) require the Company to maintain prescribed levels of tangible net worth, net cash flow and working capital and (ii) place limits on the Company's capital expenditures. The Loan Agreement also contains restrictions on indebtedness, liens, investments, distributions (including payment of common and preference dividends), mergers, acquisitions and disposition of assets. As of September 30, 1995, the Company was in default under Section 8.3.3 of the Loan Agreement as a result of failing to achieve a stated level of cash flow for the third quarter of 1995. As a result of the weak remodeling market during 1995, sales volume and earnings were less than anticipated, negatively impacting cash flow. At the request of the Company, Fleet Capital waived the cash flow requirements for the third quarter without penalty and amended this and other financial covenants for subsequent periods based on a review of the Company's financial condition and future projections. As of December 31, 1995, the Company was in compliance with all covenants.
Interest on the revolving credit commitment under the First Amended Loan Agreement accrues at the Fleet Capital base rate (as specified in such Agreement) or the London Interbank Offering Rate ("LIBOR") plus 2 3/4% at the Company's election on all borrowings plus the greater of $25,000 per annum or 1/4% on any unused portion of the commitment payable monthly in arrears. The interest on the term loan accrues at the base rate or the LIBOR rate plus 2 3/4% at the Company's election. The interest rate on outstanding borrowings at December 31, 1995 was
8.69%. The repayment of the principal on the term loan is at the rate of $62,500 per month through November 1996 and $71,417 per month thereafter with a final principal payment of $3,455,800 due on November 30, 1997. Proceeds in excess of $100,000 from the sale of fixed assets may, at Fleet Capital's discretion, be applied to the outstanding principal payments of the term loan.
In order to control its cost and supply of asphalt, the Company constructed an asphalt oxidizer plant at its roofing facility in Norwood, Massachusetts. Construction was completed during January 1995. The Company's decision to build the oxidizer was triggered by the decision of Exxon (the only remaining supplier of asphalt in New England) to exit the New England market. The cost of this plant expansion was approximately $5.5 million.
On March 8, 1995, the Company sold substantially all of the assets of its vinyl siding operation to Jannock, Inc. for $47.5 million in cash subject to certain downward adjustments which totaled $4,962,000. Net of adjustments, the gain on the sale of the vinyl business totaled $20,579,000.
On June 2, 1995, the Company sold all of the outstanding capital stock of Bird-Kensington Holding Corp. ("Bird-Kensington"), which owned the Company's interest in Kensington Partners ("Kensington"), to Jannock, Inc. ("Jannock"). The sale was consummated pursuant to the exercise by Jannock of an option granted under an Asset Purchase Agreement related to the sale of the Company's vinyl business dated as of September 23, 1994 (as amended by amendments dated as of January 24, 1995, January 31, 1995, and April 27, 1995, the "Asset Purchase Agreement"). The purchase price consisted of cash in the amount of $2,780,000 and the assumption of certain liabilities related to the Kensington business. Cash proceeds of $1 million were used to acquire the minority partner's interest in Kensington. In addition, $3,692,000 was invested by the Company in Bird-Kensington, as a condition of the sale, to enable Kensington to pay certain liabilities and to assure that the equity of Kensington was not less than $1,150,000 at the time of closing as stipulated in the Asset Purchase Agreement.
Following the closing date, Jannock presented to the Company financial statements of Kensington as of June 2, 1995, indicating that net equity was $471,000 less than the amount required by the Asset Purchase Agreement. The Company had established a reserve for the full amount of the shortfall at June 30, 1995 and subsequently paid to Jannock $398,000 in full settlement of the terms of the Asset Purchase Agreement. Net of certain purchase price adjustments, the loss on the sale of Kensington was $1,959,000.
One June 18, 1994, the Company agreed to cause the sale of its 80% interest in Bird Environmental Gulf Coast, Inc. ("BEGCI") to the minority shareholders thereof, subject to financing, resulting in the complete withdrawal from the environmental business. During 1995, the minority partner became unable to finance the purchase of the facility and efforts to attract another purchaser were unsuccessful. In July 1995, the Company's Board of Directors suspended further funding of the facility. As a result of this action, during the second quarter of
1995, the Company's remaining investment of $8.6 million was written-off and a $3 million reserve was established for the costs associated with the closure of the facility. On November 29, 1995, the Company caused the sale all of the outstanding capital stock of BEGCI to GTS Duratek, Inc. for a purchase price of $1.00. In addition, the Company agreed to pay the purchaser the amount by which BEGCI's current liabilities exceeded its current assets at August 31, 1995 which was approximately $1.3 million. Of the $3 million reserve established in the second quarter of 1995, $2,050,000 was utilized, while $650,000 remains at December 31, 1995 for future claims against discontinued operations.
Net cash and cash equivalents increased during fiscal 1995 by $3.4 million primarily due to cash received from the sale of the vinyl business. The cash used by continuing operations for the fiscal period ended December 31, 1995 increased $6.7 million, from $11.6 million to $18.3 million. In 1995, the Company recorded a gain of $20.6 million on the sale of its vinyl business. This gain was offset by charges of $11.3 million and $2 million related to the disposal of the environmental and window fabrication businesses, respectively. Cash used by operations in 1995 was also attributable to several significant changes in the balance sheet such as a reversal of future tax benefits of $11.3 million, a decrease of $3.1 million in trade accounts receivable, a decrease of $14.3 million in liabilities not relating to financing activities and an increase of $2.7 million relating to inventories.
Additionally, the vinyl and window fabrication business activities which were discontinued in 1995 had a significant impact on the changes in the balance sheet accounts between December 31, 1994 and December 31, 1995. As a result of these sales, inventory decreased $6.3 million, accounts and notes receivable decreased $11 million, and current liabilities decreased $9 million. In addition, assets held for sale decreased $7.5 million due to the write-off of the Company's interest in Bird Environmental Gulf Coast, Inc. ("BEGCI").
The Company had approximately $47.3 million of net cash provided from investing activities for the period ended December 31, 1995 as compared to a total of approximately $19.4 million for the period ended December 31, 1994. The change is primarily the result of $50.7 million of cash receipts from the proceeds of the sale of certain of the Company's assets (primarily, the sale of the assets of the vinyl and window fabrication businesses to Jannock, Inc. in March and June 1995, respectively), offset by cash used for capital expenditures of the roofing business and additional investments in discontinued operations. In the prior comparable period, net cash provided by investing activities resulted primarily from the proceeds of the sale of the Company's distribution business to Wm. Cameron & Co., offset by cash used for capital expenditures.
The net cash resulting from financing activities changed by $11 million from the prior year. Cash used in financing activities during 1995 resulted from the net repayment of debt of $24 million and $1.6 million of dividend payments, as compared to 1994 when the Company had net
repayments of debt of approximately $16 million and made minimal dividend payments.
ENVIRONMENTAL MATTERS
The Company monitors its compliance with environmental regulations on an ongoing basis. The Company's general counsel receives environmental site assessments from the operating managers responsible for site environmental compliance. Appropriate action is undertaken where needed. When environmental claims are asserted against the Company, the claims are evaluated by the Company's general counsel and operating management in conjunction with external legal counsel and environmental engineers as necessary, and action is taken with respect to all known sites, as appropriate. The Company is currently engaged in proceedings relating to or has received notice of the following environmental matters:
On March 15, 1994 the Company received a draft of an Administrative Consent Order and Notice of Noncompliance from the Massachusetts Department of Environmental Protection ("DEP") concerning operations at its Norwood, Massachusetts manufacturing facility and associated rock granule processing facility. The draft alleges that the Company was not in compliance with regulations of the DEP relating to air emissions, granule plant operation, and labeling, handling and storage of certain hazardous waste. The draft proposes certain corrective action on the part of the Company as well as payment of civil administrative penalties. On June 10, 1994, the Company's roofing division entered into an administrative consent order and notice of noncompliance with respect to the alleged violations. The consent order requires the Company to undertake certain modifications and corrective actions with respect to certain hazardous waste handling and storage facilities at the Norwood facility, to conduct an environmental audit of its operations at such facility and to undertake various modifications of air pollution control equipment. On May 13, 1994, the Company paid an administrative penalty of $30,000. The Company estimated that the cost of corrective action to be taken by it in accordance with the consent order would be approximately $100,000. The majority of the corrective actions were completed in 1995.
On March 25, 1994, the Company received a notice from the United States Environmental Protection Agency (the "EPA") regarding a site inspection prioritization report prepared by the DEP. The notice alleges a potential release of hazardous substances into the environment at the Company's former mill site in East Walpole, Massachusetts. The EPA has reserved the right to conduct further site tests on the location. A site assessment performed on the mill site in East Walpole for the Company by its environmental consultants, GZA, showed no environmental cleanup was necessary. This report was submitted to the DEP in July 1995. In the opinion of management and based on management's and GZA's understanding that the alleged releases are in de minimis quantities, this matter should not have a material adverse effect on the Company's financial position or on the results of its operations.
On June 21, 1994, the Arizona Department of Environmental Quality ("ADEQ") issued a notice of violation ("NV") to Southwest Roofing Supply, a previously owned division of the Company ("Southwest"), which directed Southwest to conduct a site investigation of property formerly leased by Southwest. A consent order between the ADEQ and the Company was issued on September 23, 1994. Pursuant to the consent order, the Company agreed to submit a work plan with a view to remediating the soil and groundwater that may have been contaminated by leaks from an underground storage tank previously removed by the Company. The Company's management believes that the remediation cost to the Company will be in the range of $200,000 to $700,000. As of December 31, 1995, the Company has provided a reserve of $450,000 for the estimated cost of cleanup. The Company anticipates that $200,000 will be reimbursed to the Company by the ADEQ in accordance with Arizona law and regulation.
In 1986, the Company, along with numerous other companies, was named by the EPA and other governmental agencies responsible for regulation of the environment as a Potentially Responsible Person ("PRP") pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. Paragraph 9601, et seq. ("CERCLA") in connection with hazardous substances at a site known as the Fulton Terminal Superfund site located in Fulton, Oswego County, New York. On September 28, 1990, the Company and a number of other PRPs reached a negotiated settlement with the EPA pursuant to which the settling PRPs agreed to pay the costs of certain expenses in connection with the proceedings and to pay certain other expenses, including the costs and expenses of administering a trust fund to be established by the settling PRPs. The settlement agreement is embodied in a consent decree lodged with the United States District Court for the Western District of New York and fixed the Company's proportionate share of the total expenses. The ultimate cost to the Company of the remedial work and other expenses covered by the settlement agreement is estimated to be between $1 million to $2 million payable over a period of 3 to 15 years (depending upon the duration of remediation efforts). At December 31, 1995, the Company has provided a reserve of approximately $1 million to cover the estimated cost of the Company's remaining proportionate share (i.e., 17%) of the ultimate total cost of cleanup. Under a cost-sharing arrangement set forth in a consent decree with the EPA, the other PRPs have agreed to incur 83% of the aggregate cost of remediation of this site.
The Company has been named as a PRP with respect to certain other sites which are being investigated by federal or state agencies responsible for regulation of the environment. As a consequence of its status as a PRP, the Company may be jointly and severally liable for all of the potential monetary sanctions and remediation costs applicable to each site. In assessing the potential liability of the Company at each site, management has considered, among other things, the aggregate potential cleanup costs of each site; the apparent involvement of the
Company at each site and its prospective share of the remediation costs attributable thereto; the number of PRPs identified with respect to each site and their financial ability to contribute their proportionate shares of the remediation costs for such site; the availability of
insurance coverage for the Company's involvement at each site and the likelihood that such coverage may be contested; and whether and to what extent potential sources of contribution from other PRPs or indemnification by insurance companies constitute reliable sources of recovery for the Company. Similar consideration has been given in determining the exposure and potential liability of the Company in connection with other significant legal proceedings to which the Company is a party. On the basis of such consideration, management has determined that such environmental matters will not have a material adverse effect on the Company's financial position or results of operations. The Company has provided an aggregate reserve amounting to approximately $300,000 for its estimated share of the ultimate cost of clean-up for claims arising from other such sites (without taking into account any potential indemnification or recovery from third parties).
The Company's roofing facility at Norwood, Massachusetts is one of 4,000 sites on the DEP List of Confirmed Disposal Sites. The DEP significantly revised the regulations that govern the reporting, assessment and remediation of hazardous waste sites in Massachusetts. The new Massachusetts Contingency Plan ("MCP") however, does not alter the ultimate liability for any remediation that may be necessary at the Norwood facility. Under the new MCP, the roofing facility was listed on the August 1993 "Transition List of Confirmed Disposal Sites and Locations to be Investigated."
A site assessment of the Norwood facility was performed for the Company by its environmental consultants GZA GeoEnvironmental, Inc. because the Company was on the DEP List of Confirmed Disposal Sites. The Company must complete certain additional remedial activities described in the new MCP on or before August 2, 1996. The Phase I and Phase II plan was completed and submitted to the DEP in January 1996. In the opinion of management, no additional material costs will be incurred.
Since 1981 Bird has been named as a defendant in approximately 550 product liability cases throughout the United States by persons claiming to have suffered asbestos-related diseases as a result of alleged exposure to asbestos used in products manufactured and sold by Bird. Approximately 140 of these cases are currently pending and costs of approximately $2 million in the aggregate have been incurred in the defense of these claims since 1981. Employers Insurance of Wausau ("Wausau") has accepted the defense of these cases under an agreement for sharing of the costs of defense, settlements and judgments, if any. At December 31, 1995, the Company has recorded a reserve of $950,000 to cover the estimated cost of these claims. In light of the nature and merits of the claims alleged, in the opinion of management, the resolution of these remaining claims will not have a material adverse effect on the results of operations or financial condition of the Company.
INSURANCE AND PRODUCT LIABILITY CLAIMS
On June 1, 1993, Wausau commenced action in the Superior Court for Norfolk County, Massachusetts, against Bird seeking a declaratory judgment that certain built-up roofing and glass shingle claims made
against Bird were not covered by liability insurance policies issued by Wausau. Bird asserts that the claims are covered and has answered the complaint. A trial is scheduled for 1997. In the opinion of management, the above matter will not have a material adverse effect on the Company's financial position or results of operations.
The Company is also exposed to a number of other asserted and unasserted potential claims encountered in the normal course of business. In the opinion of management, the resolution of such claims will not have a material adverse effect on the Company's financial position or results of operations.
The Company is a defendant in a number of suits alleging product defects, the outcome of which management believes will not in the aggregate have a material impact on the Company's financial position or results of operations.
LEGAL MATTERS
In 1992, a subsidiary of the company, Bird Atlantic Corporation, formerly Atlantic Building Products Corporation ("ABPCO"), commenced an action against a former vendor, alleging violation of an exclusive distributorship without adequate and fair compensation to ABPCO. A jury trial was held in November 1995 in the Superior Court of Plymouth County, Massachusetts. The jury found in favor of ABPCO and judgement was entered on January 26, 1996 in the principal amount of approximately $1.8 million. The award, with interest accruing at 12% per annum, is expected to be in excess of $3 million and will not be reported as income until collected. The defendant has appealed the judgement.
RESULTS OF OPERATIONS
The Company's future prospects and sales are tied solely to one line of business (roofing manufacturing) which is dependent upon the economy in the northeastern United States. The Company produces all of its output at a single plant which relies on one major supplier for glass mat, a critical raw material. Nevertheless, the Company believes it has significant competitive advantages in this business. These advantages stem from, and are expected to continue in light of the Company's leading market share, its low cost production abilities resulting from a state-of-the-art plant, its internal supply of granules from its own quarry and granule plant and its asphalt oxidizing plant.
1995 COMPARED WITH 1994
Earnings from continuing operations before income taxes in fiscal 1995 were $10,627,000 compared to losses of $5,927,000 in fiscal 1994. Net sales from continuing operations decreased 67.7% from $167,886,000 to $54,180,000 as compared to 1994, primarily due to the sale of the Company's distribution and vinyl products business units. Sales from the roofing manufacturing business decreased $10,857,000 or 19.9% due
to price weakness and a decline in volume. The decreased volume was attributable to a weak re-roofing market in the northeast caused by a mild 1994/1995 winter followed by a hot, dry summer. The Company is expanding its sales territories to include areas bordering the northeastern United States in an effort to replace lost volume.
Cost of sales in 1995 was $48,007,000 as compared to $136,878,000 in 1994, constituting a decrease of 64.9%. The decline was primarily a result of the sale of the Company's distribution and vinyl products business units. Cost of sales for the roofing business decreased 18.4% or $8,662,000 due primarily to decreased manufacturing costs related to a decrease in sales volume. Although the Company experienced raw material price increases in glass mat and dry felt, the cost of asphalt, along with related freight, was reduced significantly as a result of the newly constructed asphalt oxidizer, which produces asphalt saturant and coatings. The oxidizer became operational in February 1995. From November 1995 through mid-February 1996, the oxidizer was temporarily shut down for repairs as a result of a fire within the tank farm area of the plant.
Cost of sales, stated as a percentage of net sales, was 88.6% in fiscal 1995 as compared to 81.5% in fiscal 1994. Roofing manufacturing cost of sales, as a percentage of sales, increased 1.6% from 86.2% to 87.8% in 1995. Increases in raw material costs and decreases in sales prices contributed to the percentage increase.
Selling, general and administrative ("SG&A") expenses for fiscal 1995 decreased 59% from $28,786,000 to $11,817,000. The decrease was primarily attributable to the sale of the Company's distribution and vinyl products business units. However, SG&A expenses, as a percentage of sales, increased approximately 5% from year-to-year. The increase was due primarily to the amortized refinancing costs associated with the 1994 refinancing of an earlier credit agreement, additional charges related to environmental remediation and costs associated with closing the Company's corporate office. The decrease in sales in the roofing business without a corresponding decline in certain fixed costs also contributed to the increase as a percentage of sales.
Interest expense was $927,000 in 1995 as compared to $4,782,000 in 1994, an 80.6% decrease. The decrease resulted from the reduction of debt which occurred through the use of proceeds from the sale of the vinyl products and distribution business units.
Discontinued business activities income in 1995 reflects primarily the gain of $20,579,000 on the sale of the vinyl manufacturing business, the loss of $1,959,000 on the sale of the window fabrication business and a charge of $1,500,000 for costs associated with the Company's employee benefit plans and future product liability claims, both related to former roofing operations. Fiscal 1994 discontinued business activities income reflects primarily the gain of $2,727,000 on the sale of all of the Company's building materials distribution businesses reduced by the loss of $1,261,000 on the sale of the Company's 40% interest in Mid-South Building Supply, Inc.
Equity losses from the Company's partnership in the Kensington window
fabrication business amounted to $372,000 for the period January 1, through February 28, 1995 as compared to $4,680,000 for the twelve month period ended December 31, 1994.
A provision for income taxes from continuing operations amounting to $11,424,000 was recorded in 1995 compared to a benefit of $7,010,000 in 1994. The Company's decision to reverse $4 million of the valuation reserve in 1994 and subsequent decision to increase the reserve to $15.1 million in 1995 is the primary reason the effective tax rates differ from the statutory rate. At December 31, 1995 the Company's net deferred tax asset is approximately $19.1 million less a valuation reserve of $15.1 million. As required under FAS 109, this valuation reserve was determined based upon the Company's review of all available evidence including projections of future taxable income. During 1995, the Company disposed of Bird-Kensington Holding Corporation and Bird Environmental Gulf Coast, Inc. resulting in losses not anticipated at the end of the previous year. In addition, the lower overall demand and price weakness in the northeast caused by a mild 1994/1995 winter followed by a hot, dry summer negatively impacted profits of the roofing operations.
During the second quarter of 1995, the Company's remaining investment in BEGCI of $8.6 million was written-off to discontinued operations and a $3 million reserve was established for additional costs associated with the closure and disposition of the facility (see Note 9 to Consolidated Financial Statements). In November 1995, the Company caused the sale of all the outstanding capital stock of BEGCI to GTS Duratek, Inc.. for a purchase price of $1.00. Of the $3 million reserve established in the second quarter of 1995, $2,050,000 was utilized, while $650,000 remains at December 31, 1995 for future claims against discontinued operations.
In connection with the Board of Director's 1994 decision to withdraw from the off-site environmental business and the Company's agreement on June 18, 1994 to cause the sale of its shares in BEGCI to the minority stockholders on or before February 28, 1995, subject to financing, the Company reclassified the environmental business results as discontinued operations as of June 30, 1994 and adjusted the book value associated with BEGCI, resulting in an aggregate charge for the twelve months ended December 31, 1994 of $11,586,000.
In 1993, in connection with its decision to withdraw from the "on-site" environmental remediation business, the Company charged the results of operations for the write-down of assets, the expected loss from operations and general expenses related to closing of such "on-site" remediation business (see notes to Consolidated Financial Statements). Based upon the actual outcome of the sale of assets and results of operations, excess costs of $3,861,000 charged in 1993 were reversed and recorded as discontinued operations in the consolidated statement of operations for the year ending December 31, 1994.
1994 COMPARED WITH 1993
Losses from continuing operations before income taxes in 1994 were
approximately $5.9 million compared to losses of approximately $5.3 million in 1993. Net sales from continuing operations decreased 10.6% from $187,745,000 in 1993 to $167,886,000 in 1994. Sales from the Company's roofing manufacturing business and its vinyl business increased 14.9% and 5.9%, respectively. Improved weather conditions and renewed strength in the remodeling market caused by low interest rates and a generally favorable economy contributed to the improvement in these businesses. However, a decrease in sales volume due to the sale of substantially all of the Company's building materials distribution businesses in August and November of 1994 significantly offset the improvement attained by the roofing and vinyl businesses.
The Company's cost of sales from continuing operations in 1994 as compared to 1993 decreased 9.7% from $151,664,000 to $136,878,000. Cost of sales from continuing operations in the roofing and vinyl manufacturing businesses increased 15.4% and 7.9%, respectively, due to increased manufacturing costs related to volume, higher raw material costs related to the increase in resin prices for the vinyl business and higher asphalt prices for the roofing manufacturing business. The increase was more than offset by the decline in cost of sales due to the August and November 1994 sales of the Company's building materials distribution businesses.
Cost of sales stated as a percentage of net sales was 81.5% in 1994 as compared to 80.8% in 1993. The roofing manufacturing business cost of sales as a percentage of sales increased .3% from 85.9% to 86.2% in 1994. The vinyl business cost of sales as a percentage of sales for fiscal 1994 increased from 76.0% to 77.5% or 1.5% over fiscal 1993. The major factor in such percentage increase was the increased cost of raw materials.
Selling, general and administrative ("SG&A") expenses for fiscal 1994 decreased 12.0% from $32,716,000 in 1993 to $28,786,000 in 1994. The decrease was primarily attributable to the sale of the Company's building materials distribution businesses. The SG&A expenses of the Company's roofing and vinyl manufacturing businesses, on a combined basis, decreased 7.2% from year-to-year. However, SG&A expenses, as a percentage of sales remained relatively constant at approximately 17%.
Interest expense was $4,782,000 in 1994 as compared to $2,472,000 in 1993, constituting a 93% increase. The increased interest expense reflects the nearly $10 million increased debt level and higher overall interest costs in 1994. Between April 11, 1994 and November 30, 1994 the Company was required to pay a default interest rate of 4% above the rate otherwise applicable to the revolving credit and term loans, compared to an approximate rate of 4.5% to 5% for 1993. Default interest expense totaled $1,032,000 during fiscal 1994.
Discontinued business activities income in 1994 reflects primarily the gain of $2,727,000 on the sale of all of the Company's building materials distribution businesses reduced by the loss of $1,261,000 on the sale of the Company's 40% interest in Mid-South Building Supply, Inc.
Other non-recurring expenses totalled $4,680,000 in 1994 as compared to $5,903,000 in 1993. Kensington continued to experience operations problems and incurred losses of $4,680,000 and $2,625,000 in 1994 and 1993, respectively.
A higher tax benefit from continuing operations was recorded in 1994 compared to the benefit booked in 1993. The Company's decision to record a $9 million valuation reserve in 1993 and subsequent decision to reverse $4 million in 1994 is the primary reason the effective tax rates differ from the statutory rate.
In connection with the Board of Director's decision to withdraw from the environmental business and the Company's agreement on June 18, 1994 to cause the sale of its shares in BEGCI to the minority stockholders on or before February 28, 1995, subject to financing, the Company reclassified BEGCI results as a discontinued operation as of June 30, 1994 and adjusted its book value, resulting in an aggregate charge for the twelve months ended December 31, 1994 of $11,586,000. The Company intended to operate the San Leon Facility until the sale of its interest in BEGCI was consummated.
Due to the Company's decision to exit the off-site environmental business by selling its interest in the San Leon Facility as described above, the Company completely withdrew from the environmental business. As a result, historical results of operations for all of the environmental businesses have been classified as discontinued operations. In 1993, in connection with its decision to withdraw from the "on-site" environmental remediation business, the Company recorded a charge for the write-down of assets, the expected loss from operations and general expenses related to the closing of such "on-site" remediation business (see notes to Consolidated Financial Statements). Based upon the outcome of the sales of assets and results of operations, excess costs of $3,861,000 charged in 1993 were reversed and recorded as discontinued operations in the consolidated statement of operations for the year ending December 31, 1994.
INFLATION
The Company is continually seeking ways to deal with raw material cost increases by productivity improvements and cost reduction programs. In recent years, the Company has not always been able to pass on increased raw material costs to customers by increasing selling prices because of intense competitive pressures. The Company has an ongoing program of updating productive capacity to take advantage of improved technology, and although the cumulative impact of inflation has resulted in higher costs for replacement of plant and equipment, these costs have been offset, in part, by productivity savings.
NEW ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards No. 123 Accounting For Stock Based
Compensation" ("FAS 123"). The Company intends to adopt FAS 123 through disclosure only in 1996.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and schedules of the Company are included in a separate section of this report and are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10, 11, 12 and 13 (except the information on executive officers) is included in the Company's definitive proxy statement for its 1996 Annual Meeting of Stockholders which will be filed with the Commission by April 30, 1996 and which is incorporated herein by reference. Information on executive officers, required by Item 10, is included in PART I of this report under the heading "Executive Officers of the Registrant".
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) An Index of Financial Statements and Schedules is on page of this report. The Exhibit Index is on pages 28 through 33 of this report.
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the last quarter of the year ended December 31, 1995.
(d) Financial Statements of Kensington Partners are on Page through of this report.
Items 14 (a) (3) and (c) Exhibits Bird Corporation Norwood, Massachusetts
EXHIBIT INDEX
Sequential Exhibit No. Page No. - ----------- ----------
3(a) Articles of Organization (Filed as Appendix B to the Company's Registration Statement on Form S-4, Registration No 33-34440 and incorporated herein by reference.)
3(b) By-laws of the Company as amended to date. (Filed as Exhibit 3(b) to the Company's report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.)
4(a)(1) Forbearance Agreement dated as of February 14, 1994 with regard to the Revolving Credit Agreement dated as of December 17, 1990, as amended. (Filed as Exhibit 4 (a)(3) to the Company's Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.)
4(a)(2) Third Amended and Restated Revolving Credit and Term Loan Agreement dated as of March 4, 1994 (Filed as Exhibit 4(a)(1) to the Company's Form 8-K dated March 14, 1994 and incorporated herein by reference.)
4(a)(3) Loan and Security Agreement dated as of November 30, 1994 (the "Loan Agreement") between Barclays Business Credit, Inc. (now known as Fleet Capital Corporation) and Bird Incorporated. (Filed as Exhibit 4(a)(3) to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.)
4(a)(4) First Amendment dated as of March 8, 1995 to the Loan Agreement between Shawmut Capital Corporation (now known as Fleet Capital Corporation) and Bird Incorporated. (Filed as Exhibit 4(a)(4) to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.)
Sequential Exhibit No. Page No. - ----------- ----------
4(a)(5) Rights Agreement dated as of November 25, 1986 between the Company and the First National Bank of Boston, as Rights Agent. (Filed as Exhibit 1 to Registration Statement on Form 8-A dated December 5, 1986 and incorporated herein by reference.)
4(a)(6) First Amendment dated May 24, 1990 to Rights Agreement dated as of November 25, 1986. (Filed as Exhibit 4(b)(2) to the Company's report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.)
10(a)* Plan for Assistance to Key Employees in Financing Purchases of Company Stock (Filed as Exhibit 10(b) to the Company's report on Form 10-K for the year ended December 31, 1980 and incorporated herein by reference.)
10(b)* Plan for Deferring Payment of Senior Officer's Compensation (Adopted December 22, 1975). (Filed as Exhibit 10(c) to the Company's report on Form 10-K for the year ended December 31, 1980 and incorporated herein by reference.)
10(c)* 1975 Plan for Deferring Payment of Director's Compensation (Adopted June 23, 1975). (Filed as Exhibit 10(d) to the Company's report on Form 10-K for the year ended December 31, 1980 and incorporated herein by reference.)
10(d)* Settlement Agreement dated as of July 7, 1994 between Bird Corporation and George J. Haufler. (Filed as Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.)
10(e)* Management Incentive Compensation Program adopted January 25, 1983. (Filed as Exhibit 10(m) to the Company's report on Form 10-K for the year ended December 31, 1982 and incorporated herein by reference.)
Sequential Exhibit No. Page No. - ----------- ----------
10(f)* Bird Corporation 1982 Stock Option Plan as amended through January 29, 1992. (Filed as Exhibit 10(f) to the Company's report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.)
10(g)* Bird Corporation 1992 Stock Option Plan. (Filed as Exhibit 10(g) to the Company's report on Form 10-K for the year ended December 31, 1992 incorporated herein by reference.)
10(h)* Bird Corporation Non-Employee Director Stock Option Plan. (Filed as Exhibit 10(h) to the Company's report on Form 10-K for the year ended December 31, 1992 incorporated herein by reference.)
10(i)(1)* Form of severance agreement with eight key executive employees of the Company. (Filed as Exhibit 10(n) to the Company's report on Form 10-K for the year ended December 31, 1984 and incorporated herein by reference.)
10(i)(2)* Form of Amendment dated May 24, 1990 to form of severance agreement. (Filed as Exhibit 10(g)(2) to the Company's report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.)
10(k) Glass Mat Supply Agreement dated as of February 20, 1985 between the Company, The Flintkote Company and Genstar Roofing Company, Inc. (Filed as Exhibit 10(s) to Amendment No. 1 to the Company's report on Form 10-K for the year ended December 31, 1984 and incorporated herein by reference.)
10(l) Equipment Acquisition Agreement dated May 25, 1990 between BancBoston Leasing Inc. and Bird Incorporated. (Filed as Exhibit 10(j) to the Company's report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.)
Sequential Exhibit No. Page No. - ----------- ----------
10(m) Equipment Acquisition Agreement dated July 23, 1986 between BancBoston Leasing Inc. and Bird Incorporated. (Filed as Exhibit 10(s) to the Company's report on Form 10-K for the year ended December 31, 1986 and incorporated herein by reference.)
10(n)(1)* Long Term Incentive Compensation Plan dated June 28, 1988. (Filed as Exhibit 10(v) to the Company's report on Form 10-Q for the quarter ended September 30, 1988 and incorporated herein by reference.)
10(n)(2)* Amendment dated May 24, 1990 to Long Term Incentive Compensation Plan. (Filed as Exhibit 10(o)(2) to the Company's report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.)
10(o) Amendment dated February 1, 1994 to the First Amended and Restated Partnership Agreement between Bird Vinyl Products, Inc. and Kensington Manufacturing Company. (Filed as Exhibit 10(o)(2) to the Company's report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.)
10(p)* Employment Agreement dated as of December 1, 1993 between the Company and Joseph D. Vecchiolla. (Filed as Exhibit 10(p) to the Company's report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.)
10(q)* Severance Agreement dated as of December 21, 1993 between the Company and Joseph D. Vecchiolla. (Filed as Exhibit 10(q) to the Company's report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.)
10(r)* Settlement Agreement dated as of November 25, 1994 between Bird Corporation and William A. Krivsky. (Filed as Exhibit 10(r) to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.)
Sequential Exhibit No. Page No. - ----------- ----------
10(s) Asset Purchase Agreement dated as of August 19, 1994 between Bird Incorporated, Atlantic Building Products Corporation, Greater Louisville Aluminum, Inc., Southwest Roofing Supply, Inc., Southwest Express, Inc., New York Building Products, Inc., and Wm. Cameron & Co. (Filed as Exhibit (1) to the Company's Form 8-K dated August 31, 1994 and incorporated herein by reference.)
10(t) Asset Purchase Agreement dated as of September 23, 1994 among Bird Corporation, Bird Incorporated, and Jannock, Inc. (as amended by amendments dated as of January 27, 1995 and January 31, 1995). (Filed as Exhibit B to the Company's proxy statement dated February 10, 1995 for the special meeting of the stockholders to be held on March 7, 1995 and incorporated herein by reference.)
10(u)* Employment Agreement dated as of July 31, 1995 between the Company and Frank S. Anthony. (Filed as Exhibit 10(u) to the Company's Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference).
10(v)* Amended Employment Agreement dated August 21, 1995 between the Company and Richard C. Maloof. (Filed as Exhibit 10(v) to the Company's Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference).
10(w) Stock Purchase Agreement dated as of November 29, 1995 by and among Bird Environmental Gulf Coast, Inc., Bird Environmental Technologies, Inc., Bird Corporation, GTS Duratek,Inc. and GTSD Sub II, Inc.
10(x) Amended Glass Mat Supply Agreement dated as of December 1, 1995 between the Company, Flintkote Company and Genstar Roofing Company, Inc.
10(y) Agreement and Plan of Merger by and among CertainTeed Corporation, BI Expansion Corporation and Bird Corporation dated as of March 14, 1996.
Sequential Exhibit No. Page No. - ----------- ----------
11 Statement regarding computation of per share earnings(loss).
22 Significant subsidiaries.
23(a) Consent of Price Waterhouse LLP.
23(b) Consent of Alpern, Rosenthal and Company, independent accountants for Kensington Partners.
24 Power of Attorney. (Immediately preceding the signature page hereof.)
28 Annual report on Form 11-K of the Bird Employees' Savings and Profit Sharing Plan for the fiscal year ended December 31, 1995. (To be filed by amendment.)
* Indicates management contract or compensatory plan or arrangement
POWER OF ATTORNEY
We, the undersigned officers and Directors of Bird Corporation, hereby severally constitute and appoint Richard C. Maloof and Frank S. Anthony, and each of them severally, our true and lawful attorneys or attorney, with full power to them and each of them to execute for us, and in our names in the capacities indicated below, and to file with the Securities and Exchange Commission the Annual Report on Form 10-K of Bird Corporation, for the fiscal year ended December 31, 1995, and any and all amendments thereto.
IN WITNESS WHEREOF, we have signed this Power of Attorney in the capacities indicated on March 21, 1996.
Principal Executive Officer:
____________________________ President, Director and Richard C. Maloof Chief Operating Officer
Principal Accounting Officer:
____________________________ Corporate Controller Donald L. Sloper, Jr.
Directors
____________________________ ____________________________ Robert P. Bass, Jr. Francis J. Dunleavy
____________________________ ____________________________ Charles S. Bird, Jr. John T. Dunlop
____________________________ ____________________________ Guy W. Fiske Joseph D. Vecchiolla
____________________________ Loren R. Watts
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.
BIRD CORPORATION (Registrant)
By_____________________ Richard C. Maloof President, COO
March 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ----
________________________ President, Director, March 27, 1996 RICHARD C. MALOOF and COO (Principal Executive Officer)
________________________ Corporate Controller March 27, 1996 DONALD L. SLOPER, JR. (Principal Accounting Officer)
* ________________________ Director March 27, 1996 JOSEPH D. VECCHIOLLA
SIGNATURES (continued)
* ________________________ Director March 27, 1996 ROBERT P. BASS, JR.
* ________________________ Director March 27, 1996 CHARLES S. BIRD, JR.
* ________________________ Director March 27, 1996 FRANCIS J. DUNLEAVY
* ________________________ Director March 27, 1996 JOHN T. DUNLOP
* ________________________ Director March 27, 1996 GUY W. FISKE
* ________________________ Director March 27, 1996 LOREN R. WATTS
* By _________________________________________ Frank S. Anthony as Attorney-in-fact
ANNUAL REPORT ON FORM 10-K
ITEM 14 (A) (1) AND (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1995
BIRD CORPORATION NORWOOD, MASSACHUSETTS
Bird Corporation and Subsidiaries
Form 10-K
Items 14(a)(1) and (2)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the registrant and its subsidiaries required to be included in Item 8 are listed below.
Consolidated Financial Statements: Page ---- Reports of independent accountants
Balance sheets at December 31, 1995 and 1994
Statements of operations for each of the three years in the period ended December 31, 1995
Statements of stockholders' equity for each of the three years in the period ended December 31, 1995
Statements of cash flows for each of the three years in the period ended December 31, 1995
Notes to consolidated financial statements
The following consolidated financial statement schedules of Bird Corporation and its subsidiaries are included in Item 14(a)(2) and should be read in conjunction with the financial statements included herein:
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Bird Corporation
We have audited the consolidated balance sheets of Bird Corporation and its subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, of stockholders' equity and of cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Kensington Partners, which statements reflect total assets of $8.9 million at December 31, 1994, and total net sales of $24.2 million and $21.2 million and net losses of $5.3 million and $5.2 million for the years ended December 31, 1994 and 1993, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Kensington Partners, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on Page present fairly, in all material respects, the financial position of Bird Corporation and its subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1993 to comply with a new pronouncement issued by the Financial Accounting Standards Board.
Price Waterhouse LLP Boston, Massachusetts
March 15, 1996
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS KENSINGTON PARTNERS AND AFFILIATE Leechburg, Pennsylvania
We have audited the accompanying combined balance sheet of Kensington Partners and Affiliate (Joint Venture Partnerships) as of December 31, 1994 and the related combined statements of operations and changes in partners' capital (deficit), and cash flows for the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Kensington Partners and Affiliate as of December 31, 1994, and the results of their operations and their cash flows for the years ended December 31, 1994 and 1993, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Kensington Partners and Affiliate will continue as going concerns. As discussed in Note 2 to the financial statements, the Companies have incurred significant operating losses and current liabilities exceed current assets. Those conditions, among others, raise substantial doubt about the Companies' ability to continue as going concerns. Management's plans regarding those matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Alpern, Rosenthal & Company Pittsburgh, Pennsylvania
February 10, 1995
BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE, PAR VALUE, AND LIQUIDATION VALUE DATA)
See accompanying notes to consolidated financial statements.
BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE, PAR VALUE, AND LIQUIDATION VALUE DATA)
See accompanying notes to consolidated financial statements.
BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
See accompanying notes to consolidated financial statements.
BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
See accompanying notes to consolidated financial statements.
BIRD CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
BIRD CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
NATURE OF OPERATIONS
Bird Corporation is a manufacturer of asphalt roofing products. Currently, asphalt shingles and roll roofing are produced at the Company's plant in Norwood, Massachusetts for commercial and residential use. These products are marketed in the northeastern United States through independent wholesalers and building material retailers whose primary customers are roofing contractors.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Bird Corporation and its majority-owned subsidiaries (the "Company"). All material intercompany activity has been eliminated from the financial statements. Investments in less than majority-owned companies are accounted for by the equity method. Certain prior year amounts have been reclassified to conform with the 1995 presentation.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS
The Company is dependent upon the economy in the northeastern United States and sells its products primarily to independent wholesalers and building material retailers for resale primarily to roofing contractors. One customer accounted for slightly more than 10% of the Company's sales during 1995 and accounts receivable at December 31, 1995.
The principal raw materials used in the manufacture of asphalt roofing products are fiberglass mat, asphalt saturants and coatings and crushed granules. The Company's requirements for fiberglass mat are met primarily under a Glass Mat Supply Agreement with one vendor which expires on December 31, 1996. Fiberglass mat is also generally available in adequate quantities from a number of outside suppliers.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped or services are performed.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined for a large portion of the inventories by the last-in, first-out (LIFO) method computed using the dollar value method for natural business unit pools. The cost of the remaining inventories is determined generally on a first-in, first-out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation has been provided in the financial statements primarily on the straight-line method at rates, based on reasonable estimates of useful lives, which fall within the following ranges for major asset classifications:
Land improvements 10 to 20 years Buildings 20 to 40 years Machinery and equipment 5 to 20 years
Deprecation expense for continuing operations for 1995, 1994 and 1993 amounted to $2,831,000, $3,644,000 and $3,757,000, respectively. Maintenance, repairs and minor renewals are charged to earnings in the year in which the expense is incurred. Additions, improvements and major renewals are capitalized. The cost of assets retired or sold, together with the related accumulated depreciation, are removed from the accounts, and any gain or loss on disposition is credited or charged to earnings. The Company capitalizes interest cost on construction projects while in progress. The capitalized interest is recorded as part of the asset to which it is related and is amortized over the asset's estimated useful life.
RETIREMENT PLANS
The Company has a defined contribution plan covering substantially all eligible non-union salaried and non-union hourly employees. Annual contributions are made to the plan based on rates identified in the plan agreement.
ADVERTISING
Advertising costs are charged to operations when incurred. The Company did not incur any costs associated with direct response advertising in 1995, 1994 and 1993, and there were no capitalized advertising costs at December 31, 1995 and 1994. Advertising expense for 1995, 1994 and 1993 was $503,000, $1,023,000 and $1,230,000, respectively.
EARNINGS(LOSS) PER COMMON SHARE
Primary earnings(loss) per common share is determined after deducting the dividend requirements of the preferred and preference shares and is based on the weighted average number of common shares outstanding during each period increased by the effect of dilutive stock options. Fully diluted earnings(loss) per common share also give effect to the reduction in earnings per share, if any, which would result from the conversion of the $1.85 cumulative convertible preference stock at the beginning of each period if the effect is dilutive.
ENVIRONMENTAL MATTERS
The Company records a liability for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on the available evidence and site assessments. If an amount is likely to fall within a range and no single amount within that range can be determined to be a better estimate, the minimum amount of the range is recorded. If there are other participants and the liability is joint and several, the financial stability of the other participants is considered in determining the Company's accrual. In addition, the liability excludes claims for recoveries from insurance companies and other third parties until such claims for recoveries are probable of realization at which point they would be classified separately as a receivable.
WARRANTY COSTS
The Company warrants under certain circumstances that its building material products meet certain manufacturing and material specifications. The warranty policy is unique to each product, ranges from twenty to forty years, is generally for the material cost and requires the owner to meet specific criteria such as proof of purchase. The Company offers the original manufacturer's warranty only as part of the original sale and at no additional cost to the customer. In addition, for marketing considerations, the Company makes elective settlements in response to customer complaints. The Company records the liability for warranty claims and elective customer settlements when it determines that a specific liability exists or a payment will be made.
2. INVENTORIES
The percentages of inventories valued on the LIFO method were 100% and 86% at December 31, 1995 and 1994, respectively. It is not practical to separate LIFO inventories by raw materials and finished goods components; however, the following table (in thousands) presents these components on a current cost basis with the LIFO reserve shown as a reduction.
3. DEBT
At December 31, the Company's borrowings and debt obligations are summarized as follows (in thousands):
Prior to November 30, 1994, the Company's external financial needs were satisfied by borrowing under the Second and Third Amended Credit Agreements with The First National Bank of Boston, Philadelphia National Bank incorporated as Corestates Bank, N.A. and The Bank of Tokyo Trust Company.
On November 30, 1994, Bird Incorporated entered into a three year $39 million Loan Agreement with Fleet Capital Corporation ("Fleet Capital"), previously Barclays Business Credit, Inc. and Shawmut Capital Corporation. At the end of the three year period, the Loan Agreement will be automatically renewed for successive one year periods unless terminated specifically in writing. The Loan Agreement consisted of a $24 million revolving credit commitment and two equal term loans (Term loan A and Term loan B, as defined in the Loan Agreement) totaling $15 million. On March 8, 1995 the Company sold the assets of its vinyl siding operation to Jannock, Inc. for $47.5 million which was reduced to approximately $42.5 million by post-closing working capital adjustments (see Note 7). The proceeds from the sale were used to reduce bank debt. Concurrent with the sale, Fleet Capital executed the First Amendment to the Loan Agreement amending the amount of the facility to $20 million consisting of a $15
million revolving credit commitment and a $5 million term loan. On January 10, 1996, the Company paid down the term loan so that the outstanding principal balance equaled $2.5 million. Up to $5 million of the revolving credit facility can be used for letters of credit. Letters of credit outstanding as of December 31, 1995 totaled $2,233,000 compared to $2,927,000 as of December 31, 1994.
Borrowings by Bird Incorporated under the Loan Agreement are guaranteed by the Company and the Company's other subsidiaries and are secured by substantially all of the assets of the Company and its subsidiaries. The revolving credit line availability is determined with reference to a percentage of accounts receivable and inventory which are pledged to the lender. During the period January 1 through April 30, the Loan Agreement provides a $2 million over advance on accounts receivable and inventories in order to assist the Company in assuring adequate funding of any seasonal build up of accounts receivable which may occur under sales programs offered during the winter months. Currently, the availability calculation does not allow borrowings to the full extent of the revolving credit commitment, due to the seasonality of the building materials manufacturing business. As of March 15, 1996, an aggregate of $7,683,000 was available to the Company under the terms of the revolving credit facility under the Loan Agreement.
The Loan Agreement contains financial and operating covenants which, among other things, (i) require the Company to maintain prescribed levels of tangible net worth, net cash flow and working capital and (ii) place limits on the Company's capital expenditures. The Loan Agreement also contains restrictions on indebtedness, liens, investments, distributions (including payment of common and preference dividends), mergers, acquisitions and disposition of assets. As of September 30, 1995, the Company was in default under Section 8.3.3 of the Loan Agreement as a result of failing to achieve a stated level of cash flow for the third quarter of 1995. As a result of the weak remodeling market during 1995, sales volume and earnings were less than anticipated, negatively impacting cash flow. At the request of the Company, Fleet Capital waived the cash flow requirements for the third quarter without penalty and amended this and other financial covenants for subsequent periods based on a review of the Company's financial condition and future projections. As of December 31, 1995, the Company was in compliance with all covenants.
Interest on the revolving credit commitment under the First Amended Loan Agreement accrues at the Fleet Capital base rate (as specified in such Agreement) or the London Interbank Offering Rate ("LIBOR") plus 2 3/4% at the Company's election on all borrowings plus the greater of $25,000 per annum or 1/4% on any unused portion of the commitment payable monthly in arrears. The interest on the term loan accrues at the base rate or the LIBOR rate plus 2 3/4% at the Company's election. The interest rate on outstanding borrowings at December 31, 1995 was 8.69%. The repayment of the principal on the term loan is at the rate of $62,500 per month through November 1996 and $71,417 per month thereafter with a final principal payment of $3,455,800 due on November 30, 1997. Proceeds in excess of $100,000 from the sale of fixed assets may, at Fleet Capital's discretion, be applied to the outstanding principal payments of the term loan.
The weighted average interest rates on short term borrowings at December 31, 1995 and December 31, 1994 were 9.74% and 9.53%, respectively. The fair value of the Company's total debt approximated the carrying value at December 31, 1995 and 1994, respectively. The fair value is based on management's estimate of current rates available to the Company for similar debt with the same remaining maturity.
Maturities of long-term debt for each of the five years subsequent to December 31, 1995 are as follows:
1996 - $1,113,000; 1997 - $4,614,000; 1998 - $255,000; 1999 - $0; 2000 - $0. The Company incurred net interest expense of $927,000 in 1995, $4,782,000 in 1994 (net of $257,000 capitalized interest), and $2,472,000 in 1993 (net of $345,000 capitalized interest).
4. INCOME TAXES
Earnings (loss) from continuing operations before income taxes and the provision(benefit) for income taxes are shown below (in thousands):
The provision (benefit) for income taxes on continuing operations varied from the U.S. federal statutory rate for the following reasons:
The net provision (benefit) for income taxes related to discontinued operations amounted to $(2,962,000) and $304,000 for 1994 and 1993, respectively.
The deferred income tax asset recorded in the consolidated balance sheet results from differences between financial statement and tax
reporting of income and deductions. A summary of the composition of the deferred income tax asset at December 31, 1995 and 1994 is as follows (in thousands):
The Company has available for federal income tax purposes unused net operating loss and investment tax credit carryforwards, which may provide future tax benefits, expiring as follows (in thousands):
Additionally, for federal income tax purposes, at December 31, 1995 the Company had available for carryforward minimum tax credits with no expiration aggregating $1,091,000. If certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of the carryforwards, including certain unrealized built-in losses, which can be utilized for regular and alternative minimum tax purposes. (See Note 14 regarding proposed merger with CertainTeed Corporation.)
The Company adopted FAS 109 in 1993 and recorded the cumulative effect of the change in accounting principle of approximately $2.7 million as a benefit in the results of operations for the first quarter of 1993. This accounting change also requires the recognition of a valuation reserve if it is more likely than not that the Company may not be able to realize the benefits of recorded deferred tax assets. At December 31, 1995 the Company's net deferred tax asset is approximately $19.1 million less a valuation reserve of $15.1 million. As required under FAS 109, this valuation reserve was determined based upon the Company's review of all available evidence including projections of future taxable income. During 1995, the company disposed of Bird-Kensington Holding Corporation and Bird Environmental Gulf Coast, Inc. (as disclosed in Notes 7 and 9, respectively) resulting in losses not anticipated at the end of the previous year. In addition, the lower overall demand and price weakness in the northeast caused by a mild 1994/1995 winter followed by a hot, dry summer negatively impacted profits of the roofing operations. Based on the above factors, the Company increased the valuation reserve by $10.1 million.
The Company expects to be profitable and with other tax planning strategies expects to generate future taxable income. Realization of the $4,066,000 net deferred tax asset is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes that it is more likely than not that the net deferred tax asset will be realized. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
5. STOCKHOLDERS' EQUITY
The $1.85 cumulative convertible preference stock is redeemable, in whole or in part, at the option of the Company, at a redemption price of $20.00 per share on and after May 15, 1993. The convertible preference stock has a liquidation value of $20.00 per share and is convertible at the option of the holder into common stock of the Company at a conversion price of $22.25 per share, subject to adjustment in certain events. Dividends are cumulative from the date of issue and are payable quarterly. There are four preference dividends in arrears. The Company has the option to redeem the convertible preference stock. The Company's 5% cumulative preferred stock ranks senior to the convertible preference stock as to dividends and upon liquidation.
On June 18, 1992 the Company announced that its Board of Directors authorized it to buy back, on the open market or in privately negotiated transactions, up to 400,000 of its outstanding shares of common stock at prices available from time to time that the Company deems attractive. Since this announcement the Company has repurchased 248 shares in 1994, 5,364 shares in 1993 and 92,007 shares in 1992.
The Company is prohibited from purchasing its common stock as long as dividends on the convertible preference stock are in arrears. Under the 1992 Stock Option Plan described in Note 6, 931,325 shares of
common stock are reserved for issuance upon exercise of options and stock appreciation rights at December 31, 1995.
Restrictions on the payment of dividends on common and preference stock are imposed by the terms of the Loan Agreement dated November 30, 1994. Payment of dividends on the preferred stock are permitted under the Loan Agreement. As of December 31, 1995, all dividends current and in arrears on the preferred stock in the amount of $29,000 and $22,000 respectively, have been declared and paid in full. Dividends are in arrears on the preference stock in the aggregate amount of $1,506,000 for the four quarterly periods ended February 15, 1995 and must be paid in full before any dividends could be declared and paid on the common stock. The quarterly dividends on the preference stock due May 15, August 15, and November 15, 1995 in the aggregate amount of $1,130,000, along with one dividend in arrears in the amount of $377,000, have with the consent of Fleet Capital, been declared and paid in full.
The Company has a Rights Agreement which, as amended, entitles certain common stockholders to purchase shares of common stock of the Company or securities of an acquiring entity in the event of certain efforts to acquire control of the Company. The proposed merger with CertainTeed Corporation (Note 14) will not trigger the exercisability of these rights.
6. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS
The Company's "Bird Employees' Savings and Profit Sharing Plan" provides for a defined base contribution and profit sharing and savings contributions.
DEFINED BASE CONTRIBUTION
The Company contributes annually 2-7% of plan participants' basic compensation depending upon their age and employment status as of December 31, 1984. Vesting accrues at 20% per year of service. Contributions for continuing operations for the years ended December 31, 1995, 1994, and 1993 amounted to $72,000, $203,000, and $352,000, respectively.
PROFIT SHARING CONTRIBUTION
Profit sharing contributions are made annually, if earned, based upon certain defined levels of return on equity by the Company and its business units. The distribution of the contribution to the plan's participants is based upon annual basic compensation. Contributions for continuing operations for the year ended December 31, 1993 amounted to $145,000. No profit sharing contributions were earned for 1995 or 1994.
SAVINGS CONTRIBUTION
The Company's savings plan provides that eligible employees may contribute to the plan any whole percentage of their basic
compensation varying from 2 to 15%. The Company may make discretionary matching contributions not exceeding 6% of the participant's basic compensation during the plan year. Such matching Company contributions are invested in shares of the Company's common stock. The Company's contributions for continuing operations for the years ended December 31, 1995, 1994, and 1993 amounted to $124,000, $142,000, and $155,000, respectively.
POST RETIREMENT BENEFITS
Certain health care and life insurance benefits are provided for substantially all of the Company's retired employees, except those covered under union plans. Benefits are provided by the payment of premiums for life insurance benefits and the reimbursement for eligible employees of a portion of their health care premiums. The Company's cost for the years 1995, 1994, and 1993 amounted to $66,000, $79,000, and $71,000, respectively.
EMPLOYEE INCENTIVE PLANS
Under the 1982 Stock Option Plan, as amended, options to purchase up to 900,000 shares of the Company's common stock may be granted to officers, directors and key employees upon terms and conditions determined by a committee of the Board of Directors which administers the plan. In 1993, the Company adopted a new stock option plan which allows the issuance of up to 450,000 stock options in addition to the unissued shares approved for issuance under the 1982 plan. The new plan will expire in 2002 and no further options will be granted under the former plan. A Non-Employee Directors' Stock Option Plan was also adopted in 1993 which will automatically provide grants of options to each non-employee director serving on the Board of Directors at the time of such grant. Each annual grant will cover 2,500 shares of common stock and any recipient may not receive option grants exceeding a total of 30,000 shares. An aggregate of 100,000 shares of common stock are available for grants under the Non-Employee Directors' Stock Option Plan.
Options granted by the committee may be designated as either incentive stock options, as defined under the current tax laws, or non-qualified options. The committee may also grant stock appreciation rights, either singly or in tandem with stock options. A right entitles the holder to benefit from market appreciation in the Company's common stock subject to the right between the date of the grant and the date of exercise without any payment on the part of the holder. Upon exercise of a right, the holder surrenders the option and receives an amount of common stock (or, at the election of the committee, cash) equal in value to the amount of such appreciation.
The exercise price of options specified by the committee must be at least 100% of the fair market value of the Company's common stock as of the date of grant. All options and rights granted become exercisable at the rate of 20 to 25% per year, on a cumulative basis, beginning with the first anniversary of the date of grant for options granted under the Stock Option Plan and in full one year after grant for option granted under the Non-Employee Directors' Stock Option Plan. In case of termination of employment, options and grants
vested, but not yet exercised, are subject to forfeiture under the Stock Option Plan and are exercisable up to 90 days after termination for the Non-Employee Directors' Stock Option Plan.
Transactions involving the Stock Option Plan are summarized as follows for the year ended December 31, 1995:
In tandem with the stock options there are 9,500 stock appreciation rights at December 31, 1995.
During 1995, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards No. 123 Accounting for Stock Based Compensation" ("FAS 123"). The Company intends to adopt FAS 123 through disclosure only in 1996.
LONG TERM INCENTIVE COMPENSATION
Under the terms of a Long Term Incentive Compensation Plan, certain officers and key management employees received common stock of the Company on a restricted time lapse grant basis. These shares were to be released from escrow and delivered to the plan's participants when the market price of the Company's common stock achieved certain designated levels between $12 and $24 per share for 30 consecutive days prior to June 28, 1994 or in any event if the participant has remained in the continuous employ of the Company through June 2003. Certain market prices were achieved and maintained for the required 30-day period during 1994 and 1993. Therefore, 40,670 and 45,630 shares of the Company's common stock were released in June of 1994 and 1993, respectively, to the plan's participants. Additionally, 30,000 shares were released to the former Chief Executive Officer in 1994 as part of his Termination Agreement. As a result of his termination and the termination of certain other officer and key management personnel during 1994, 125,145 shares of restricted stock valued at $910,000 were forfeited and returned to treasury stock. Upon consummation of the vinyl sale, all restrictions on the remaining 23,560 shares of common stock held under the plan automatically lapsed and such shares were distributed to the intended recipients.
Amortization of unearned compensation under this agreement for the years 1995 and 1993 amounted to $157,000 and $595,000, respectively. In 1994 amortization was reduced by $113,000 associated with the forfeiture of shares.
7. DISCONTINUED BUSINESS ACTIVITIES
The Company records income and expenses associated with former business activities on the Consolidated Statement of Operations under the caption "Discontinued Business Activities".
On March 8, 1995, the Company sold substantially all of the assets of its vinyl business to Jannock, Inc. for $47.5 million in cash subject to certain downward adjustments which totaled $4,962,000. Net of adjustments, the gain on the sale of the vinyl business totaled $20,579,000. Sales of $6,365,000 were recorded for the now discontinued vinyl business for the period ending March 7, 1995.
On June 2, 1995 the Company sold all of the outstanding capital stock of Bird-Kensington Holding Corp., which owned the Company's interest in Kensington Partners, to Jannock, Inc. The purchase price consisted of cash in the gross amount of $2,780,000 and the assumption of certain liabilities related to the Kensington window business. The sale resulted in a loss of $1,959,000. Sales of $4,265,000 were recorded for this business for the period March 1, 1995 through June 2, 1995.
On June 10, 1994, the Company's 40% interest in Mid-South Building Supply, Inc. was redeemed for $1 million in cash resulting in a loss of $1,261,000.
On August 22, 1994, the Company sold the assets of substantially all of its distribution businesses to Wm. Cameron & Co. for a purchase price consisting of cash in the amount of $26,142,000, including $1 million held in escrow to pay any indemnification claims arising under the purchase and sale agreement. The sale resulted in a gain of $2,677,000. Sales of $67,089,000 were recorded for these businesses for the period ending August, 22, 1994.
On November 28, 1994, the Company sold its last remaining building materials distribution business, Southland Building Products, Inc., to Ashley Aluminum, Inc. for a purchase price of $2,134,000. The sale resulted in a modest gain. Sales of $9,092,000 were recorded for this business for the period ending November 27, 1994.
The Company recorded other expenses related to discontinued business activities of $1,050,000, $153,000, and $268,000, for the years 1995, 1994, and 1993, respectively. These charges against earnings include warranty claims and other costs directly related to discontinued business activities. Expenses incurred in 1995 also included $1.5 million in provisions relating to employee benefit plans and product liability claims associated with former roofing operations which were offset by a $602,000 crude oil refund from the Department of Energy.
8. OTHER EXPENSE
Other expense was $3.3 million in 1993. A series of non-recurring items developed at the end of 1993 that required a number of charges to results of operations. The majority of these are outlined in the following paragraphs:
Accounting requirements associated with the responsible parties on an environmental cleanup require the Company to maintain a reserve sufficient to absorb the full cost of the Company's portion of the cleanup. Based on recent site assessments, the Company increased the cleanup reserve by $500,000 based on the Company's estimated share of the proportionate costs.
The Company had been considering the development of certain real property. As a result of cash flow and bank covenant constraints, no further development was possible. Based on the estimated net realizable value of the property, the Company wrote-off its $1.3 million investment.
To satisfy the remaining portion of an outstanding receivable, the Company previously accepted a $1.3 million note, collateralized by a secondary interest in a mortgage portfolio. Because assessment of the portfolio and the bankruptcy of the debtor indicated the note to be of no value it was written off.
The termination of the former Chief Executive Officer of the Company resulted in a $850,000 reserve to cover a settlement under an employment agreement which was paid in 1994.
The remainder of "Other Expense" is comprised of other miscellaneous adjustments of a more typical nature and income of approximately $1.3 million from a settlement with an insurance provider relating to product liability claims.
9. DISCONTINUED OPERATIONS
ENVIRONMENTAL BUSINESSES
On June 18, 1994, the Company agreed to cause the sale of its 80% interest in its "off-site" environmental business, Bird Environmental Gulf Coast,Inc. ("BEGCI") to the minority shareholders thereof, subject to financing, resulting in the complete withdrawal from the environmental business. Accordingly, the Company, as of June 30, 1994, recorded the operating results of BEGCI as a discontinued operation for all years presented. In conjunction with this decision, the Company recorded an aggregate charge of approximately $9 million, to adjust its book value to approximate the net realizable value of $7.5 million at June 30, 1994. In June 1994, the Company estimated that the results of operations from the "off-site" environmental business would be breakeven through the disposal date and, accordingly, no liability for anticipated losses from the measurement date to the disposal date was recorded. However, at December 31, 1994, the Company had invested an additional $1,270,000 in BEGCI
which, based on the Company's assessment, would not be recoverable and was accordingly written-off, thus maintaining the Company's investment at $7.5 million.
During 1995, the minority partner became unable to finance the purchase of the facility and efforts to attract another purchaser were unsuccessful. In July 1995, the Company's Board of Directors suspended further funding of the facility. As a result of this action, during the second quarter of 1995, the Company's remaining investment of $8.6 million was written off and a $3 million reserve was established for additional expenses associated with the closure of the facility. On November 29, 1995, the Company caused the sale of all of the outstanding capital stock of BEGCI to GTS Duratek, Inc. for a purchase price of $1.00. Of the $3 million reserve established in the second quarter of 1995, $2,050,000 was utilized, while $650,000 remains at December 31, 1995 for future claims against discontinued operations.
In 1993 the Company decided to close the "on-site" environmental remediation business. This business involved environmental remediation projects such as the processing of oily waste sites at a refinery, operations and management of waste processing sites and the removal and remediation of sludge. The contracts with customers were generally fixed price and usually for periods less than one year. As a result of the decision to exit this business, the Company recorded a provision totaling approximately $11 million. Included in this provision was a $5.8 million write-down of certain assets to net realizable value, $2.1 million for certain contracts including any additional amounts due to stipulated buyouts, $635,000 for severance-related payments, $740,000 for inventory and other assets, $1 million for the write-off of intangible assets and $700,000 for other expenses due to lease buyouts, fees and other general expenses.
Included in the 1993 environmental results is a restructuring reserve of $2 million relating primarily to the environmental business. Included in this provision is $300,000 for severance and benefit payments, $700,000 for lease buyouts, $650,000 for expected losses on exiting certain contracts, and $350,000 of other costs. This charge was offset by a $858,000 gain on the sale of the municipal sludge business. These amounts, including the operating results, are recorded as discontinued operations. Based upon the actual results of the environmental "on-site" remediation operations and the sale of its assets, excess costs of $3,861,000 charged in 1993 were reversed and recorded as discontinued operations in the consolidated statement of operations for the twelve months ended December 31, 1994.
Net sales relating to these environmental businesses amounted to $2,848,000, $3,715,000 and $24,681,000 for 1995, 1994 and 1993, respectively.
10. ACQUISITIONS
On July 1, 1992 the Company entered into a 50% joint venture with Kensington Manufacturing Company to manufacture vinyl replacement windows through Kensington Partners ("Kensington"). In 1993,
Kensington experienced serious cash needs which hampered production requirements. As a result of continuing losses and the inability of Kensington to properly finance its operation, Kensington's independent accountants issued "going concern" opinions at December 31, 1994 and December 31, 1993. After negotiating with its partner, Bird Corporation agreed to invest additional cash in return for temporarily increasing its ownership in Kensington to 90%. The terms of the new agreement allowed Kensington to return to an equal partnership if, before the later of December 31, 1994 or six months following the Company's last investment (made in August, 1994), its partner matched the additional investment made by the Company. As of February 28, 1995, the minority partner did not match the additional investment made by the Company. As a result, the Company's ownership in the joint venture was permanently fixed at 90%, resulting in a change in financial reporting from the equity method to consolidation beginning March 1, 1995 through June 2, 1995 when the operation was sold (see Note 7).
The Company recorded 50% of the joint venture's loss from operations under the equity method from inception through January 31, 1994 and 90% for the period February 1, 1994 through February 28, 1995. Equity losses from Kensington are shown separately on the consolidated statements of operations.
The following table represents summarized financial information for Kensington Partners for the year ended December 31, 1994 (in thousands):
The following table represents summarized financial information for the years ended December 31, 1994 and December 31, 1993 and the two month period ended February 28, 1995 (in thousands):
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain manufacturing, administrative, warehousing,
transportation equipment and other facilities. The leases generally provide that the Company pay the taxes, insurance and maintenance expenses related to the leased assets.
At December 31, 1995 minimum lease commitments under noncancelable operating leases are as follows (in thousands):
Total rental expense for continuing operations, exclusive of taxes, insurance and other expenses paid by the lessee related to all operating leases (including those with terms of less than one year) was as follows (in thousands):
The following represents property under capital leases (in thousands):
At December 31, 1995 minimum lease commitments under capital leases are as follows (in thousands):
LITIGATION
Since 1981, the Company has been named as a defendant in approximately
550 product liability cases throughout the United States by persons claiming to have suffered asbestos-related diseases as a result of alleged exposure to asbestos in products manufactured and sold by the Company. Approximately 140 of these cases are currently pending and costs of approximately $2 million in the aggregate have been incurred in the defense of these claims since 1981. The Company's insurance provider has accepted the defense of these cases under an agreement for sharing of the costs of defense, settlements and judgements, if any. The Company has provided a reserve amounting to $950,000 at December 31, 1995 for its estimated share of losses related to these claims. In light of the nature and merits of the claims alleged, in the opinion of management, the resolution of these remaining claims will not have a material adverse effect on the results of operations or financial condition of the Company.
In 1986, the Company, along with numerous other companies, was named by the United States Environmental Protection Agency ("EPA") as a Potentially Responsible Party ("PRP") under the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, 42 U.S.C. Paragraph 9601, et seq. ("CERCLA"), in connection with the existence of hazardous substances at a site known as the Fulton Terminal Superfund site located in Fulton, Oswego County, New York. On September 28, 1990 the Company and a number of other PRPs reached a negotiated settlement with the EPA pursuant to which the settling PRPs agreed to pay the costs of certain expenses in connection with the proceedings, and to pay certain other expenses including the costs and expenses of administering a trust fund to be established by the settling PRPs. The settlement agreement is embodied in a consent decree lodged with the United States District Court for the Western District of New York. The ultimate cost to the Company of the remedial work and other expenses covered by the settlement agreement is estimated to be between $1 million to $2 million. This range is based, in part, on an allocation of certain sites' costs which, due to the joint and several nature of the liability, could increase if the other PRP's are unable to bear their allocated share. The Company has provided a reserve of approximately $1 million at December 31, 1995 to cover the remaining proportionate share of the estimated total remaining cost of cleanup, most of which will be paid in 1996. Based on information currently available to the Company, management believes that it is probable that the major responsible parties will fully pay the cost apportioned to them. Management believes that, based on its financial position and the estimated accrual recorded, its remediation expense with respect to this site is not likely to have a material adverse effect on its consolidated financial position or results of operations of the Company.
The Company has been named as a PRP with respect to certain other sites which are being investigated by federal or state agencies responsible for regulation of the environment. Status as a PRP means that the Company may be jointly and severally liable for all of the potential monetary sanctions and remediation costs applicable to each site. In assessing the potential liability of the Company at each site, management has considered, among other things, the aggregate potential cleanup costs of each site; the apparent involvement of the Company at each site and its prospective share of the remediation costs attributable thereto; the number of the PRPs identified with
respect to each site and their financial ability to contribute their proportionate shares of the remediation costs for such site; the availability of insurance coverage for the Company's involvement at each site and the likelihood that such coverage may be contested; and whether and to what extent potential sources of contribution from other PRPs or indemnification by insurance companies constitute reliable sources of recovery for the Company. On the basis of such consideration, management has determined that such environmental matters will not have a material affect on the Company's financial position or results of operations. The Company has provided an aggregate reserve amounting to approximately $300,000 at December 31, 1995 for its estimated share of the ultimate cost of cleanup for such claims excluding any potential sources of indemnification or recovery from third parties.
In 1992, a subsidiary of the Company, Bird Atlantic Corporation, formerly Atlantic Building Products Corporation ("ABPCO"), commenced an action against a former vendor, alleging violation of an exclusive distributorship without adequate and fair compensation to ABPCO. A jury trial was held in November 1995 in the Superior Court of Plymouth County, Massachusetts. The jury found in favor of ABPCO and judgement was entered on January 26, 1996 in the principal amount of approximately $1.8 million. The award, with interest accruing at 12% per annum, is expected to be in excess of $3 million and will not be reported as income until collected. The defendant has appealed the judgement.
The Company is also exposed to a number of other asserted and unasserted potential claims encountered in the normal course of business and unrelated to environmental matters. In the opinion of management, the resolution of such claims will not have a material adverse effect on the Company's financial position or results of operations.
WARRANTY OBLIGATIONS
The Company warrants under certain circumstances that its Housing Group's products meet certain manufacturing and material specifications. In addition, for marketing considerations, the Company makes elective settlements in response to customer complaints. The Company records the liability for warranty claims and elective customer settlements when it determines that a specific liability exists or a payment will be made. During 1995, 1994 and 1993, the Company recorded (exclusive of those claims included in discontinued business activities) approximately $2,262,000, $2,687,000, and $3,196,000, respectively, in warranty expenses and elective customer settlements. The warranty related expense included in discontinued business activities for 1995, 1994 and 1993 amounted to approximately $94,000, $100,000 and $104,000, respectively. Based upon analyses performed by the Company's management, a reasonably possible range of potential liability from unasserted warranty obligations for all products sold prior to December 31, 1995 is estimated to be between $3.5 million and $16.5 million. However, the Company has not recorded any liability for these future unasserted claims or complaints because management has concluded, based on such analyses, that no particular estimate within this range is probable.
12. OPERATIONS IN DIFFERENT INDUSTRIES
The Company has had two business segments which it defined as the Housing Group and the Environmental Group.
The Housing Group manufactures and markets residential and commercial roofing products in the northeastern United States, including a full line of fiberglass based asphalt shingles and roll roofing. The Group also manufactured vinyl siding, window profiles, trim and accessories which were distributed nationwide. In prior years, the Group operated distribution centers primarily in the southeastern and southwestern markets for vinyl siding and in the Arizona and northeastern markets for roofing and other building materials products.
The Company's Environmental Group provided recycling, remediation, and beneficial re-use services for applications as diverse as food processing waste streams, oily waste recovery and the treatment of municipal wastes. Generally, these on-site services recovered valuable constituents, removed wastes and reduced the volume of materials which must be disposed of by other means. In December 1993, the Company decided to close this portion of the environmental segment and dedicate this group to operating BEGCI, the fixed site facility in Texas. As discussed in Note 9, the Company sold its interest in BEGCI in November 1995 to GTS Duratek, Inc.
Net sales represent sales to unaffiliated customers. Identifiable assets are those that are used in the Company's operations in each industry segment. Corporate assets are principally cash investments and equivalents and property maintained for general corporate purposes. As discussed in Note 9, the results of operations for the environmental group for the three years ended December 31, 1995 have been recorded as discontinued operations. Accordingly, net sales, cost of sales and SG&A relating to this segment are not shown below.
12. OPERATIONS IN DIFFERENT INDUSTRIES (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1995 and 1994 is shown below:
(1) Decrease in gross profit in the fourth quarter compared to the previous quarter is due to sales price weakness and the decline in sales volume attributable to a weak re-roofing market caused by a dry, hot summer.
(2) Decrease in gross profit in the fourth quarter compared to the previous quarter is due primarily to increased raw material costs that could not be passed on via price increases.
14. MERGER WITH CERTAINTEED CORPORATION
On March 14, 1996, the Company signed a definitive agreement with CertainTeed Corporation, a subsidiary of Saint-Gobain Corporation, providing for CertainTeed to acquire in a merger transaction all of the Company's outstanding common, preferred and preference shares.
Upon the effective date of the merger, each share of the Company's outstanding common stock, par value $1 per share, will be converted into the right to receive an amount in cash equal to $7.50. The Company's outstanding 5% cumulative preferred stock, par value $100 per share, will remain issued and outstanding upon the effective date of the merger and will be called for redemption and retirement as soon as practicable thereafter at a price equal to $110, plus all accrued and unpaid dividends thereon as of the date of redemption and retirement. Each share of the Company's outstanding $1.85 cumulative convertible preference stock, par value $1 per share, will be converted into the right to receive $20 plus all accrued and unpaid dividends thereon as of the effective date of the merger. All outstanding options to purchase common stock under the 1982 Stock Option Plan, the 1992 Stock Option Plan, and the 1992 Non-Employee Directors' Stock Option Plan will be converted into the right to receive an amount in cash equal to $7.50 per share less the exercise price per share. Any option with an exercise price equal to or greater than $7.50 will be cancelled on the effective date of the merger without any payment to the option holder.
Completion of the merger is subject to approval by the Company's shareholders and appropriate governmental authorities. The merger is not subject to a financing contingency. The Company's Board of Directors has received a fairness opinion from its investment bankers regarding the merger. The closing of the merger is anticipated at the end of the second quarter, following distribution of proxy materials to the Company's shareholders and approval at a special meeting.
BIRD CORPORATION and Subsidiaries
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 and 1993 (In thousands)
(a) Represents recovery of balances previously written off.
(b) Uncollectible accounts written off by a charge to reserve.
(c) Represents the allowance for doubtful accounts of vinyl business sold of $517 and the uncollectible accounts written off by a charge to reserve of $2,549.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
COMBINED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION ITEM 14(d)
DECEMBER 31, 1994
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- DECEMBER 31, 1994 - --------------------------------------------------------------------------------
PAGE ----
FINANCIAL STATEMENTS
Independent Auditors' Report
Combined Balance Sheet
Combined Statements of Operations and Partners' Capital (Deficit)
Combined Statements of Cash Flows
Notes to the Combined Financial Statements
SUPPLEMENTAL INFORMATION
Independent Auditors' Report on Financial Statement Schedule
Financial Statement Schedule II
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS KENSINGTON PARTNERS AND AFFILIATE Leechburg, Pennsylvania
We have audited the accompanying combined balance sheet of Kensington Partners and Affiliate (Joint Venture Partnerships) as of December 31, 1994 and the related combined statements of operations and changes in partners' capital (deficit), and cash flows for the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Kensington Partners and Affiliate as of December 31, 1994, and the results of their operations and their cash flows for the years ended December 31, 1994 and 1993, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Kensington Partners and Affiliate will continue as going concerns. As discussed in Note 2 to the financial statements, the Companies have incurred significant operating losses and current liabilities exceed current assets. Those conditions, among others, raise substantial doubt about the Companies' ability to continue as going concerns. Management's plans regarding those matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Alpern, Rosenthal & Company Pittsburgh, Pennsylvania
February 10, 1995
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
COMBINED BALANCE SHEET
The accompanying notes are an integral part of these combined financial statements.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL (DEFICIT)
The accompanying notes are an integral part of these combined financial statements.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
COMBINED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these combined financial statements.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
The accompanying notes are an integral part of these combined financial statements.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS) NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of Kensington Partners (KP), combined with the accounts of North American Installations Company (NAICO). NAICO is owned 100% by common owners of KP. All significant intercompany balances and transactions have been eliminated in the preparation of the combined financial statements. The combined group is herein referred to as "the Companies".
KP is a joint venture partnership formed by ZES, Inc. (formerly Kensington Manufacturing Company) (ZES) and Bird-Kensington Holding Corp., an indirect subsidiary of Bird Corporation (Bird). NAICO was formed in May 1993, as a joint venture partnership, and ceased operations in 1994.
B. NATURE OF BUSINESS
Kensington Partners operates in one principal industry segment: the manufacture of vinyl replacement windows for wholesalers and home remodelers. The Partnership grants credit to its customers, substantially all of which are retail and wholesale resellers of windows located in the eastern half of the United States.
NAICO was an exclusive installer of KP windows for a significant customer of KP, a retail seller of windows to end users, which has sales throughout the United States. The installation of the windows has been transferred to the customer that purchases the windows.
C. CASH AND CASH EQUIVALENTS
Interest-bearing deposits and other investments with original maturities of three months or less are considered cash equivalents.
D. ACCOUNTS RECEIVABLE
The Companies provide for estimated losses on uncollectible accounts receivable based on historical data and management's evaluation of individual accounts receivable balances at the end of the year.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS) NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. INVENTORIES
The Companies value all of its inventories at the lower of cost or market. Raw materials are determined on the last-in, first-out (LIFO) method. Work-in-process and finished goods inventories are determined on a first-in, first-out (FIFO) method.
F. DEPRECIATION
Depreciation is computed by the straight-line method at rates intended to distribute the cost of the assets over their estimated useful lives. Property under capital lease is being amortized over the life of the lease in accordance with generally accepted accounting principles. Rates used by principal classifications are as follows:
Rate (Years) -------
Warehouse and manufacturing equipment 3-10 Furniture and fixtures 5-10 Leasehold improvements 3-15 Transportation equipment 3- 6
Maintenance and repairs which are not considered to extend the useful lives of assets are charged to operations as incurred. Upon sale or retirement, the cost of assets and related allowances are removed from the accounts and any resulting gains or losses are included in other income (expense) for the year.
G. INVESTMENT IN AFFILIATED COMPANY
The Companies' investment in a joint venture partnership is carried on the equity basis, which approximates the Companies' equity in the underlying net book value.
H. PRODUCT WARRANTIES
The Companies provide an accrual for future warranty costs based upon actual claims experience. The warranties are limited and provide for parts and/or labor based upon the type of window sold.
I. INCOME TAXES
The Companies are being treated as partnerships for Federal and state income tax purposes. Under the Internal Revenue Code provisions for partnerships, the partners reflect their proportionate share of the Companies' taxable income or loss on their respective income tax returns, and the Companies are not liable for income taxes.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. RECLASSIFICATION
Certain reclassifications were made to the amounts previously reported for December 31, 1993 to conform with the 1994 classifications.
NOTE 2 - OPERATIONS AND LIQUIDITY
The Companies' combined financial statements have been presented on the basis that they are going concerns, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Companies incurred net losses of approximately $5,310,000 and negative cash flows from operations of $1,731,000 for 1994. At December 31, 1994, the balance sheet reflects an excess of current liabilities over current assets of $4,682,000, and a net capital deficiency of $2,155,000.
In addition, a lease agreement (Note 12A) is in default as a result of late payments being made and certain payroll and sales taxes are delinquent. (Note 9)
Management believes the above mentioned losses and the associated balance sheet deficiencies are a result of adding new products in 1993 which required different manufacturing processes and a significant increase in orders, which put strain on the existing systems. The combination of the above resulted in manufacturing inefficiencies, low asset performance, excessive delivery costs and inadequate management information.
During 1993, the Companies embarked on a program to correct the problems associated with operations. Management believes that the major components of the plan have been achieved in 1994 and that the effect of addressing and correcting these problems during 1994 will have a positive impact on 1995 operating results.
During the first quarter of 1995, KP has secured price increases from a majority of its customers and negotiated a price reduction from a major vendor. In addition, KP continues on a program to increase productivity, which includes: simplifying product lines, improving plant layout, management training and investing in labor saving equipment. KP has also begun a sales program to broaden its customer base.
The outcome of the uncertainties discussed above cannot be predicted at this time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Companies be unable to continue in existence.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACCOUNTS RECEIVABLE
At December 31, 1994, accounts receivable - trade from three customers were approximately 67% of trade receivables. Sales to these unrelated customers comprised 67% of total sales for the years ended December 31, 1994. Sales to these customers comprised 51% of total sales for the year ended December 31, 1993.
NOTE 4-INVENTORIES
Inventories at December 31, 1994 are as follows:
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - OTHER ASSETS
Other assets at December 31, 1994 is as follows:
NOTE 7 - DEMAND NOTES
On June 15, 1994, KP entered into a financing/factoring agreement with a lending institution to sell, on an ongoing basis, up to 80% or $2,500,000, whichever is less, of acceptable trade accounts receivable. All accounts receivable that remain unpaid after 90 days of the purchase by the lender are subject to recourse at the lender's discretion. KP may, at any time, repurchase the accounts receivable sold. The agreement, which expires on June15, 1995, is subject to automatic renewal for a six month period, unless notice of nonrenewal is given by either party. The loan was funded with $1,000,000, at which time the Companies' line of credit was paid in full (see below).
Under the terms of this agreement, fees ranging from 1% to 3 1/2% are based on the number of days to collect the trade receivable, with a guaranteed minimum monthly fee of $5,000. In addition, interest is charged on any amounts advanced under the agreement, at the rate of prime (8 1/2% at December 31, 1994) plus 1 1/2%. Under the terms of this agreement, Bird has guaranteed $1,250,000 of this debt.
The amount outstanding under this agreement, included in the accompanying balance sheet at December 31, 1994, is net of a $150,000 cash reserve held by the lending institution.
Prior to June 15, 1994, the Companies had a line-of-credit, with maximum borrowings of $2,500,000. Interest was payable monthly at the bank's basic rate plus 1% (see below). The borrowings on the line were collateralized by substantially all the assets of the Companies. The line was guaranteed by the partners of the Companies.
In early 1994, the bank cited defaults under the line of credit agreement and made demand for payment. Based on agreements between the Companies and the bank in February and April, 1994, the bank agreed to forebear collection and set a final due date of August 31, 1994. In addition, the interest rate was changed to the bank's basic rate plus 3%. Bird was required to put up $750,000 as additional collateral, which was later applied to the line. Bird was also required to make additional payments totaling $1,200,000. The payments by Bird were recorded as capital contributions to the partnership.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8-CAPITAL LEASE OBLIGATIONS AND LONG-TERM DEBT
The following is a schedule by years of future minimum lease payments under capital leases and installment notes together with the present value of the net minimum lease payments and note payments as of December 31, 1994:
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - ACCRUED EXPENSES
Accrued expenses at December 31, 1994 are as follows:
NOTE 10 - PARTNERS' CAPITAL
Effective July 1, 1992, ZES entered into an agreement with Bird through one of Bird's indirect subsidiaries to form a joint venture partnership, Kensington Partners (KP), for the purpose of manufacturing and selling custom windows, a business previously conducted by ZES. ZES' capital contribution to KP consisted of all of its assets subject to certain of its liabilities, including $2,800,000 owed to Jones and Brown, Inc. (J&B), a related party. Bird's capital contribution consisted of $2,800,000, in cash, which was used to pay off the amount owed by KP to J&B, subsequent to the inception of the Partnership. The net assets contributed by ZES were $1,689,000.
During 1994, the partners entered into an agreement to restructure the partnership agreement of KP and to make capital contributions. Each partner's ownership percentage is to be adjusted plus or minus 2% for each $50,000 of capital contributed or collateral provided on the bank loan, but in no event should a partner be diluted below 10%. A diluted partner is entitled to cure any shortfall between its capital account and the other partner's capital account by contributing the capital necessary to equalize each partner's capital account by the later of December 31, 1994 or six months from the date of the last capital contribution (August 1994) made on or before December 31, 1994.
Pursuant to the agreement, Bird contributed $2,700,000 in cash, including payments on debt (Note 7), and $150,000 of inventory. ZES has contributed $250,000 in cash and $250,000 of inventory. Accordingly, the ownership percentages for Bird and ZES at December 31, 1994 are 90% and 10%, respectively.
In addition to the capital contributed, the partners have advanced various amounts of working capital during 1994 (Note 13).
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - PARTNERS' CAPITAL (CONTINUED)
In September 1994, Bird entered into a sales agreement with Jannock, Inc. to sell all of the assets of a wholly owned subsidiary, Bird Incorporated. The sales agreement contains an option for Jannock to purchase Bird's interest in Kensington Partners for $2,780,000. In addition to the purchase price, Jannock would assume all of Bird's obligations under various security agreements. The option, which expires on April 7, 1995, is subject to Bird fulfilling its obligations under the partnership agreement.
Subsequent to December 31, 1994, Bird advanced KP approximately $524,000.
NOTE 11 - RETIREMENT PLANS
KP participates in a multi-employer defined benefit pension plan for the electrician's union employees. Plan contributions are determined by the union labor agreement. Management has not expressed any intent to terminate its participation in this plan. KP contributed approximately $191,000 and $163,000 to this plan during the years ended December 31, 1994 and 1993, respectively.
The Companies also sponsors an executive retirement plan. Under the provisions of the plan certain key employees may elect, at their discretion, to contribute to the plan. The Companies provide a matching contribution of one half of all employee contributions up to a maximum of 3% of gross compensation. Contributions are used to purchase variable rate annuities.
Additional benefits under this plan include proceeds from life insurance policies owned by KP or the cash value upon termination of employment. The Companies' contributions to this plan were not material for the years ended December 31, 1994 and 1993.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
A. OPERATING LEASES
The Companies lease various operating facilities from related and unrelated parties and transportation equipment from unrelated parties under various operating leases. Rent expense for the years ended December 31, 1994 and 1993 are as follows:
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following are the approximate future minimum operating lease payments at December31, 1994, substantially all of which are due to a related party:
KP is currently in default on its lease for its primary operating facility as a result of not making the required rent payments as they became due. Rent of approximately $237,000, due a related party, has been accrued in the accompanying balance sheets at December 31, 1994. Based upon the current payment plan, approximately $61,000 of the accrued rent at December31, 1994 is included in other long-term liabilities - related parties.
B. PURCHASE COMMITMENTS
KP and Bird have entered into a supply agreement which requires KP to purchase specified quantities of raw materials from Bird beginning in 1993 and ending in the year 2002. Minimum purchases for the next five years are 1995, $900,000; 1996, $1,100,000; 1997, $1,300,000; and 1998 and 1999, the greater of $1,300,000 or actual amounts purchased in 1997. The agreement includes penalties for shortfalls in purchases on a per year basis. Shortfalls can be offset with credits from years when excess volume is purchased.
KP and Domken Plastics (Note 13A) have entered into a supply agreement which requires KP to purchase $2,500,000 of raw materials, annually, through 1999. The agreement includes penalties for shortfalls in total purchases over the term of the agreement.
C. SUPPLY AGREEMENTS
KP has entered into a supply agreement with a customer that primarily purchases through Quantum II Partners (Notes 12D and 13E). The agreement requires KP to provide not less than 90% of the customer's total requirement of Quantum II vinyl replacement windows (Note 12D).
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
D. LITIGATION
On September 13, 1994, a complaint was filed in Middlesex Superior Court by the other 50% owner of Quantum II Partners (Note 13E) and others, including Quantum II Partners (collectively, the plaintiffs), against Kensington Partners and Quantum II Partners (collectively, the defendants). The plaintiffs allege various breaches of contract on the part of the defendants including breach of a partnership agreement, a supply agreement (Note 12C) and an employment agreement along with other complaints under the Massachusetts Unfair Trade Practices Act. The plaintiffs are seeking relief of actual damages in an unspecified amount and a doubling or trebling of such damages as provided in the Unfair Trade Practices Act. KP believes that the claims filed by the plaintiffs have no merit and denies any liability.
On October 4, 1994, the defendants filed a complaint in Federal Court alleging various breaches of contract by the plaintiffs and seeking collection of outstanding balances due to the Company from the plaintiffs of approximately $560,000, included in accounts receivable - trade.
No answers have been filed in these actions because the parties are involved in settlement negotiations. With respect to the litigation filed by KP for the collection of the 1994 balances receivable, management estimates that some loss may occur and has recorded its estimate of possible loss as an allowance for doubtful accounts.
The Company anticipates that a settlement agreement will be achieved, as currently contemplated. If the matter is not settled, and goes to trial, management believes that the ultimate loss, if any, will not exceed the amounts recorded.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - RELATED PARTY TRANSACTIONS
The Companies have entered into various transactions with related parties during the years ended December 31, 1994 and 1993. The transactions are as follows:
A. PURCHASES AND PAYABLES
The Companies have purchases for raw materials, advertising services, and commissions from the following related parties as of and for the years ended December 31, 1994 and 1993:
DMI and DPL are related through common ownership with ZES.
A stockholder of ZES was compensated approximately $143,000 during the year ended December 31, 1993 for services rendered in assisting with the acquisition of raw materials from DPL. In addition, J&B was also compensated $86,000 during 1993 for similar services.
Any compensation for services discussed above was reimbursed directly by DPL to ZES for the year ended December 31, 1994.
Fees from J&B for computer software support of approximately $144,000 were charged to operations for the year ended December 31, 1994.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13-RELATED PARTY TRANSACTIONS (CONTINUED)
B. SALES AND RECEIVABLES
The Companies had sales to Jones & Brown, Inc. (J&B), a related party through common ownership with ZES, of approximately $5,890,000 and $7,255,000 for 1994 and 1993, respectively. In addition, the Companies had sales to other related parties of approximately $471,000 for 1994. Accounts receivable from related parties are as follows as of December31, 1994:
C. RENTS
KP rents facilities from related parties (Note 12).
D. MANAGEMENT FEES
Management fees of approximately $488,000 were paid to J&B under a management contract for the year ended December 31, 1993. The management agreement was terminated effective December 31, 1993.
E. OTHER
Kensington Partners owns a 50% equity investment in Quantum II Partners (Note 12D). Quantum II was formed during 1993 to be the exclusive marketing representative to sell Quantum II replacement windows manufactured by KP. Quantum II Partners reported a net partnership deficit of approximately $130,000 and $138,000 for 1994 and 1993, respectively. KP has reflected its share of Quantum's excess of liabilities over assets in other long-term liabilities.
At December 31, 1994, approximately $306,000 due from Quantum II is included in other receivables - related parties. This amount is net of an allowance for doubtful accounts of $65,000.
KENSINGTON PARTNERS AND AFFILIATE (JOINT VENTURE PARTNERSHIPS)
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT
In 1995, Jannock, Inc. exercised its option to purchase Bird's interest, owned by its wholly-owned subsidiary Bird-Kensington Holding Corporation, in KP. Immediately preceding the sale, Bird purchased ZES' interest in KP for $1,000,000. In addition, Bird invested in KP $4,090,000 prior to the sale to fulfill provisions in the asset purchase agreement.
On June 2, 1995, the stock of Bird-Kensington Holding Corporation, which owned the assets and liabilties of KP was sold by Bird to Jannock, Inc. in exchange for cash of $2,780,000 and assumption of certain liabilities.
SUPPLEMENTAL INFORMATION
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
TO THE PARTNERS KENSINGTON PARTNERS AND AFFILIATE Leechburg, Pennsylvania
We have audited the combined financial statements of Kensington Partners and Affiliate as of December 31, 1994 and for each of the two years in the period then ended, and have issued our report thereon dated February 10, 1995. In connection with our audits of these financial statements, we audited financial statement schedule II. In our opinion, such a 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.
/s/Alpern, Rosenthal & Company Pittsburgh, Pennsylvania February 10, 1995
KENSINGTON PARTNERS AND AFFILIATE
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1994
(1) Uncollectible accounts written off.