ITEM 1. BUSINESS
THE COMPANY
Apogee Enterprises, Inc. is a holding company incorporated under the laws of the State of Minnesota in 1949. The Company, through its operating subsidiaries, is primarily engaged in the fabrication, distribution and installation of value-added glass products and window and curtainwall systems. Approximately sixty percent of the Company's revenues are generated from the architectural and nonresidential construction markets, with the other forty percent coming from operations serving the auto glass market. Three business segments comprise Apogee's operations: Glass Technologies (GT) serves the construction and imaging and display markets. Auto Glass (AG) serves the automotive glass replacement and repair market. Building Products & Services (BPS) serves certain sectors of the commercial and institutional, detention and security building markets. Financial information about the Company's segments can be found at Note 19 to the consolidated financial statements of Apogee Enterprises, Inc. contained in a separate section of this report. See "Index of Financial Statements and Schedules".
Unless the context otherwise requires, the terms "Company" and "Apogee" as used herein refer to Apogee Enterprises, Inc. and its subsidiaries.
GLASS TECHNOLOGIES
The businesses of the Glass Technologies segment add value to ordinary glass through fabrication of high-technology coatings products which provide strength, energy efficiency in high-rise structures and optical clarity for mirrors, glare filter screens and picture frame glass. The operating units in this segment include Viracon, an architectural glass unit, Viratec Thin Films (Viratec), a producer of coated glass for computer anti-glare screens and other optical devices and Tru Vue, a picture framing glass unit.
Viracon fabricates finished glass products and provides glass coating services. The operating unit purchases flat, unprocessed glass in bulk quantities from which a variety of glass products are fabricated, including insulated, heat processed and laminated architectural glass; security glass and laminated industrial glass.
Laminated glass consists of two or more pieces of glass fused with a plastic interlayer and is used primarily for strength and safety in skylights and in security applications. Sales of laminated safety glass products have increased with the adoption of federal and state safety glazing standards. Glass is heated to its softening point then cooled very quickly to create heat-processed glass. The heating and cooling strengthen the glass to withstand impact and wind or snow loads. This process is used in architectural glass. Insulating glass, comprised of two or more pieces of glass separated by a sealed air space, is used in architectural and residential applications for thermal control. Viracon's reflective and low-emissivity coatings reduce energy costs and provide innovative design features for window and curtainwall systems. Low-emissivity coatings are an invisible, metallic film deposited on glass which selectively limits the transfer of heat through the glass. Low-emissivity coated glass represents a fast-growing segment of both residential and nonresidential glass markets.
The Viracon unit is able to fabricate all types of architectural glass (insulating, laminated and combinations of both) at its Owatonna, Minnesota facility. Combined with its glass coating capabilities, the unit is able to provide a full range of products from these facilities. In March 1998, Viracon announced that it will invest $35 million to build a new facility in Statesboro, Georgia. The new facility, together with the planned expansion at the Owatonna facility, are expected to add approximately 80 percent of production capacity over the next few years.
Viracon markets its products nationally and overseas to glass distributors, contractors (including BPS) and industrial glass fabricators. A substantial portion of its glass products is delivered to customers by Viracon's fleet of company-owned trucks, providing "backhaul" capability for its raw materials, thereby reducing shipping time, transportation costs and breakage expense.
Viratec develops advanced, optical-display and imaging coatings for glass and other surfaces. These products are used in anti-glare computer screens, high- quality optical components and high performance mirror products for the imaging industry. Viratec markets optical display and imaging products to both domestic and overseas customers. These customers provide further assembly, marketing and distribution to end users. In February 1998, Viratec's Optium(TM) (formerly known as CaRT(R)) business, which coats the curved glass surfaces of cathode ray tubes (CRTs) used inside computer monitors, announced plans to move its operation near to its customers' facilities and the natural flow of CRTs. By bringing the coater nearer to its customers, Viratec hopes to maximize the utility of its Optium operation and reduce two critical cost elements that hampered demand and profitability -- shipping and logistical cycle time. The new Optium facility is expected to be operating by the end of calendar 1998.
Tru Vue is one of the largest domestic manufacturers of picture framing glass. Tru Vue provides its customers with a full array of picture framing glass products, including clear, reflection control, which diminishes reflection, and conservation glass, which blocks ultraviolet rays. Tru Vue is also a manufacturer of conservation picture framing matboard, which complements the unit's glass product offerings. The products are distributed primarily through independent distributors which, in turn, supply local picture framing markets.
AUTO GLASS
The Auto Glass (AG) segment is engaged in the auto glass replacement and repair business through its Harmon AutoGlass service centers (retail), Glass Depot wholesale centers (wholesale) and Curvlite fabrication center.
Harmon AutoGlass operates auto glass service centers in 43 states. The centers replace and repair auto glass on the premises and also provide mobile installation service. Primary customers include insurance companies (on behalf of their insured clients), fleet owners and car owners. The service centers also carry limited inventories of flat glass, which are sold at retail for such purposes as home window repair and table tops. Some automotive accessories are also sold and installed at certain service centers. Quality service is emphasized in all service centers. The Company believes Harmon AutoGlass is the second-largest auto glass retailer in the United States. The unit also operates two call centers (Centers) for handling auto glass claims. The Centers, on behalf of their insurance company and fleet customers, handle replacement glass claims made by policyholders or fleet owners. Calls are placed through a toll-free number and then routed to one of the Centers located in Orlando, Florida or Eau Claire, Wisconsin. Customer service agents arrange for the prompt replacement or repair of auto glass by either a Harmon AutoGlass service center or an affiliated shop member of the Center's network and begin the process of filing the claim electronically with the applicable insurance company. The Center subcontracts for replacement and repair services with over 3,300 auto glass stores nationwide. The unit seeks to maximize the electronic exchange of information, which reduces claim costs and eliminates errors. This type of service is an essential requirement to become one of the few choice providers for insurance companies.
The AG wholesale centers, known as "Glass Depot", supply the Harmon AutoGlass service centers with auto and flat glass and related products as well as selling wholesale to other glass installers. Due to the variety of makes and models of automobiles, auto glass service centers typically stock only windshields for the most popular models. As a result, there is a demand for distributors to maintain inventories of auto glass and to provide prompt delivery. Through the segment's National Distribution Center (NDC), a mega-distribution center offering other manufacturers' products as well as its own for both domestic and foreign vehicles, the segment is able to maintain a broad selection of automotive glass. The NDC also offers AutoGlass Express, a delivery system which allows the unit to fill customers' orders on an individual basis versus the industry norm of truckload orders. Purchases of fabricated automotive glass are made from several primary glass manufacturers and fabricators, including the segment's Curvlite unit.
Curvlite fabricates replacement windshields for foreign and domestic automobiles and laminated glass parts for the transportation industry. It fabricates approximately 800 types of replacement windshields which are marketed nationally to distributors and glass shops, including the Glass Depot wholesale centers. Curvlite seeks to offer a broad selection of windshields by promptly adding new windshields as new models are introduced.
On February 28, 1998, the AG segment had 73 wholesale locations and 340 service centers. The segment evaluates opportunities to expand both its retail and wholesale auto glass locations, while closely monitoring existing units' profitability.
Under a franchise agreement with Midas International Corporation, the segment operates eight Midas Muffler locations in Minnesota, South Dakota, North Dakota and Wisconsin.
BUILDING PRODUCTS & SERVICES
The Company's Building Products & Services (BPS) segment operates principally in the design, engineering and installation of custom and standard curtainwall and window systems for commercial, institutional as well as specialized detention and security building products and services. BPS' four operating units are Detention & Security, Full Service, New Construction and Architectural Products.
BPS competes in the detention and security market through its Norment operating unit, which is a leader in the design, manufacture and installation of institutional and governmental security and detention systems in the United States. The unit's products include complex windows, doors and monitoring systems for high-security buildings such as prisons, jails, convenience stores, hospitals, schools and other governmental facilities.
BPS' Full Service group has ten locations operating as Harmon, Inc. located in major metropolitan areas. The locations offer complete design, engineering, installation and replacement or glazing services for commercial, institutional and other buildings. In addition, this unit offers 24-hour replacement service for storm or vandalism damage. In-house engineering capabilities allow Full Service to duplicate the original design or create a completely new appearance for renovated buildings.
BPS' New Construction unit, known as Harmon, Ltd., is one largest designers and installers of curtainwall and window systems for nonresidential construction in the United States. During fiscal 1998, the segment made the strategic decision to exit its European and Asian international curtainwall operations. The unit has offices in several major metropolitan areas in the United States. All of the offices typically design, assemble and install a building's exterior "skin" or curtainwall. Curtainwall is an exterior multi-story wall consisting of an aluminum framing system anchored to steel or concrete, "glazed" (filled) with glass in the vision areas and with panels in the nonvision (spandrel) areas. Panels are
usually made from aluminum, precast concrete or natural stone. The segment procures its materials from a number of independent fabricators, including the BPS' Architectural Products group and Glass Technology's Viracon unit. Harmon, Ltd. also sometimes serves as a stone subcontractor, setting stone on both the exterior and interior of buildings.
The Architectural Products unit of BPS designs and manufactures high-quality, thermally-efficient aluminum window and curtainwall systems under the "Wausau Metals" (Wausau) trade name. These products meet high standards of wind load capacity and resistance to air and moisture seepage. Wausau's aluminum window frame designs are engineered to be thermally efficient, utilizing high-strength polyurethane to limit the transfer of heat or cold through the window frame. Products are marketed through a nationwide network of distributors and a direct sales staff. Sales are made to building contractors, including BPS' New Construction unit, and to building owners for retrofitting older buildings. Wausau maintains design and product engineering staffs to prepare aluminum window and curtainwall system designs to fit customers' needs and to originate new product designs. Wausau occasionally joins the New Construction unit in pursuing certain projects, as many architects and general contractors prefer to work with an experienced curtainwall subcontractor and manufacturer team.
Operating under the "Linetec" name, the Architectural Products unit also has two metal coating facilities which provide anodized and fluoropolymer coatings to metal. Anodizing is the electrolytic process of putting a protective, often colored, oxide film on light metal, typically aluminum. Fluoropolymer coatings are high quality paints which are sometimes preferred over anodizing because of the wide color selection. Coatings are applied to window and curtainwall components for industrial metal fabricators (including Wausau Metals), as well as other companies' metal, plastic, wood or glass products.
Harmon, Ltd. and Harmon, Inc. are subject to normal subcontractor's risks, including material and wage increases, construction and transportation work stoppages and contractor credit worthiness. In addition, office vacancy rates, tax laws concerning real estate and interest rates are important factors which affect nonresidential construction markets.
COMPETITION
The Company's businesses are in industries that are, in general, fairly mature and highly competitive. The Glass Technologies segment competes with several large integrated glass manufacturers and numerous smaller specialty fabricators. Product pricing and service are the primary competitive factors in this market. The Auto Glass segment competes with other auto glass shops, glass warehouses, car dealers, body shops and fabrication facilities on the basis of pricing and customer service. Its competition consists of national and regional chains as well as significant local competition. The curtainwall subcontractor business is primarily price competitive, although BPS' New Construction's reputation for quality engineering and service is an important factor in receiving invitations to bid on large complex projects. BPS' Architectural Products unit competes against several major aluminum window manufacturers and primarily serves the custom portion of the construction market in which the primary competitive factors are product quality, reliable service and the ability to provide technical engineering and design services.
MARKETS
GT services the architectural glass, computer, optical imaging and picture framing glass markets in which coated glass is becoming the industry standard. These markets are very competitive, highly responsive to new products and can be price sensitive. The Company believes that GT possesses one of the world's largest coating capacities for glass and is a leading fabricator and global distributor of high-performance architectural glass. Its fully integrated, glass fabrication and coating capabilities allow the segment to meet customer needs and react quickly to market demands while improving margins and developing new products.
AG services the automotive glass aftermarket, which is influenced by a variety of factors, including new car sales, speed limits, road conditions, the economy, weather and average number of miles driven. A transformation of the industry's pricing structure has intensified competition. In recent years, major purchasers of auto glass, such as insurance companies, have increasingly requested volume pricing and insurance claims processing on a national scale. As a result, margins have narrowed at the retail level and, to a lesser extent, at wholesale and manufacturing levels.
BPS serves the domestic nonresidential construction market, which tends to be cyclical and has been on a slow to moderate recovery, both in terms of dollars and square feet of new contract awards. This market was hard hit due to overbuilding in past years, tax law changes, tightening credit standards, business restructuring and other factors. The resulting contraction in demand for building materials and construction services has intensified competition, squeezed profit margins and contributed to some business failures in the market sectors served by the Company. In response to these circumstances, BPS has consolidated manufacturing facilities, closed offices and reduced personnel and discretionary expenses. It has also redirected its marketing focus to sectors with relative strength, including remodeling, institutional, detention and security markets.
SOURCES AND AVAILABILITY OF RAW MATERIALS
None of the Company's operating units are significantly dependent upon any one supplier. The Company believes a majority of its raw materials (bulk flat glass, aluminum extrusions, automotive glass and related materials) are available from a variety of domestic sources.
TRADEMARKS AND PATENTS
The Company has several nationally recognized trademarks and trade names which it believes have significant value in the marketing of its products. Harmon AutoGlass(R), Harmon Contract(R), Norment(R), Airteq(R), Viratec(R), Tru Vue(R), and Linetec(R) are registered trademarks and Glass Depot(R) and Optium(R) are listed trademarks of the Company. Viratec Thin Films has obtained several patents pertaining to its glass coating methods. However, no single patent is considered to be materially important to the Company.
FOREIGN OPERATIONS AND EXPORT SALES
During the years ended February 28, 1998, March 1, 1997 and March 2, 1996, the Company's export sales, principally from GT operations, amounted to approximately $71,821,000, $61,855,000 and $38,348,000, respectively.
During fiscal 1998, the BPS segment decided to close or exit its European and Asian international curtainwall operations. Sales for those operations were approximately $29,834,000, $120,318,000 and $114,305,000 for the years ended February 28, 1998, March 1, 1997 and March 2, 1996, respectively. Operating losses for 1998, 1997 and 1996, were $115,709,000, $5,716,000 and $1,983,000, respectively. At February 28, 1998, March 1, 1997 and March 2, 1996, the identifiable assets of foreign operations totaled $11,417,000, $86,866,000 and $58,753,000, respectively. At February 28, 1998, the backlog of work for Asian projects was approximately $15 million.
EMPLOYEES
The Company employed 6,672 persons at February 28, 1998, of whom 1,010 were represented by labor unions. The Company is a party to 132 collective bargaining agreements with several different unions. Approximately 33% of the collective bargaining agreements will expire during fiscal 1999. The number of collective bargaining agreements to which the Company is a party will vary with the number of cities with active nonresidential construction contracts. The Company considers its employee relations to be very good and has not recently experienced any significant loss of work days due to strike.
BACKLOG
The backlog of orders is significant in the Company's construction-related BPS segment. At February 28, 1998, the Company's total backlog of orders considered to be firm was $308,234,000 compared with $358,169,000 at March 1, 1997. This amount included $114 million related to BPS' curtainwall operations, approximately $35 million of which is not expected to be reflected as revenue in fiscal 1999.
ITEM 2.
ITEM 2. PROPERTIES
The following table lists, by division, the Company's major facilities, the general use of the facility and whether it is owned or leased by the Company.
Facility Location Owned/Leased Function - -------- -------- ------------ --------
Glass Technologies - ------------------
Viracon Owatonna, MN Owned Mfg./Admin. Viracon - Coatings Bldg Owatonna, MN Owned Mfg. Viratec Thin Films, Inc. Faribault, MN Owned Mfg./Admin. Tru Vue Chicago, IL Owned Mfg./Admin.
Auto Glass - ----------
Curvlite Owatonna, MN Owned Mfg./Admin. National Distribution Center Owatonna, MN Owned Warehouse/Admin. Harmon AutoGlass and Glass Depot headquarters Minneapolis, MN Leased Administrative Call Center Orlando, FL Owned Administrative Call Center Eau Claire, WI Leased Administrative
Building Products & Services - ----------------------------
New Construction headquarters Minneapolis, MN Leased Administrative Norment Montgomery, AL Owned Mfg./Admin. Architectural Products Wausau, WI Owned Mfg./Admin. Architectural Products - Plant II Wausau, WI Owned Mfg. Architectural Products - Plant III Wausau, WI Owned Mfg. Linetec (Painting) Wausau, WI Owned Mfg./Admin. Linetec (Anodizing) Wausau, WI Owned Mfg.
Other - -----
Apogee Corporate Office Minneapolis, MN Leased Administrative
The Glass Technologies segment has four fabrication facilities located in the Midwest.
The Automotive Glass segment has 413 retail and distribution locations nationally and eight Midas Muffler franchises located in the Midwest. The majority of such locations are leased.
The Building Products & Services segment's New Construction sales offices, Full Service locations and fabrication facilities are located in the United States. Except as noted above, all such locations are leased.
The Curvlite plant, an Architectural Products facility, the Linetec paint facility, and the Call Center in Florida were constructed with the use of proceeds from industrial revenue bonds issued by those cities. These properties are considered owned, since at the end of the bond term, title reverts to the Company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Apogee has been a party to various legal proceedings incidental to its normal operating activities. In particular, like others in the construction industry, its construction business is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages. Although it is impossible to predict the outcome of such proceedings, the Company believes, based on facts currently available to us, that none of such claims will result in losses that would have a material adverse effect on its financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter ended February 28, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------
NAME AGE POSITION ---- --- --------
Donald W. Goldfus 64 Chairman of the Board of Directors
Russell Huffer 48 President and Chief Executive Officer
James L. Martineau 57 Executive Vice President
Richard Gould 58 Senior Vice President
Robert G. Barbieri 42 Vice President - Finance and Chief Financial Officer
Michael Bevilacqua 41 Treasurer/Senior Director Business Development
Martha L. Richards 35 General Counsel and Secretary
Executive officers are elected annually by the Board of Directors and serve for a one-year period. With the exception of Richard Gould, who has an employment contract with the Company that covers the period through 2000, no other officers have employment contracts with the Company. None of the executive officers or directors of the Company are related.
Messrs. Goldfus, Huffer and Mr. Martineau have been employees of the Company for more than the last five years. Mr. Gould joined the Company in May 1994. Prior to joining the Company, Mr. Gould was president of Gould Associates, a strategic management consulting firm to a wide range of companies. Mr. Barbieri joined the Company in 1997. Prior to joining the Company, Mr. Barbieri held several financial management positions at Air Products and Chemicals, Inc. in Allentown, Pennsylvania. Mr. Bevilacqua joined the Company in April 1998. Prior to joining the Company, Mr. Bevilacqua held several financial management positions at Air Products and Chemicals, Inc. in Allentown, Pennsylvania. Ms. Richards joined the Company in March 1997. Prior to joining the Company, Ms. Richards was a Partner with the law firm, Jenner & Block, Chicago, Illinois.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Apogee common stock is traded in the NASDAQ National Market System, under the ticker symbol APOG. Stock price quotations are printed daily in major newspapers. During the fiscal year ended February 28, 1998, the average trading volume of Apogee common stock was 4,065,000 shares per month, according to NASDAQ.
As of March 31, 1998, there were 27,511,168 shares of common stock outstanding, of which about 6.5 percent were owned by officers and directors of Apogee. At that date, there were approximately 1,992 shareholders of record and 7,300 shareholders for whom securities firms acted as nominees.
The following chart shows the quarterly range and year-end close of the Company's common stock price per share over the past five fiscal years, as adjusted to reflect the two-for-one stock split effected in the form of a stock dividend paid on February 14, 1997 (the February Stock Dividend).
QUARTER QUARTER QUARTER QUARTER YEAR I II III IV END ---------------------------------------------------------------------- 1994 5 1/8-6 1/4 5 3/4-7 1/8 5 5/8-7 1/4 6 3/4-8 7/8 7 1/4
1995 5 3/4-7 5/8 5 7/8-7 7/8 7 3/8-9 1/8 7 3/8-9 1/4 8 5/8
1996 8 1/4-9 7 1/4-9 1/8 7 1/8-7 7/8 6 1/2-9 7/8 9 13/16
1997 9 5/8-14 1/4 13 1/4-18 1/4 15 1/4-22 5/8 17 1/4-23 3/4 19 7/8
1998 14-21 1/4 17 3/4-22 5/8 21 1/8-25 1/4 10 3/8-23 12 15/16
DIVIDENDS
It is Apogee's policy, subject to Board review and approval, to pay quarterly cash dividends in May, August, November and February. Cash dividends have been paid each quarter since 1974, and have been increased each year since then. The chart below shows quarterly cash dividends per share for the past five years, as adjusted to reflect the February Stock Dividend.
QUARTER QUARTER QUARTER QUARTER I II III IV YEAR -------------------------------------------------- 1994 0.035 0.035 0.038 0.038 0.140 1995 0.038 0.038 0.040 0.040 0.155 1996 0.040 0.040 0.043 0.043 0.165 1997 0.043 0.043 0.045 0.045 0.175 1998 0.045 0.045 0.050 0.050 0.190
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In fiscal 1998, we continued our focus on company-wide efforts to improve margins, productivity, working capital usage and capital allocation. For most of our businesses, we achieved improved profitability on increased net sales in fiscal 1998. However, the success of these efforts was significantly overshadowed by operating losses and nonrecurring charges related to international curtainwall construction activities. During the year, we made the strategic decision to close or exit our European and Asian curtainwall operations and to focus more selectively on higher margin domestic curtainwall business. Related to these actions, European operations have been deconsolidated, reflecting our ceding of control over those entities. Consequently, the net operating results of European operations for fiscal 1998 have been included in our "Consolidated Results of Operations" under the caption "Unusual items," which also includes two nonrecurring charges related to international curtainwall operations. The net liability associated with these businesses was included in accrued expenses in our "Consolidated Balance Sheet" at February 28, 1998. The closure of these European and Asian curtainwall operations will permit the Company to focus on other business markets that management believes will provide opportunity for greater returns on capital invested. A more detailed description of our results for 1998 and financial position is provided in this financial review.
PERFORMANCE FISCAL 1998 COMPARED TO FISCAL 1997
The following table illustrates the relationship between various components of operations, stated as a percent of net sales, for each of the fiscal years in the three-year period ended February 28, 1998.
PERCENT OF NET SALES 1996 1997 1998 -------- --------- -------- Net sales 100.0 100.0 100.0 Cost of sales 86.4 84.0 80.3 Gross profit 13.6 16.0 19.7 Selling, general and Administrative expenses 9.9 11.1 15.2 Unusual items -- -- 10.5 Operating income (loss) 3.7 4.9 (6.1) Interest and other expense, net 0.7 0.7 0.8 Earnings (loss) before income taxes and other items 3.1 4.2 (6.9) Income taxes 1.1 1.5 (1.4) Equity in net loss (earnings) of affiliated companies (0.1) -- 0.1 Minority interest (0.1) (0.1) -- Net earnings (loss) 2.0 2.8 (5.6)
Consolidated net sales decreased 4% to $913 million in fiscal 1998. If European curtainwall net sales were excluded from fiscal 1997 results, comparative net sales would have grown by 4%. Our Glass Technologies (GT) and Auto Glass (AG) segments reported net sales gains of 18% and 13%, respectively. GT's net sales grew primarily due to continued strong demand for its fabricated glass products, particularly the Viracon unit's high-performance architectural glass. AG increased net sales by combining nominal retail same-store net sales growth, the addition of retail and wholesale locations, and the full-year inclusion of Portland Glass, which the segment acquired in the fourth quarter of fiscal 1997. Building Products & Services (BPS) net sales dropped 24%, nearly two-thirds related to the deconsolidation of European curtainwall operations. Domestic and Asian curtainwall net sales fell 33%, while net sales of BPS noncurtainwall businesses grew 8%.
On a consolidated basis, cost of sales, as a percentage of net sales, fell to its lowest figure this decade, dropping 3.7%. The deconsolidation of European curtainwall results accounted for two-thirds of the margin improvement. Productivity gains at most of our fabrication operations, most notably Viracon and Viratec Thin Films (Viratec), and a shift in net sales mix away from low-margin curtainwall construction business combined to produce the remainder of this positive variance. BPS reported improved margins for all but its international operations. These factors were partly offset by higher costs experienced by the AG segment's Retail and Distribution operations.
Selling, general and administrative (SG&A) expenses grew by $33.2 million, or 32%. As a result, SG&A costs increased as a percent of net sales. The primary factors were higher salaries, outside services, increased information systems and marketing costs, particularly at our
AG segment. SG&A expenses in fiscal 1998 also included $3.4 million in foreign currency translation losses in BPS' Asian curtainwall unit, a $3.0 million write-off of certain information systems assets, primarily in AG, and severance costs associated with certain management changes.
In fiscal 1998, pre-tax charges of $96.1 million were included in our "Consolidated Results of Operations" under the caption "Unusual items." The above amount included nonrecurring charges of $26.0 million and $35.9 million recorded in the third and fourth quarter, respectively, related to our international curtainwall operations. In addition, unusual items included operating losses totaling $34.2 million, representing the net operating results for European curtainwall operations which were deconsolidated as described in the above introductory paragraph.
Net interest expense rose nominally in fiscal 1998. Increased interest income from investments held by the Company's captive insurance subsidiary and lower interest rates offset nearly all of the effect of higher borrowings under our revolver and uncommitted credit lines. We expect higher debt levels and interest expense for fiscal 1999 due to the financing of higher capital investments.
Our income tax benefit amounted to 19.9% of our net loss before income taxes. The unusually low effective rate was primarily due to foreign operating activity for which no tax benefit was recognized.
Our share of net losses recorded by various affiliated companies in which we have a 50% or less equity interest amounted to $879,000 in fiscal 1998 compared to $337,000 last year.
Apogee's fiscal 1998 net loss was $51.1 million, or $1.84 diluted loss per share. This compared to net earnings of $26.2 million, or $0.93 diluted earnings per share, a year ago. The negative return on average shareholders' equity was 36.2% in fiscal 1998 versus a positive return of 16.9% for fiscal 1997.
At February 28, 1998, our consolidated backlog stood at $308 million, down 14% from a year ago. This reduction was primarily attributable to the closure of our international curtainwall business. Approximately $35 million of the February 1998 backlog will not be reflected as net sales in fiscal 1999.
SEGMENT ANALYSIS
The following information provides a more detailed look at each of our three business segments. Also see Note 19-Business Segment Information on page 29 for a three-year history of each segment's net sales, operating income (loss), identifiable assets, capital expenditures, and depreciation and amortization.
(DOLLAR AMOUNTS IN THOUSANDS) 1996 1997 1998 ------------ ------------ ----------- Glass Technologies Net sales $ 150,457 $ 192,827 $ 227,203 Operating income 16,431 19,908 27,330
Auto Glass Net sales 273,133 307,935 347,191 Operating income 18,069 20,149 15,046
Building Products & Services Net sales 462,102 460,714 348,892 Operating income (loss) (2,073) 5,557 (96,433)
GLASS TECHNOLOGIES (GT) posted record net sales and operating income for the fifth consecutive year. Net sales rose by 18%, while operating income improved 37% to $27.3 million. The net sales increase reflected improvements by each of the segment's units.
Most of the segment's earnings improvement came from Viracon, our high-performance architectural glass fabrication unit. Viracon posted net sales and operating income growth of 14% and 29%, respectively. The gains were due to strong demand for its architectural glass products, improved product mix, and improved productivity. Viracon ran near full capacity during the year, even as expanded production capacity was added. In response to continued strong demand for its segment's high-performance architectural glass products, Viracon will begin construction of a new architectural glass fabrication complex in Statesboro, Georgia. This facility, expected to be operational in fiscal 2000, together with enhancements at Viracon's existing facility, will eventually increase Viracon's capacity by over 80%.
Viratec reported improved results in fiscal 1998. Viratec, which applies optical-grade coatings to glass and other substrates, saw its net sales grow by 33%, while operating earnings nearly quadrupled. Both improvements were primarily due to Viratec's Optium (TM) cathode ray tube coating operation (formerly known as CaRT). Optium net sales more than doubled for the year and the unit reported a small operating profit versus a sizable loss in the prior year. Viratec's flat glass operations had a double-digit net sales gain, but industry pricing pressure and production downtime related to an ongoing capacity expansion caused the operation to report lower earnings. At February 28, 1998, Viratec's backlog was 43% lower than last year's year-end backlog, primarily due to the suspension of the Optium business related to its expected relocation. During fiscal 1999, Viratec's Optium line is expected to be moved to a location closer to the flow of customers' computer monitor supply chains, reducing shipping costs and breakage risks.
The segment's Tru Vue unit, our custom picture framing glass and matboard fabricator, also posted improved net sales and operating earnings for the year. These results occurred despite somewhat soft industry sales, as the unit again successfully controlled its production costs. Tru Vue plans to move to a new facility in fiscal 1999. This should allow for increased capacity and improved productivity for both its picture-framing glass and matboard operations.
Based on current order rates and industry conditions, GT expects to report higher net sales and solid operating results in fiscal 1999. However, each of the segment's operating units will be affected by the start-up costs and disruptions associated with significant capital projects, making earnings improvements difficult to project. The extent of earnings gains will be highly dependent on the ability of its business units to reach operational status for each project as planned.
AUTO GLASS (AG) operates retail stores under the Harmon AutoGlass (Harmon) name and distribution centers under the Glass Depot name. Due to an industry merger in 1997, AG became the second largest company in the auto glass repair and replacement industry.
AG reported 13% net sales improvement in fiscal 1998 despite lower unit sales demand in the replacement auto glass industry. Approximately one-third of the net sales growth was due to the fourth quarter fiscal 1997 acquisition of Portland Glass. The segment's net sales growth continued to outpace the industry. Market data indicated that unit demand for replacement auto glass in the U.S. fell from 1996.
Despite the net sales increase, AG's operating income fell to $15.0 million, a 25% decline. Margin pressures intensified throughout the year due to intense competition, particularly at the retail level. Lower margins, and higher selling and administrative costs were the primary factors behind the decline. The segment also recorded a $2.4 million write-off of certain information systems assets. Same-location retail net sales rose by 1.5%, while unit net sales declined 1.2%.
The segment's Curvlite operation fabricates auto glass for the replacement auto glass aftermarket. Curvlite increased net sales in fiscal 1998 by about 25%. The unit's National Distribution Center, which offers other manufacturers' products as well as its own for both domestic and foreign vehicles, and the AutoGlass Express program, a delivery system to fill customer orders more quickly and completely, accounted for much of the unit's net sales growth. About 68% of Curvlite's net sales were made to Glass Depot units in fiscal 1998.
During the year, AG completed four small acquisitions. These acquisitions, combined with other locations added during the year, increased the number of locations to 340 Harmon retail locations and 73 Glass Depot distribution centers. The segment continues to explore opportunities to expand the reach of its businesses.
The merger of the industry's two largest companies may provide AG with an enhanced position as insurance companies adjust their allocations of business to maintain their own flexibility and access to competitive pricing. Insurance companies, which make up about 50% of the replacement auto glass market, prefer vendors who can expedite claims processing and other administrative efforts related to auto glass replacement and repair. The segment has the ability to offer comprehensive claims processing services to these customers on a nationwide basis.
Partly due to the aforementioned factors, AG expects to report higher net sales in fiscal 1999 with unit growth from market penetration and start-up or acquired locations. Meanwhile, the segment is taking actions to reduce its cost structure and improve productivity, particularly in its retail operations. However, the continued uncertainty of industry unit sales and pricing makes it difficult to project operating earnings for fiscal 1999.
BUILDING PRODUCTS & SERVICES (BPS) posted a $96.4 million operating loss in fiscal 1998, compared with operating income of $5.6 million a year ago. Other than the segment's international curtainwall operations, BPS operating units recorded solid results, with operating income for those units 71% higher than a year ago.
As expected, segment net sales decreased 24% to $349 million, or 38% of consolidated net sales, which represented BPS' lowest percentage contribution to Apogee's total net sales in over 17 years. Two-thirds of the decrease related to the deconsolidation of European
curtainwall operations. Adjusting for this factor, BPS net sales would have fallen 11%. Domestic and Asian curtainwall net sales fell by 30% and 40%, respectively, due primarily to our decision to focus more selectively on higher margin domestic curtainwall business and the closure of our Asian curtainwall business. Net sales of BPS noncurtainwall businesses grew 8%.
The operating loss was primarily due to international curtainwall operations and included two nonrecurring pre-tax charges amounting to $61.9 million related to exit activities and other unusual items. A $26.0 million pre-tax provision for restructuring and other unusual items was recorded in the third quarter. The provision also included amounts for the estimated loss associated with certain disputed construction contract receivables in Europe, including the accrual of certain penalty amounts, and the accrual of costs associated with the resolution of legal proceedings related to organizational changes in its European curtainwall unit. In the fourth quarter, we recorded a $35.9 million pre-tax provision for exiting all European curtainwall and related operations, including the completion of certain remaining projects.
In addition to the nonrecurring charges, international curtainwall operations posted an operating loss of $53.8 million, reflecting significant cost overruns at certain projects in Europe and Asia. The operations also sustained sizable foreign currency translation losses on Asian assets, particularly those held in Malaysia. Despite a decline in net sales, our domestic curtainwall unit produced sharply higher profits, aided by the completion of the Getty Museum project as well as by reductions in overhead and operating costs.
BPS noncurtainwall businesses posted another year of solid results. Net sales for these units rose 8%, while operating profits totaled $9.6 million. The segment's Full Service business had another solid year, generating slightly higher net sales. A favorable shift in net sales mix towards higher-margin service business helped the unit's profitability. The Detention & Security unit also reported slightly higher net sales. However, operating income fell as improved earnings from contracting were offset by losses from a start-up operation. The Wausau Architectural Products unit leveraged higher net sales into sharply higher profitability as the unit improved its engineering and fabrication productivity. These businesses enter fiscal 1999 with backlog 46% higher than a year earlier.
At February 28, 1998, BPS' backlog was $264 million. Of this amount, curtainwall operations accounted for $114 million. The domestic curtainwall backlog was essentially unchanged from a year ago, while the Asian backlog fell by 67%.
The absence of significant operating losses from international curtainwall activities should enable BPS to report favorable earnings comparisons in fiscal 1999. The segment anticipates lower net sales from domestic curtainwall operations with better overall project margins, but the smaller domestic net sales base makes it unlikely that operating income for that unit can match fiscal 1998 levels. Overall, BPS noncurtainwall businesses are expected to post another year of improved results. Ultimate outcomes will continue to depend on BPS' ability to control costs, effectively manage projects, maintain margins inherent in the segment's backlog and book additional contracts.
FISCAL 1997 COMPARED TO FISCAL 1996 Consolidated net sales grew 9% to $951 million in fiscal 1997, largely reflecting gains by our GT and AG segments. GT's net sales grew primarily due to continued strong demand and firm pricing for its fabricated architectural glass products and the addition of net sales from the newly acquired Viratec Thin Films (Viratec) unit. Despite a very challenging industry environment, our AG segment increased net sales by combining retail same-store net sales growth of 10% with additional retail and wholesale locations and strong net sales growth at Curvlite. BPS net sales were essentially unchanged from the prior year. Fiscal 1996 comprised 53 weeks, the additional week accounting for approximately 2% of the consolidated net sales that year, while fiscal 1997 comprised 52 weeks.
Overall, cost of sales, as a percent of net sales, fell 2.4% from the previous year. Slight productivity gains at most of our operations, sharply lower insurance costs due to reserve reductions and a significant change in net sales mix away from the low-margin curtainwall construction activity of BPS' New Construction unit combined to produce this positive variance.
SG&A expenses grew 22%, reflecting increased information systems and marketing costs, particularly at our AG segment, and higher profit-sharing and commission expense related to higher net sales and improved profitability. As a result, SG&A costs as a percent of net sales rose, despite the moderate net sales gain and productivity measures undertaken by our operating segments.
Net interest expense rose 22%, primarily due to the impact of interest paid associated with the settlement of outstanding tax matters.
Our effective tax rate dropped to 34.9% from 36.9% in fiscal 1996. The decrease was primarily due to the tax benefits related to higher export net sales levels and the resolution of prior years' tax examinations. These items were partially offset by foreign operating losses for which no tax benefit was recognized.
As explained below, the inclusion of 100% of the results of Marcon Coatings (Marcon) and Viratec in our consolidated financial statements means that equity in net earnings of affiliates in 1997 no longer included a 50% interest in those units. The $337,000 charge to earnings in fiscal 1997 reflected our share of net losses recorded by various affiliated companies in which we have a 50% or less equity stake. Minority interest rose due to a larger loss at Harmon Europe S.A., a 70%-owned French subsidiary.
Consolidated net earnings advanced 47% in fiscal 1997 to $26.2 million, or $0.93 a share, from $17.8 million, or $0.65 a share, in fiscal 1996. Return on shareholders' equity rose to 16.9% from 13.5% a year earlier. The aforementioned per share figures reflect the two-for-one stock split, effected in the form of a 100% stock dividend, paid to shareholders on February 14, 1997.
Apogee ended fiscal 1997 with a $358 million backlog, down 12% from $405 million at the end of fiscal 1996.
SEGMENT ANALYSIS The following information provides a more detailed look at each of our three segments. Also see Note 19-Business Segment Information on page 29 for a three-year history of each segment's net sales, operating income (loss), identifiable assets, capital expenditures, and depreciation and amortization.
GLASS TECHNOLOGIES (GT) included Viracon, our architectural glass fabricator, Tru Vue, our picture framing glass and matboard fabricator, and Viratec, which applies optical-grade coatings to glass and other substrates. As described below, Viratec was acquired along with Marcon, which applies coatings to architectural and residential building glass, and was merged into Viracon's operations. Beginning in March 1996, Marcon and Viratec were consolidated with our other majority-owned business units. Through fiscal 1996, our 50% equity in Marcon's and Viratec's net earnings was included in the Consolidated Results of Operations under the caption "Equity in net earnings of affiliated companies."
In January 1997, we agreed to pay our 50% joint venture partner (JV Partner) $41 million for its interest in Marcon/Viratec and certain leased assets. This agreement also included the irrevocable release of both parties from all outstanding claims related to the litigation as described hereafter. In November 1995, our 50% JV Partner in Marcon/Viratec commenced litigation against us, alleging claims for damages and seeking to have the Court order us to sell our 50% interest to the JV Partner. We filed counterclaims seeking to have the JV Partner's 50% interest sold to us. In March 1996, the Court ordered the JV Partner to sell the shares of stock representing its 50% interest in Marcon/Viratec to us upon payment by us of fair value for those shares as determined by the Court after further proceedings. As a result of the Court order, the JV Partner's rights and status as shareholder and directors were terminated and Marcon/Viratec was consolidated in our financial statements beginning in the first quarter of fiscal 1997. The JV Partner's claims against us for damages were still pending and the Court also was considering a motion brought by the JV Partner to add a claim for punitive damages until agreement was reached by the parties in January 1997.
GT improved net sales and earnings for the fifth consecutive year, exceeding fiscal 1996's record results. Net sales rose 28%, while operating income improved 21% to $19.9 million. The net sales increase was due to continued strong demand and firm pricing for its fabricated architectural glass products and the addition of net sales from the acquired Viratec unit. While the segment contributed 20% of consolidated net sales, it provided 43% of our consolidated operating income.
Viracon experienced continued strong demand for its architectural glass products. This unit ran at or near full capacity for most of the year. Viracon's operating income grew 21%. Further production capacity was added in 1997 and additional increases were planned for 1998.
Tru Vue posted marginally improved net sales and operating income in fiscal 1997. These results occurred against a backdrop of soft industry net sales. The unit was successful in controlling costs and made progress toward integrating its matboard operations with its picture-framing glass business.
On a pro forma basis, Viratec saw its net sales fall 9%, although year-end activity reflected high incoming order rates. In fiscal 1997, industry pricing pressure for its flat glass coated products and the unit's inability to reach operating profitability for its direct-coat business combined to reduce operating income when compared to fiscal 1996. At March 1, 1997, Viratec's backlog of $17 million was more than double the prior year's $8 million year-end backlog.
AUTO GLASS (AG) reported modestly improved results in fiscal 1997. The segment net sales grew 13% during the year despite intense competition and lower unit movement in the replacement auto glass industry. Operating income increased 12%. This increase resulted mainly from the above-mentioned increase in net sales, which more than offset the increase in information systems and marketing expense associated with the segment's drive to expand market coverage and develop new services to meet customers' needs. AG, which operates retail stores under the Harmon AutoGlass (Harmon) name and distribution centers under the Glass Depot name, possessed the third-largest market share in the auto glass repair and replacement industry during fiscal 1997.
Insurance companies continued to prefer vendors who could expedite claims processing and other administrative efforts related to auto glass replacement and repair. The segment's significant investment in information systems provided Harmon the means to offer comprehensive claims processing and management services to these customers on a nationwide basis.
Curvlite, AG's auto glass fabricator, increased net sales in fiscal 1997 by 32%. The unit's National Distribution Center, which in fiscal 1996 began to offer other manufacturers' products as well as its own for both domestic and foreign vehicles, and AutoGlass Express program, a new delivery system which allowed Curvlite to fill customer orders more quickly and completely, accounted for much of the unit's net sales growth. About 63% of Curvlite's net sales were made to Glass Depot units.
In January 1997, Harmon completed its acquisition of Portland Glass, a 46-location auto glass replacement chain operating in the Northeast U.S. This acquisition, combined with other locations added during the year, increased the number of locations to 319 Harmon retail locations and 66 Glass Depot distribution centers. At March 1, 1997, AG also had 8 Midas Muffler franchises.
BUILDING PRODUCTS & SERVICES (BPS) posted its first operating profit in five years in fiscal 1997, recording earnings of $5.6 million. Overall net sales were flat compared to a year earlier. Higher net sales by our Detention & Security, Full Service and Architectural Products units were offset by lower domestic curtainwall net sales and the absence of net sales from the Nanik Window Coverings businesses sold in fiscal 1996. Overseas net sales grew marginally for the year. Other than the segment's European operations, each of BPS' operating units recorded solid operating earnings improvement compared to fiscal 1996. Harmon, Ltd., BPS' domestic and international curtainwall unit, experienced flat results as the domestic and Asian operations' improved earnings were offset by a large operating loss in Europe. The European loss reflected high-risk projects taken and executed at unacceptably low margins. The improvement in operating earnings by our domestic and Asian curtainwall units was achieved through overhead and operating cost reductions, and improved management of projects.
The segment's Full Service unit had another solid year, generating 6% higher net sales and healthy operating income. The Detention & Security unit reported 38% higher net sales and significantly greater income in fiscal 1997. However, its fiscal 1997 year-end backlog was down 19% from a year earlier. The Architectural Products unit leveraged its higher net sales into sharply higher profitability as the unit improved its engineering and fabrication productivity.
At the end of fiscal 1997, BPS' backlog was $315 million, which represented almost 88% of the consolidated total.
LIQUIDITY AND CAPITAL RESOURCES FINANCIAL CONDITION NET CASH PROVIDED BY FINANCING ACTIVITIES In May 1998, we obtained a five-year, committed secured credit facility in the amount of $275 million. This new credit facility requires us to maintain minimum levels of net worth and certain financial ratios. This facility replaced a $150 million five-year, multi-currency committed credit facility which had been obtained in May 1996. This previous credit facility also required us to maintain minimum levels of net worth and certain financial ratios. As a result of our losses and exit charges relating to our international curtainwall businesses in fiscal 1998, we were not in compliance with certain financial covenants of the previous credit facility. As we are in compliance with all of the financial covenants of the new credit facility, all bank borrowings at February 28, 1998 were classified as long-term debt.
Long-term debt, including current installments of $1.7 million, stood at $153.6 million at February 28, 1998, up $24.3 million from a year earlier. Most of the Company's long-term debt consisted of bank borrowings. The additional borrowings were required to finance capital spending and the repurchase of common stock under the Company's share repurchase program.
For fiscal 1999, we expect outstanding borrowings will increase to fund the amount by which estimated capital spending and dividend requirements exceed the anticipated cash flow from operations. We believe efforts to reduce working capital relative to net sales growth plus our available credit facilities will enable us to maintain adequate liquidity.
NET CASH PROVIDED BY OPERATING ACTIVITIES Cash provided by operating activities in fiscal 1998 fell to $34.0 million from $41.6 million in fiscal 1997. The decrease primarily reflected lower net earnings, which were partly offset by favorable changes in working capital. Net receivables dropped $28.2 million, primarily reflecting lower receivables in our remaining curtainwall operations, after accounting for the effect of removing European curtainwall operations from Apogee's consolidation. Receivables growth at AG, GT and BPS' noncurtainwall businesses generally tracked sales growth in the last quarter of the fiscal year. Most of our $5.8 million increase in inventories was due to GT, reflecting the segment's higher activity level. The change in costs and earnings in excess of billings was essentially offset by the change in billings in excess of costs and earnings on uncompleted contracts. Accounts payable changed nominally after accounting for the removal of European curtainwall operations from consolidation. Year-end accrued expenses were $48.6 million higher than a year earlier, mainly due to accruals associated with the nonrecurring charges recorded during the year.
NET CASH USED IN INVESTING ACTIVITIES New capital investment in fiscal 1998 totaled $39.0 million, versus $86.2 million and $29.0 million in fiscal 1997 and 1996, respectively. Additions to property, plant and equipment totaled $38.2 million, and consisted primarily of
expenditures for manufacturing equipment, facility expansion and upgrading of information systems throughout the Company. The AG segment completed four small acquisitions of retail auto glass replacement stores for $0.8 million.
In fiscal 1999, we intend to invest an estimated $100 million in capital expenditures, primarily in our GT businesses. GT plans include expenditures for the construction of an architectural glass fabrication facility in Statesboro, Georgia, a new Tru Vue facility in Chicago, Illinois and the move of Viratec's Optium cathode ray tube coating line to a new location.
SHAREHOLDERS' EQUITY At February 28, 1998, Apogee's shareholders' equity stood at $109.6 million, down 36% from a year ago. Our net loss, dividends paid, and the repurchase of common stock primarily accounted for the decrease slightly offset by the effect of common stock issued in connection with our stock-based compensation plans. Apogee pays a quarterly dividend of 5.0 cents per share. For the year, the Company repurchased 933,000 shares of common stock for $13.5 million, while issuing 504,000 common shares under its stock-based incentive plans. In February 1998, our Board of Directors authorized the repurchase of up to an additional 1,000,000 shares of the Company's common stock.
IMPACT OF INFLATION Our financial statements are prepared on a historical cost basis, which does not completely account for the effects of inflation. However, since the cost of many of our inventories is determined using the last-in, first-out (LIFO) method of accounting, cost of sales, except for depreciation expense included therein, generally reflects current costs.
Year-end prices were essentially unchanged from a year ago for the cost of glass, one of our primary raw materials. We expect the cost of glass to remain essentially unchanged in fiscal 1999. Aluminum prices at year end were slightly lower than a year ago. While our construction and supply contracts are at fixed prices, the material components are usually based on firm quotes obtained from suppliers. Labor cost increases, including taxes and fringe benefits, rose moderately in fiscal 1998 and a moderate increase also can be reasonably anticipated for fiscal 1999. Other costs are managed to minimize the inflationary pressures that exist in markets for goods and services our business operations require.
IMPACT OF YEAR 2000 We are reviewing the potential impact of the "Year 2000" date change which involves the inability of certain software and systems to properly recognize and process date information relating to the Year 2000. We have assigned a team to evaluate the nature and extent of the work required to make our systems, products and infrastructure Year 2000 compliant. A number of existing systems projects are either underway or under review within our various business units to incorporate Year 2000 compliance, the cost of which has not been determined. We continue to evaluate the estimated costs associated with our efforts to ensure that our systems, products and infrastructure are Year 2000 compliant. While these on-going efforts will involve additional costs, we believe, based on available information, that we are and will continue to effectively manage our Year 2000 transition without any material adverse effect on our business, results of operations or financial condition.
CAUTIONARY STATEMENT This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of factors should be considered in conjunction with the report's forward-looking statements, including changes in economic and market conditions, factors related to competitive pricing, commercial building market conditions, management of growth or restructuring of business units, expected cost savings from the restructuring cannot be fully realized or realized within the expected timeframe, net sales following the restructuring are lower than expected, costs or difficulties related to the operation of the businesses or execution of restructuring or exit activities are greater than expected, the impact of foreign currency markets, the integration of acquisitions, the realization of expected economies gained through expansion and information systems technology and other factors as set forth in the cautionary statements included in Exhibit 99 to our 10-K filed with the Securities and Exchange Commission.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section of this report. See "Index of Financial Statements and Schedules".
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III --------
ITEMS 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by these Items, other than the information set forth in Part I above in "Executive Officers of the Registrant," is included on pages 1 to 5 and 10 to 12 of the Proxy Statement for the Annual Meeting of Shareholders to be held June 23, 1998, which is incorporated herein by reference.
PART IV -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Financial Statement Schedules -
The consolidated financial statements and schedules of the Registrant listed in the accompanying "Index of Financial Statements and Schedules" together with the report of KPMG Peat Marwick LLP, independent auditors, are filed as part of this report.
(b) Reports on Form 8-K
During the quarter ended February 28, 1998, two reports on Form 8-K dated January 12, 1998 and February 27, 1998 were filed.
(c) Exhibits -
The information called for by this Item is contained in a separate section of this report. See "Exhibit Index".
- 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.
Date: May 29, 1998 APOGEE ENTERPRISES, INC.
By: /s/ Donald W. Goldfus ----------------------------- Donald W. Goldfus Chairman of the Board of Directors
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 --------- ----- ---- /s/ Donald W. Goldfus Chairman of the Board of Directors 5-29-98 - ---------------------------------
Donald W. Goldfus
/s/ Russell Huffer President and CEO, Director 5-29-98 - --------------------------------- Russell Huffer
/s/ Harry A. Hammerly Director 5-29-98 - --------------------------------- Harry A. Hammerly
/s/ Laurence J. Niederhofer Director 5-29-98 - --------------------------------- Laurence J. Niederhofer
/s/ James L. Martineau Executive Vice President, Director 5-29-98 - --------------------------------- James L. Martineau
/s/ D. Eugene Nugent Director 5-29-98 - --------------------------------- D. Eugene Nugent
/s/ Barbara B. Grogan Director 5-29-98 - --------------------------------- Barbara B. Grogan
SIGNATURE TITLE DATE --------- ----- ---- /s/ Stephen C. Mitchell Director 5-29-98 - --------------------------------- Stephen C. Mitchell
/s/ Jerome B. Cohen Director 5-29-98 - --------------------------------- Jerome B. Cohen
/s/ Michael E. Shannon Director 5-29-98 - --------------------------------- Michael E. Shannon
EXHIBIT INDEX
Exhibit (3A) Restated Articles of Incorporation Incorporated by reference to Exhibit 3A to Registrant's Annual Report on Form 10-K for year ended February 27, 1988.
Exhibit (3B) Restated By Laws of Apogee Enterprises, Inc., as amended to date. Incorporated by reference to Exhibit 3C to Registrant's Annual Report on Form 10-K for year ended February 29, 1992.
Exhibit (4A) Specimen certificate for shares of common stock of Apogee Enterprises, Inc. Incorporated by reference to Exhibit 4A to Registrant's Annual Report on Form 10-K for year ended February 29, 1992.
Exhibit (10A) Deferred Incentive Compensation Plan dated February 27, 1986 between Registrant and certain executive officers. Incorporated by reference to Exhibit 10N to Registrant's Annual Report on Form 10-K for year ended March 1, 1986.
Exhibit (10B) Amended and Restated 1987 Apogee Enterprises, Inc. Partnership Plan is incorporated by reference to Registrant's S-8 registration statement (File No. 33-60400)
Exhibit (10C) Rights Agreement between Registrant and American Stock Transfer Co. dated October 19, 1990. Incorporated by reference to Registrant's Form 8-A on October 19, 1990.
Exhibit (10D) Consulting Agreement between Registrant and Laurence J. Niederhofer dated November 1, 1993. Incorporated by reference to Exhibit 10I to Registrant's Annual Report on Form 10-K for year ended February 26, 1994.
Exhibit (10E) Employment Agreement between Registrant and Richard Gould dated May 23, 1994. Incorporated by reference to Exhibit 10I to Registrant's Annual Report on Form 10-K for year ended February 25, 1995.
Exhibit (10F) 1987 Apogee Enterprises, Inc. Stock Option Plan is incorporated by reference to Registrant's S-8 registration statement (File No. 33-35944)
Exhibit (10G) $275 million Multi-currency Credit Agreement dated as of May 21, 1998 between Apogee Enterprises, Inc. and banks party to the agreement, including related security, pledge, contribution and subsidiary guaranty agreements.
Exhibit (10H) 1997 Omnibus Stock Incentive Plan is incorporated by reference to Registrant's S-8 registration statement (File No. 333-32437)
Exhibit (21) Subsidiaries of the Registrant
Exhibit (23) Consent of KPMG Peat Marwick LLP
Exhibit (27) Financial Data Schedule (EDGAR filing only)
Exhibit (99) Litigation Reform Act of 1995 - Cautionary Statement
Apogee Enterprises, Inc. Form 10-K Items 8, 14 (a) and 14 (d)
Index of Financial Statements and Schedules
Financial Statements Independent Auditors' Report............................................F-2 Consolidated Balance Sheets.............................................F-3 Consolidated Results of Operations......................................F-4 Consolidated Statements of Shareholders' Equity.........................F-5 Consolidated Statements of Cash Flows...................................F-6 Notes to Consolidated Financial Statements..............................F-7
Financial Schedules Schedule II - Valuation and Qualifying Accounts.........................F-19
All other schedules are omitted because they are not required, or because the required information is included in the consolidated financial statements or noted thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Apogee Enterprises, Inc.:
We have audited the consolidated financial statements of Apogee Enterprises, Inc. and subsidiaries as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Apogee Enterprises, Inc. and subsidiaries as of February 28, 1998 and March 1, 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended February 28, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota April 8, 1998, except as to Note 6 which is as of May 22, 1998
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
PRINCIPLES OF CONSOLIDATION Our consolidated financial statements include the accounts of Apogee and all majority-owned subsidiaries except, for fiscal 1998 only, for our formerly 70%-owned European operations. In March 1998, in accordance with a February 26, 1998 resolution of our Board of Directors, five operating companies comprising our European curtainwall operations filed for bankruptcy or commercial liquidation, effectively relinquishing our control over those entities. Accordingly, such entities were deconsolidated and net operating results were included as a single component in our 1998 Consolidated Results of Operations under the caption "Unusual items" and the net liability was included in accrued expenses in our Consolidated Balance Sheet. We use the equity method to account for 50%-owned joint ventures. Intercompany transactions have been eliminated. Certain amounts from prior-years' financial statements have been reclassified to conform with this year's presentation.
CASH AND CASH EQUIVALENTS Investments with an original maturity of three months or less are included in cash and cash equivalents.
INVENTORIES Inventories, which consist primarily of purchased glass and aluminum, are valued at the lower of cost or market. Approximately 47% of the inventories are valued by use of the last-in, first-out (LIFO) method, which does not exceed market. If the first-in, first-out (FIFO) method had been used for all inventories, our inventories would have been $3,000,000 and $2,615,000 higher than reported at February 28, 1998 and March 1, 1997, respectively.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Significant improvements and renewals are capitalized. Repairs and maintenance are charged to expense as incurred. Depreciation is computed on a straight-line basis, based on estimated useful lives of 20 to 40 years for buildings and 2 to 15 years for equipment.
INTANGIBLE ASSETS AND AMORTIZATION Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill) and are amortized on a straight-line basis, primarily over 40 years. The carrying value of intangible assets is reviewed when circumstances suggest that it has been impaired. If this review indicates that intangible assets will not be recoverable based on the estimated undiscounted cash flows over the remaining amortization period, the carrying value of intangible assets must be reduced to estimated fair value. Amortization expense amounted to $2,011,000, $1,503,000 and $665,000 in 1998, 1997 and 1996, respectively.
INSURANCE SUBSIDIARY We established a wholly-owned insurance subsidiary, Prism Assurance, Inc. (Prism), in 1996 to insure our workers' compensation, general liability and automobile liability risks. Prism invests in fixed maturity investments which we classify as "available-for-sale" and are carried at market value as prescribed by Statement of Financial Accounting Standards (SFAS) No. 115. Reserve requirements are established based on actuarial projections of ultimate losses. Apogee also has accruals for losses incurred prior to Prism's formation. Losses estimated to be paid within twelve months are classified as accrued expenses, while losses expected to be payable in later periods are included in other long-term liabilities.
NET SALES RECOGNITION We recognize net sales from construction contracts on a percentage-of-completion basis, measured by the percentage of costs incurred to date to estimated total costs for each contract. Contract costs include materials, labor, project management and other direct costs related to contract performance. We establish provisions for estimated losses, if any, on uncompleted contracts in the period in which such losses are determined. Amounts representing contract change orders, claims or other items are included in net sales only when they have been approved by our customers. Net sales from the sale of products and the related cost of sales are recorded upon shipment.
INCOME TAXES We account for income taxes as prescribed by SFAS No. 109, which requires use of the asset and liability method. This method recognizes deferred tax assets and liabilities based upon the future tax consequences of temporary differences between financial and tax reporting.
EARNINGS PER SHARE We compute basic and diluted earnings per share as prescribed by SFAS No. 128 as described below under the caption NEW ACCOUNTING STANDARDS. Share figures reflect the two-for-one stock split effective February 1997.
FOREIGN OPERATIONS The financial statements of foreign operations have been translated to U.S. dollars, using the rules of SFAS No. 52. Balance sheet accounts are stated in U.S. dollars, generally at the year-end exchange rate. Results of operations are translated at average exchange rates for the respective period.
We periodically enter into forward currency exchange contracts to manage specific foreign currency exposures related to foreign construction contracts, receivables, and bank borrowings denominated in foreign currencies. As of February 28, 1998, we had forward contracts maturing in 1999 with a value of approximately $25.6 million. Gains and losses on forward contracts related to receivables are recognized currently, while gains and losses related to construction projects are deferred and accounted for as a part of the related transaction.
ACCOUNTING PERIOD Our fiscal year ends on the Saturday closest to February 28. Fiscal year 1998 and 1997 consisted of fifty-two weeks and 1996 was fifty-three weeks.
ACCOUNTING ESTIMATES The preparation of our consolidated 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 consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Amounts subject to significant estimates and assumptions include, but are not limited to, insurance reserves and net sales recognition for construction contracts, including the status of outstanding disputes and claims. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, EARNINGS PER SHARE, which simplifies the standards for computing earnings per share. SFAS No. 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share, which excludes dilution. SFAS No. 128 also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures, and requires a reconciliation. Diluted earnings per share is computed similarly to fully diluted earnings per share pursuant to APB No. 15. SFAS No. 128 was required for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application was not permitted. Accordingly, we adopted SFAS No. 128 in the fourth quarter of 1998. SFAS No. 128 requires restatement of all prior-period earnings-per-share data presented. The adoption of SFAS No. 128 did not have a material impact on the Company's financial statement disclosures.
In February 1997, the FASB issued SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURES, which was adopted by us in the fourth quarter of 1998. SFAS No. 129 requires companies to disclose certain information about their capital structure. SFAS No. 129 did not have a material impact on our financial statement disclosures.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards for reporting and display of comprehensive income and its components (net sales, expenses, gains, and losses) in a full set of general-purpose financial statements. We will adopt SFAS No. 130 in 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports net sales. Management has not yet evaluated the effects of this change on its reporting of segment information. We will adopt SFAS No. 131 in 1999.
2. RECEIVABLES
(In thousands) 1998 1997 - -------------------------------------- ------------ ----------- Trade accounts $ 89,924 $ 78,991 Construction contracts 35,244 86,709 Contract retainage 25,271 32,609 Other receivables 1,633 13,247 - -------------------------------------- ------------ ----------- Total receivables 152,072 211,556 Less allowance for doubtful accounts (6,951) (7,297) - -------------------------------------- ------------ ----------- Net receivables $145,121 $ 204,259 ====================================== ============ ===========
We provide products and services to the commercial and institutional new construction and remodeling markets, the automotive replacement glass market and selected consumer markets. We do not believe a concentration of credit risk exists, due to the diversity of our markets and channels of distribution, and the geographic location of our customers. Allowances are maintained for potential credit losses and such losses have been within management's expectations. The provision for bad debt expense was $1,428,000, $2,917,000 and $1,983,000 in 1998, 1997 and 1996, respectively.
3. INVENTORIES
(In thousands) 1998 1997 - -------------------------------------- ------------ ---------- Raw materials $20,017 $14,760 Work-in process 4,749 3,863 Finished 39,417 39,638 - -------------------------------------- ------------ ---------- Total inventories $64,183 $58,261 ====================================== ============ ==========
4. PROPERTY, PLANT AND EQUIPMENT
(In thousands) 1998 1997 - -------------------------------------- ------------ ---------- Land $ 2,686 $ 2,488 Buildings and improvements 66,274 58,358 Machinery and equipment 130,938 115,026 Office equipment and furniture 54,720 44,431 Construction in progress 9,506 22,975 - -------------------------------------- ------------ ---------- Total property, plant and 264,124 243,278 equipment Less accumulated depreciation (134,187) (124,479) - -------------------------------------- ------------ ---------- Net property, plant and $129,937 $118,799 equipment ====================================== ============ ==========
Depreciation expense was $21,979,000, $18,955,000 and $15,863,000 in 1998, 1997 and 1996, respectively.
5. ACCRUED EXPENSES
(In thousands) 1998 1997 - -------------------------------------- ---------- ------------ Payroll and related benefits $22,088 $25,263 Insurance 13,677 10,956 Taxes, other than income taxes 4,612 8,643 Pension 5,377 4,192 Interest 1,205 2,091 Costs and expenses related to exit from 47,163 -- European curtainwall operations Other 14,771 10,290 - -------------------------------------- ---------- ------------ Total accrued expenses $108,893 $61,435 ====================================== ========== ============
6. LONG-TERM DEBT
(In thousands) 1998 1997 - -------------------------------------- ------------ ------------ Borrowings under revolving credit and other bank agreements, interest ranging from 3.77% to $150,503 $124,500 8.50% Other 3,143 4,847 - -------------------------------------- ------------ ------------ Total long-term debt 153,646 129,347 Less current installments (1,679) (1,707) - -------------------------------------- ------------ ------------ Net long-term debt $151,967 $127,640 ====================================== ============ ============
Long-term debt maturities are as follows:
FISCAL YEAR (In thousands) - ------------------------------- -------------------- 1999 $ 1,679 2000 1,082 2001 182 2002 100 2003 150,603 Thereafter -- - ------------------------------- -------------------- Total $153,646 =============================== ====================
In May 1998, we obtained a five-year, committed secured credit facility in the amount of $275 million. This new credit facility requires us to maintain minimum levels of net worth and certain financial ratios. This facility replaced a $150 million five-year, multi-currency committed credit facility which had been obtained in May 1996. This previous credit facility also required us to maintain minimum levels of net worth and certain financial ratios. As a result our losses and exit charges relating to our international curtainwall businesses in fiscal 1998, we were not in compliance with certain financial covenants of the previous credit facility. As we are in compliance with all of the financial covenants of the new credit facility, all bank borrowings under the revolving credit agreement at February 28, 1998 were classified as long-term debt.
We also had access to short-term credit on an uncommitted basis with several major banks. At February 28, 1998 and March 1, 1997, respectively, $24.9 million and $10.0 million in bank borrowings were outstanding under these agreements. We may refinance these short-term borrowings on a long-term basis under the revolving credit agreements discussed above. Accordingly, our short-term bank borrowings, which were not expected to be paid within one year, were classified as long-term debt. The interest rate on the year-end bank borrowings under uncommitted credit facilities was 6.0%.
Selected information related to bank borrowings is as follows:
(Dollar amounts in thousands) 1998 1997 - ----------------------------------------- ----------- ------------ Average daily borrowings during the year $133,158 $ 79,420 Maximum borrowings outstanding during 158,294 126,400 the year Weighted average interest rate during 5.6% 6.1% the year ========================================= =========== ============
In 1998 and 1996, we entered into interest rate swap agreements that effectively converted a portion of our variable rate borrowings into fixed rate obligations. Under these agreements, which expire in 2001, we receive payments at variable rates while we make payments at fixed rates ranging from 5.7% to 6.3%. The net interest paid or received is included in interest expense. The amount of borrowings effectively converted at February 28, 1998 and March 1, 1997 was $70 million and $20 million, respectively.
In 1992, we entered into three interest rate swap agreements that effectively converted $25 million of our fixed rate, long-term borrowings into variable rate obligations. During 1993, we sold two of the swap agreements at net gains. The gains were recognized as reductions in interest expense through 1997. The third agreement expired in 1995.
The net book value of property and plant pledged as collateral under industrial development bonds was approximately $1.1 million at February 28, 1998.
7. INTEREST AND OTHER EXPENSE, NET
(In thousands) 1998 1997 1996 - ------------------------------ ---------- ---------- --------- Interest on debt $ 8,986 $ 6,713 $ 6,747 Other interest expense 460 1,367 273 - ------------------------------ ---------- ---------- --------- Total interest expense 9,446 8,080 7,020 Less interest income (2,112) (1,116) (1,323) - ------------------------------ ---------- ---------- --------- Interest expense, net $ 7,334 $ 6,964 $ 5,697 ============================== ========== ========== =========
Interest payments were $ 8,223,000, $6,180,000 and $7,095,000 in 1998, 1997 and 1996, respectively.
In 1996, other expense, net, consisted of charges totaling $4.3 million primarily related to write-off of a minority investment in a research and development venture and an adjustment to our insurance reserves, offset by the $4.2 million gain from the sale of the Nanik Window Coverings unit discussed in Note 12.
8. SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS
During 1997, the Board of Directors approved a two-for-one stock split, in the form of a 100% stock dividend, payable to shareholders in February 1997. All share and per share data have been restated accordingly.
A class of 200,000 shares of junior preferred stock with a par value of $1.00 is authorized, but unissued.
We have a Shareholders' Rights Plan, under which each share of our outstanding common stock has an associated preferred share purchase right. The rights are exercisable only under certain circumstances, including the acquisition by a person or group of 10% of the outstanding shares of the Company's common stock. Upon exercise, the rights would allow holders of such rights to purchase common stock of Apogee or an acquiring company at a discounted price, which generally would be 50% of the respective stock's current fair market value.
The 1997 Stock Option Plan and 1987 Stock Option Plan (the "Plans") each provide for the issuance of up to 2,500,000 options to purchase Company stock. Options awarded under these Plans, either in the form of incentive stock options or nonstatutory options, are exercisable at an option price equal to the fair market value at the date of award. The 1987 Plan has expired and no new grants of stock options may be made under this Plan.
The 1987 Partnership Plan, a Plan designed to increase the ownership of Apogee stock by key employees, allows participants selected by the Compensation Committee of the Board of Directors to use earned incentive compensation to purchase Apogee common stock. The purchased stock is then matched by an equal award of restricted stock, which vests over a predetermined period. 2,200,000 common shares are authorized for issuance under the Plan. As of February 28, 1998, 1,937,000 shares have been issued under the Plan. We expensed $1,141,000, $2,145,000 and $666,000 in conjunction with the Partnership Plan in1998, 1997 and 1996, respectively.
A summary of option transactions under the Plans for 1998, 1997 and 1996 follows:
OPTIONS OUTSTANDING NUMBER OF AVERAGE OPTION PRICE SHARES EXERCISE PRICE RANGE - ----------------------------- ------------ -- ---------------- -- -------------- Balances, February 25, 1995 1,156,000 $ 6.00 $ 4.48- 9.46 Options granted 490,000 8.64 7.25- 8.80 Options exercised (174,000) 6.52 5.38- 8.13 Options canceled (68,000) 5.94 5.38- 7.94 - ----------------------------- ------------ -- ---------------- -- --------------
Balances, March 2, 1996 1,404,000 6.87 4.48- 9.46 Options granted 587,000 15.08 10.50-17.75 Options exercised (368,000) 5.83 5.38- 8.69 Options canceled (22,000) 7.53 5.38-15.06 - ----------------------------- ------------ -- ---------------- -- --------------
Balances, March 1, 1997 1,601,000 10.11 4.48-17.75 Options granted 485,000 16.09 11.31-25.00 Options exercised (372,000) 6.86 5.38-16.50 Options canceled (230,000) 12.38 5.38-16.75 - ----------------------------- ------------ -- ---------------- -- -------------- Balances, February 28, 1998 1,484,000 $12.53 4.48-25.00 - ----------------------------- ------------ -- ---------------- -- --------------
The following table summarizes information about stock options outstanding and exercisable at February 28, 1998.
We have adopted the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost has been recognized with respect to our 1987 Stock Option Plan. Had compensation cost for the Plan been determined based on the fair value methodology prescribed by SFAS 123, our net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
(In thousands, except per 1998 1997 1996 share data) - -------------------------------- --------- --------- --------- Net earnings (loss) - as ($51,055) $26,220 $17,835 reported Net earnings (loss) - pro forma (53,001) 25,221 17,493 Earnings (loss) per share diluted (1.84) 0.93 0.65 - as reported Earnings (loss) per share diluted (1.91) 0.90 0.64 - pro forma ================================ ========= ========= =========
The above pro forma amounts may not be representative of the effects on reported net earnings (loss) for future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996:
1998 1997 1996 - -------------------------------- --------- ---------- ---------- Dividend yield 1.2% 1.1% 1.5% Expected volatility 60.0% 60% 60% Risk-free interest rate 7.0% 7.0% 6.0% Expected lives 10 years 7.5 years 5 years ================================ ========= ========== ==========
9. UNUSUAL ITEMS
During 1998, we recorded a pre-tax charges of $96.1 for unusual items in our Building Products & Services segment. This is presented separately as a component of income from operations in the Consolidated Results of Operations. The amount included nonrecurring charges of $26.0 million and $35.9 million recorded in the third and fourth quarter, respectively, related to our international curtainwall operations. In addition, unusual items included operating losses totaling $34.2 million, representing the net operating results for European curtainwall operations which were deconsolidated as described in Principles of Consolidation in Note 1. A summary of the items included is as follows:
- ------------------------------ ------------- Net operating loss of European $34,243 curtainwall operations Estimated costs associated with exit from European curtainwall, 34,858 including completion of certain projects Estimated loss on construction 13,972 contract, including penalties Estimated costs related to resolution of legal 7,372 proceedings Restructuring activities and 5,686 other - ------------------------------ ------------- Total $96,131 ============================== =============
The $26.0 million charge included amounts for the estimated loss on a disputed construction contracts in Europe, including the accrual of certain penalty amounts, and a provision for the accrual of legal and related costs associated with the resolution of legal proceedings related to organizational changes in its majority-owned European curtainwall unit. In June 1997, the Company reorganized its European management team and, subsequently, several lawsuits were initiated between Apogee and the minority shareholder based on, among other items, allegations of breach of contract and fiduciary duty, and misrepresentation. Restructuring activities involved the closing of the segment's Asian offices and the rationalization of its project management, engineering and European manufacturing capacity. The charge for restructuring included amounts for severance and termination benefits for employees in France, Asia and the US. , the write-down of property and equipment and other long-term assets to their estimated net salable value and other items such as lease termination costs. We reduced manufacturing capacity in France and reduced project management and engineering costs in France and the US.
The $35.9 million charges reflected the estimated costs associated with exiting our European operations, including the completion of certain remaining projects. In March 1998, in accordance with a February 26, 1998 resolution of our Board of Directors, the five operating companies comprising our European curtainwall operations filed for bankruptcy or commenced liquidation, effectively relinquishing control over those entities. Accordingly, the net operating results for European curtainwall operations are included as a single figure as indicated above.
At February 1998, accruals totaling $47.2 million represented the estimated future cash outflows associated with the exit from our European curtainwall operations. These cash expenditures are expected to be made within the next one to two years. The primary component of the accrual relates to the completion of certain remaining projects. Other costs included in the above figure are provisions for severance and termination benefits, and legal and related costs associated with the proceedings noted above.
10. INCOME TAXES
The components of income tax expense (benefit) for each of the last three fiscal years are as follows:
(In thousands) 1998 1997 1996 - ------------------------------ ---------- ---------- --------- Current: Federal $ $ 1,866 $ 6,559 (4,164) State and local (412) 955 910 Foreign -- 1,529 544 - ------------------------------ ---------- ---------- --------- Total current (4,576) 4,350 8,013 - ------------------------------ ---------- ---------- ---------
Deferred: Federal (8,233) 8,547 1,503 State and local (316) 1,605 304 Foreign 700 (700) -- - ------------------------------ ---------- ---------- --------- Total deferred (7,849) 9,452 1,807 - ------------------------------ ---------- ---------- --------- Total income tax expense $(12,425) $ 13,802 $ 9,820 ============================== ========== ========== =========
Income tax payments, net of refunds, were $12,000,000, $11,520,000 and $10,878,000 in 1998, 1997 and 1996, respectively.
The differences between statutory federal tax rates and our consolidated effective tax rates are as follows:
1998 1997 1996 - -------------------------------- ------------ ----------- ----------- Statutory federal tax rate (35.0%) 35.0% 35.0% State and local income taxes, net of federal tax benefit (2.2) 5.1 3.0 Tax credits (1.5) (2.2) (0.5) Foreign items with no tax 1.8 8.3 0.8 benefit Valuation allowance 18.1 -- (0.6) Resolution of Revenue Agent -- (10.8) -- Exams Other, net (1.1) (0.5) (0.8) - -------------------------------- ------------ ----------- ----------- Consolidated effective tax rate (19.9%) 34.9% 36.9% ================================ ============ =========== ===========
Tax benefits for deductions associated with the 1987 Stock Option Plan and the 1987 Partnership Plan were $1,503,000 and $1,445,000 in 1998 and 1997, respectively. These benefits were added directly to additional paid-in capital and were not reflected in the determination of income tax expense.
Deferred tax assets and deferred tax liabilities at February 28, 1998 and March 1, 1997 are as follows:
1998 1997 -------------------------- -------------------------- (In thousands) CURRENT NONCURRENT CURRENT NONCURRENT - ------------------------- ------------ ------------- ------------- ------------ Accounts receivable $2,393 $ -- $2,660 $ -- Accrued insurance -- 3,715 -- 2,991 Deferred compensation (140) 4,071 191 4,447 Restructuring reserve 22,982 6 -- 26 Inventory 1,383 128 1,505 320 Depreciation 143 (6,235) 147 (6,522) Employee benefit plans (1,451) -- (1,451) -- Other 1,108 (3,291) 1,434 3,700 - ------------------------- ------------ ------------- ------------- ------------ 26,418 (1,606) 4,486 4,962 Less valuation allowance (12,200) -- -- (3,872) - ------------------------- ------------ ------------- ------------- ------------ Deferred tax assets (liability) $14,218 $(1,606) $4,486 $1,090 ========================= ============ ============= ============= ============
Our valuation allowance increased by $8,328,000 in 1998 and related primarily to a capital loss carryforward. The valuation allowances at February 28, 1998 and March 1, 1997 reflect amounts for foreign tax credits, general business tax credits, net operating loss carryforwards and capital loss carryforwards.
11. INVESTMENT IN AFFILIATED COMPANIES
We were party to a 1985 joint venture agreement with our 50% partner (JV Partner), forming Marcon Coatings, Inc. and its subsidiary, Viratec Thin Films, Inc. (Marcon/Viratec). The joint venture operated glass coating facilities. In November 1995, the JV Partner commenced litigation against us alleging claims for damages and seeking to have the Court order us to sell our 50% interest in the joint venture to the JV Partner. We filed counterclaims seeking to have the JV Partner's 50% interest sold to us. In March 1996, the Court ordered the JV Partner to sell the shares of stock representing its 50% interest in Marcon/Viratec to us upon payment of fair value for the shares as determined by the Court, or as agreed to by us and the JV Partner. In January 1997, we agreed to a comprehensive settlement of all claims and completed our purchase of the joint venture businesses from the JV Partner. We paid $41 million to the JV Partner for its 50% interest in the businesses and certain leased assets. Both parties agreed to irrevocably release each other from all outstanding claims related to the litigation, other than certain trade accounts payable in the ordinary course of business.
Reflecting the March 1996 Court order, Marcon/Viratec's assets, liabilities and results of operations were included in Apogee's consolidated financial statements beginning in 1997. Through 1996, our 50% ownership investment in Marcon/Viratec was accounted for using the equity method. Our equity in Marcon/Viratec's net earnings for 1996 is included in the accompanying Consolidated Results of Operations. A summary of assets, liabilities and results of operations for Marcon/Viratec for 1996 is presented below:
(In thousands) 1996 - ----------------------------- ------------ Current assets $ 11,950 Noncurrent assets 23,444 Current liabilities 19,098 Noncurrent liabilities 8,602 Net sales 46,297 Gross profit 8,981 Net earnings 1,183 - ----------------------------- ------------
12. EMPLOYEE BENEFIT PLANS
We maintain a qualified defined contribution pension plan that covers substantially all full-time, non-union employees. Contributions to the Plan are based on a percentage of employees' base earnings. We deposit pension costs with the trustee annually. All pension costs were fully funded or accrued as of year end. Contributions to the Plan were $4,344,000, $4,023,000 and $3,687,000 in 1998, 1997 and 1996, respectively.
We also maintain a 401(k) savings plan, which allows employees to contribute 1% to 13% of their compensation. Apogee matches 30% of the first 6% of the employee contributions. Our contributions to the Plan were $1,958,000, $1,805,000 and $1,495,000 in 1998, 1997 and 1996, respectively.
13. ACQUISITIONS AND DIVESTITURES
In 1998, our AutoGlass Segment purchased the assets of 10 retail auto glass stores in four separate transactions. The aggregate purchase price of the acquisitions was $0.8 million, including $0.2 million recorded as goodwill.
In 1997, as indicated in Note 11, we purchased our joint venture partner's 50% interest in Marcon Coatings, Inc. and its subsidiary, Viratec Thin Films, Inc. and certain leased assets. The aggregate purchase price, net of cash acquired, was $40.2 million. Liabilities of $11.8 million were assumed. The purchase price exceeded the fair value of net assets acquired by $34.5 million, which was recorded as goodwill and is being amortized over 40 years.
In 1997, our Auto Glass segment purchased the common stock of a 46-location retail auto glass replacement and repair company. The aggregate purchase price, net of cash acquired, was $10.4 million, consisting of $1.3 million in acquisition related expenditures and 215,000 shares of common stock valued at $9.1 million. Liabilities of $5.9 million were assumed. The purchase price exceeded the fair value of net assets acquired by $9.4 million, which was recorded as goodwill. The Auto Glass segment also made two smaller acquisitions of retail auto glass stores in 1997, purchasing assets for $0.1 million.
In 1996, our Auto Glass segment purchased the assets of 12 retail auto glass stores and one distribution center in five separate transactions. The aggregate purchase price of the acquisitions was $3.8 million, including $0.7 million recorded as goodwill. Promissory notes of $0.5 million were issued in connection with the transactions.
No liabilities were assumed in the 1996 transaction. All of the above transactions were accounted for by the purchase method. Accordingly, our consolidated financial statements include the net assets and results of operations from the dates of acquisition.
In 1996, we sold selected assets and liabilities of the Nanik Window Coverings unit (Nanik) for $17.6 million, realizing a $4.2 million gain included in "Other expense, net" in the accompanying Consolidated Results of Operations. Nanik accounted for less than 4% of consolidated net sales in 1996.
14. LEASES
As of February 28, 1998, we were obligated under noncancelable operating leases for buildings and equipment. Certain leases provide for increased rentals based upon increases in real estate taxes or operating costs. Future minimum rental payments under noncancelable operating leases are:
FISCAL YEAR (In thousands) - ------------------------------------ ---------------- 1999 $ 12,593 2000 9,950 2001 6,696 2002 4,688 2003 3,489 Thereafter 5,142 - ------------------------------------ ---------------- Total minimum payments $ 42,558 ==================================== ================
Total rental expense was $27,484,000, $23,551,000 and $22,155,000 in 1998, 1997 and 1996, respectively.
15. COMMITMENTS AND CONTINGENT LIABILITIES
We have ongoing letters of credit related to our risk management programs, construction contracts and certain industrial development bonds. The total value of letters of credit under which we are obligated as of February 28, 1998 was approximately $ 16,328,000. We have entered into a number of noncompete agreements. As of February 28, 1998, we were committed to make future payments of $3,613,000 under such agreements.
We have been a party to various legal proceedings incidental to our normal operating activities. In particular, like others in the construction industry, our construction business is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages. Although it is impossible to predict the outcome of such proceedings, we believe, based on facts currently available to us, that none of such claims will result in losses that would have a material adverse effect on our financial condition.
16. FAIR VALUE DISCLOSURES
Estimated fair values of our financial instruments at February 28, 1998 and March 1, 1997 are as follows:
CARRYING AMOUNT ESTIMATED FAIR VALUE (In thousands) 1998 1997 1998 1997 - ------------------------------ ---------- --------- ---------- ---------- Long-term debt including current installments $153,646 $129,347 $153,629 $129,305 Interest rate swap agreements in a net -- -- 648 93 payable position ============================== ========== ========= ========== ==========
Estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, judgment is required in developing the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.
For cash and cash equivalents, receivables, marketable securities and accounts payable, carrying value is a reasonable estimate of fair value. The carrying value of long-term debt that has variable interest rates is a reasonable estimate of fair value. For long-term debt with fixed interest rates, fair value is based on discounted projected cash flows using the rate at which similar borrowings could currently be made. The fair value of interest rate swaps is the difference between the present value of our future interest obligation at a fixed rate and the counterparty's obligation at a floating rate.
17. EARNINGS PER SHARE
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share.
(In thousands) 1998 1997 1996 - -------------------------------- ----------- ----------- ----------- Basic earnings per share - weighted common shares 27,795 27,384 26,975 outstanding Weighted common shares assumed -- 673 283 upon exercise of stock option - -------------------------------- ----------- ----------- ----------- Diluted earnings per share - weighted common shares and common shares equivalent 27,795 28,057 27,258 outstanding ================================ =========== =========== ===========
18. QUARTERLY DATA (UNAUDITED)
(Dollar amounts in thousands, except per share data)
NET SALES QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $223,851 $228,608 $219,032 Second 246,015 253,154 222,186 Third 235,021 228,781 215,487 Fourth 207,944 240,234 214,442 - ------------------------------ ---------- ----------- ---------- Total $912,831 $950,777 $871,147 - ------------------------------ ---------- ----------- ---------- GROSS PROFIT QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $ 46,889 $ 36,387 $ 31,925 Second 60,435 42,316 31,824 Third 51,638 40,117 28,264 Fourth 20,439 32,981 26,510 - ------------------------------ ---------- ----------- ---------- Total $179,401 $151,801 $118,523 - ------------------------------ ---------- ----------- ---------- NET EARNINGS (LOSS) QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $ 6,774 $ 4,976 $ 3,481 Second 9,657 7,980 5,646 Third (10,435) 7,602 5,172 Fourth (57,051) 5,662 3,536 - ------------------------------ ---------- ----------- ---------- Total $ (51,055) $ 26,220 $ 17,835 - ------------------------------ ---------- ----------- ---------- EARNINGS (LOSS) PER SHARE BASIC* QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $ 0.24 $ 0.18 $ 0.13 Second 0.35 0.29 0.21 Third (0.37) 0.28 0.19 Fourth (2.06) 0.20 0.13 - ------------------------------ ---------- ----------- ---------- Total $ (1.84) $ 0.96 $ 0.66 - ------------------------------ ---------- ----------- ---------- EARNINGS (LOSS) PER SHARE DILUTED* QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $ 0.24 $ 0.18 $ 0.13 Second 0.34 0.28 0.21 Third (0.37) 0.27 0.19 Fourth (2.06) 0.20 0.13 - ------------------------------ ---------- ----------- ---------- Total $ (1.84) $ 0.93 $ 0.65 - ------------------------------ ---------- ----------- ----------
*Per share data adjusted to reflect the fiscal 1997 stock dividend.
19. BUSINESS SEGMENTS DATA
(In thousands) NET SALES 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $227,203 $192,827 $150,457 Auto glass 347,191 307,935 273,133 Building products & services 348,892 460,714 462,102 Intersegment elimination (10,455) (10,699) (14,545) - ------------------------------------------------------------------------- Net sales $912,831 $950,777 $871,147 - -------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $ 27,330 $ 19,908 $ 16,431 Auto glass 15,046 20,149 18,069 Building products & services (96,433) 5,557 (2,073) Corporate and other (1,210) 882 30 - ------------------------------------------------------------------------- Operating income (loss) $(55,267) $46,496 $32,457 - -------------------------------------------------------------------------
IDENTIFIABLE ASSETS 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $150,044 $132,005 $ 67,606 Auto glass 127,950 123,804 108,342 Building products & services 110,468 199,050 172,019 Corporate and other 75,659 46,105 38,169 - ------------------------------------------------------------------------- Total $464,121 $500,964 $386,136 - -------------------------------------------------------------------------
CAPITAL EXPENDITURES 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $19,737 $16,972 $ 4,171 Auto glass 11,955 15,340 12,954 Building products & services 4,770 3,194 5,096 Corporate and other 1,752 107 394 - ------------------------------------------------------------------------- Total $38,214 $35,613 $22,615 - -------------------------------------------------------------------------
DEPRECIATION & AMORTIZATION 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $ 10,581 $ 7,810 $ 3,700 Auto glass 9,038 7,036 6,522 Building products & services 4,121 5,406 6,146 Corporate and other 250 206 160 - ------------------------------------------------------------------------- Total $23,990 $20,458 $16,528 - -------------------------------------------------------------------------
Apogee's Building Products & Services segment has subsidiaries in Europe and Asia. During 1998, 1997 and 1996, these foreign operations had net sales of $29,834,000, $120,318,000 and $114,305,000, respectively. Foreign operating losses for 1998, 1997 and 1996 were $115,709,000, $5,716,000 and $1,983,000, respectively. At February 28, 1998, March 1, 1997 and March 2, 1996, identifiable assets of the foreign subsidiaries totaled $11,417,000, $86,866,000 and $58,753,000, respectively. Foreign currency transaction gains or losses included in net earnings for 1997 and 1996 were immaterial. Foreign currency transaction losses for fiscal 1998 were $3.4 million.
Apogee's export net sales are less than 10% of consolidated net sales. No single customer, including government agencies, accounts for 10% or more of consolidated net sales. Segment operating income (loss) is net sales less cost of sales and operating expenses. Operating income does not include provision for interest expense or income taxes. "Corporate and other" includes miscellaneous corporate activity not allocable to business segments.
SCHEDULE II
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
Valuation and Quantifying Accounts (In thousands)
(1) Net of recoveries
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Financial Statement Schedules -
The consolidated financial statements and schedules of the Registrant listed in the accompanying "Index of Financial Statements and Schedules" together with the report of KPMG Peat Marwick LLP, independent auditors, are filed as part of this report.
(b) Reports on Form 8-K
During the quarter ended February 28, 1998, two reports on Form 8-K dated January 12, 1998 and February 27, 1998 were filed.
(c) Exhibits -
The information called for by this Item is contained in a separate section of this report. See "Exhibit Index".
- 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.
Date: May 29, 1998 APOGEE ENTERPRISES, INC.
By: /s/ Donald W. Goldfus ----------------------------- Donald W. Goldfus Chairman of the Board of Directors
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 --------- ----- ---- /s/ Donald W. Goldfus Chairman of the Board of Directors 5-29-98 - ---------------------------------
Donald W. Goldfus
/s/ Russell Huffer President and CEO, Director 5-29-98 - --------------------------------- Russell Huffer
/s/ Harry A. Hammerly Director 5-29-98 - --------------------------------- Harry A. Hammerly
/s/ Laurence J. Niederhofer Director 5-29-98 - --------------------------------- Laurence J. Niederhofer
/s/ James L. Martineau Executive Vice President, Director 5-29-98 - --------------------------------- James L. Martineau
/s/ D. Eugene Nugent Director 5-29-98 - --------------------------------- D. Eugene Nugent
/s/ Barbara B. Grogan Director 5-29-98 - --------------------------------- Barbara B. Grogan
SIGNATURE TITLE DATE --------- ----- ---- /s/ Stephen C. Mitchell Director 5-29-98 - --------------------------------- Stephen C. Mitchell
/s/ Jerome B. Cohen Director 5-29-98 - --------------------------------- Jerome B. Cohen
/s/ Michael E. Shannon Director 5-29-98 - --------------------------------- Michael E. Shannon
EXHIBIT INDEX
Exhibit (3A) Restated Articles of Incorporation Incorporated by reference to Exhibit 3A to Registrant's Annual Report on Form 10-K for year ended February 27, 1988.
Exhibit (3B) Restated By Laws of Apogee Enterprises, Inc., as amended to date. Incorporated by reference to Exhibit 3C to Registrant's Annual Report on Form 10-K for year ended February 29, 1992.
Exhibit (4A) Specimen certificate for shares of common stock of Apogee Enterprises, Inc. Incorporated by reference to Exhibit 4A to Registrant's Annual Report on Form 10-K for year ended February 29, 1992.
Exhibit (10A) Deferred Incentive Compensation Plan dated February 27, 1986 between Registrant and certain executive officers. Incorporated by reference to Exhibit 10N to Registrant's Annual Report on Form 10-K for year ended March 1, 1986.
Exhibit (10B) Amended and Restated 1987 Apogee Enterprises, Inc. Partnership Plan is incorporated by reference to Registrant's S-8 registration statement (File No. 33-60400)
Exhibit (10C) Rights Agreement between Registrant and American Stock Transfer Co. dated October 19, 1990. Incorporated by reference to Registrant's Form 8-A on October 19, 1990.
Exhibit (10D) Consulting Agreement between Registrant and Laurence J. Niederhofer dated November 1, 1993. Incorporated by reference to Exhibit 10I to Registrant's Annual Report on Form 10-K for year ended February 26, 1994.
Exhibit (10E) Employment Agreement between Registrant and Richard Gould dated May 23, 1994. Incorporated by reference to Exhibit 10I to Registrant's Annual Report on Form 10-K for year ended February 25, 1995.
Exhibit (10F) 1987 Apogee Enterprises, Inc. Stock Option Plan is incorporated by reference to Registrant's S-8 registration statement (File No. 33-35944)
Exhibit (10G) $275 million Multi-currency Credit Agreement dated as of May 21, 1998 between Apogee Enterprises, Inc. and banks party to the agreement, including related security, pledge, contribution and subsidiary guaranty agreements.
Exhibit (10H) 1997 Omnibus Stock Incentive Plan is incorporated by reference to Registrant's S-8 registration statement (File No. 333-32437)
Exhibit (21) Subsidiaries of the Registrant
Exhibit (23) Consent of KPMG Peat Marwick LLP
Exhibit (27) Financial Data Schedule (EDGAR filing only)
Exhibit (99) Litigation Reform Act of 1995 - Cautionary Statement
Apogee Enterprises, Inc. Form 10-K Items 8, 14 (a) and 14 (d)
Index of Financial Statements and Schedules
Financial Statements Independent Auditors' Report............................................F-2 Consolidated Balance Sheets.............................................F-3 Consolidated Results of Operations......................................F-4 Consolidated Statements of Shareholders' Equity.........................F-5 Consolidated Statements of Cash Flows...................................F-6 Notes to Consolidated Financial Statements..............................F-7
Financial Schedules Schedule II - Valuation and Qualifying Accounts.........................F-19
All other schedules are omitted because they are not required, or because the required information is included in the consolidated financial statements or noted thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Apogee Enterprises, Inc.:
We have audited the consolidated financial statements of Apogee Enterprises, Inc. and subsidiaries as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Apogee Enterprises, Inc. and subsidiaries as of February 28, 1998 and March 1, 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended February 28, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota April 8, 1998, except as to Note 6 which is as of May 22, 1998
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
PRINCIPLES OF CONSOLIDATION Our consolidated financial statements include the accounts of Apogee and all majority-owned subsidiaries except, for fiscal 1998 only, for our formerly 70%-owned European operations. In March 1998, in accordance with a February 26, 1998 resolution of our Board of Directors, five operating companies comprising our European curtainwall operations filed for bankruptcy or commercial liquidation, effectively relinquishing our control over those entities. Accordingly, such entities were deconsolidated and net operating results were included as a single component in our 1998 Consolidated Results of Operations under the caption "Unusual items" and the net liability was included in accrued expenses in our Consolidated Balance Sheet. We use the equity method to account for 50%-owned joint ventures. Intercompany transactions have been eliminated. Certain amounts from prior-years' financial statements have been reclassified to conform with this year's presentation.
CASH AND CASH EQUIVALENTS Investments with an original maturity of three months or less are included in cash and cash equivalents.
INVENTORIES Inventories, which consist primarily of purchased glass and aluminum, are valued at the lower of cost or market. Approximately 47% of the inventories are valued by use of the last-in, first-out (LIFO) method, which does not exceed market. If the first-in, first-out (FIFO) method had been used for all inventories, our inventories would have been $3,000,000 and $2,615,000 higher than reported at February 28, 1998 and March 1, 1997, respectively.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Significant improvements and renewals are capitalized. Repairs and maintenance are charged to expense as incurred. Depreciation is computed on a straight-line basis, based on estimated useful lives of 20 to 40 years for buildings and 2 to 15 years for equipment.
INTANGIBLE ASSETS AND AMORTIZATION Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill) and are amortized on a straight-line basis, primarily over 40 years. The carrying value of intangible assets is reviewed when circumstances suggest that it has been impaired. If this review indicates that intangible assets will not be recoverable based on the estimated undiscounted cash flows over the remaining amortization period, the carrying value of intangible assets must be reduced to estimated fair value. Amortization expense amounted to $2,011,000, $1,503,000 and $665,000 in 1998, 1997 and 1996, respectively.
INSURANCE SUBSIDIARY We established a wholly-owned insurance subsidiary, Prism Assurance, Inc. (Prism), in 1996 to insure our workers' compensation, general liability and automobile liability risks. Prism invests in fixed maturity investments which we classify as "available-for-sale" and are carried at market value as prescribed by Statement of Financial Accounting Standards (SFAS) No. 115. Reserve requirements are established based on actuarial projections of ultimate losses. Apogee also has accruals for losses incurred prior to Prism's formation. Losses estimated to be paid within twelve months are classified as accrued expenses, while losses expected to be payable in later periods are included in other long-term liabilities.
NET SALES RECOGNITION We recognize net sales from construction contracts on a percentage-of-completion basis, measured by the percentage of costs incurred to date to estimated total costs for each contract. Contract costs include materials, labor, project management and other direct costs related to contract performance. We establish provisions for estimated losses, if any, on uncompleted contracts in the period in which such losses are determined. Amounts representing contract change orders, claims or other items are included in net sales only when they have been approved by our customers. Net sales from the sale of products and the related cost of sales are recorded upon shipment.
INCOME TAXES We account for income taxes as prescribed by SFAS No. 109, which requires use of the asset and liability method. This method recognizes deferred tax assets and liabilities based upon the future tax consequences of temporary differences between financial and tax reporting.
EARNINGS PER SHARE We compute basic and diluted earnings per share as prescribed by SFAS No. 128 as described below under the caption NEW ACCOUNTING STANDARDS. Share figures reflect the two-for-one stock split effective February 1997.
FOREIGN OPERATIONS The financial statements of foreign operations have been translated to U.S. dollars, using the rules of SFAS No. 52. Balance sheet accounts are stated in U.S. dollars, generally at the year-end exchange rate. Results of operations are translated at average exchange rates for the respective period.
We periodically enter into forward currency exchange contracts to manage specific foreign currency exposures related to foreign construction contracts, receivables, and bank borrowings denominated in foreign currencies. As of February 28, 1998, we had forward contracts maturing in 1999 with a value of approximately $25.6 million. Gains and losses on forward contracts related to receivables are recognized currently, while gains and losses related to construction projects are deferred and accounted for as a part of the related transaction.
ACCOUNTING PERIOD Our fiscal year ends on the Saturday closest to February 28. Fiscal year 1998 and 1997 consisted of fifty-two weeks and 1996 was fifty-three weeks.
ACCOUNTING ESTIMATES The preparation of our consolidated 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 consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Amounts subject to significant estimates and assumptions include, but are not limited to, insurance reserves and net sales recognition for construction contracts, including the status of outstanding disputes and claims. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, EARNINGS PER SHARE, which simplifies the standards for computing earnings per share. SFAS No. 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share, which excludes dilution. SFAS No. 128 also requires dual presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures, and requires a reconciliation. Diluted earnings per share is computed similarly to fully diluted earnings per share pursuant to APB No. 15. SFAS No. 128 was required for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application was not permitted. Accordingly, we adopted SFAS No. 128 in the fourth quarter of 1998. SFAS No. 128 requires restatement of all prior-period earnings-per-share data presented. The adoption of SFAS No. 128 did not have a material impact on the Company's financial statement disclosures.
In February 1997, the FASB issued SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURES, which was adopted by us in the fourth quarter of 1998. SFAS No. 129 requires companies to disclose certain information about their capital structure. SFAS No. 129 did not have a material impact on our financial statement disclosures.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards for reporting and display of comprehensive income and its components (net sales, expenses, gains, and losses) in a full set of general-purpose financial statements. We will adopt SFAS No. 130 in 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers, and the material countries in which the entity holds assets and reports net sales. Management has not yet evaluated the effects of this change on its reporting of segment information. We will adopt SFAS No. 131 in 1999.
2. RECEIVABLES
(In thousands) 1998 1997 - -------------------------------------- ------------ ----------- Trade accounts $ 89,924 $ 78,991 Construction contracts 35,244 86,709 Contract retainage 25,271 32,609 Other receivables 1,633 13,247 - -------------------------------------- ------------ ----------- Total receivables 152,072 211,556 Less allowance for doubtful accounts (6,951) (7,297) - -------------------------------------- ------------ ----------- Net receivables $145,121 $ 204,259 ====================================== ============ ===========
We provide products and services to the commercial and institutional new construction and remodeling markets, the automotive replacement glass market and selected consumer markets. We do not believe a concentration of credit risk exists, due to the diversity of our markets and channels of distribution, and the geographic location of our customers. Allowances are maintained for potential credit losses and such losses have been within management's expectations. The provision for bad debt expense was $1,428,000, $2,917,000 and $1,983,000 in 1998, 1997 and 1996, respectively.
3. INVENTORIES
(In thousands) 1998 1997 - -------------------------------------- ------------ ---------- Raw materials $20,017 $14,760 Work-in process 4,749 3,863 Finished 39,417 39,638 - -------------------------------------- ------------ ---------- Total inventories $64,183 $58,261 ====================================== ============ ==========
4. PROPERTY, PLANT AND EQUIPMENT
(In thousands) 1998 1997 - -------------------------------------- ------------ ---------- Land $ 2,686 $ 2,488 Buildings and improvements 66,274 58,358 Machinery and equipment 130,938 115,026 Office equipment and furniture 54,720 44,431 Construction in progress 9,506 22,975 - -------------------------------------- ------------ ---------- Total property, plant and 264,124 243,278 equipment Less accumulated depreciation (134,187) (124,479) - -------------------------------------- ------------ ---------- Net property, plant and $129,937 $118,799 equipment ====================================== ============ ==========
Depreciation expense was $21,979,000, $18,955,000 and $15,863,000 in 1998, 1997 and 1996, respectively.
5. ACCRUED EXPENSES
(In thousands) 1998 1997 - -------------------------------------- ---------- ------------ Payroll and related benefits $22,088 $25,263 Insurance 13,677 10,956 Taxes, other than income taxes 4,612 8,643 Pension 5,377 4,192 Interest 1,205 2,091 Costs and expenses related to exit from 47,163 -- European curtainwall operations Other 14,771 10,290 - -------------------------------------- ---------- ------------ Total accrued expenses $108,893 $61,435 ====================================== ========== ============
6. LONG-TERM DEBT
(In thousands) 1998 1997 - -------------------------------------- ------------ ------------ Borrowings under revolving credit and other bank agreements, interest ranging from 3.77% to $150,503 $124,500 8.50% Other 3,143 4,847 - -------------------------------------- ------------ ------------ Total long-term debt 153,646 129,347 Less current installments (1,679) (1,707) - -------------------------------------- ------------ ------------ Net long-term debt $151,967 $127,640 ====================================== ============ ============
Long-term debt maturities are as follows:
FISCAL YEAR (In thousands) - ------------------------------- -------------------- 1999 $ 1,679 2000 1,082 2001 182 2002 100 2003 150,603 Thereafter -- - ------------------------------- -------------------- Total $153,646 =============================== ====================
In May 1998, we obtained a five-year, committed secured credit facility in the amount of $275 million. This new credit facility requires us to maintain minimum levels of net worth and certain financial ratios. This facility replaced a $150 million five-year, multi-currency committed credit facility which had been obtained in May 1996. This previous credit facility also required us to maintain minimum levels of net worth and certain financial ratios. As a result our losses and exit charges relating to our international curtainwall businesses in fiscal 1998, we were not in compliance with certain financial covenants of the previous credit facility. As we are in compliance with all of the financial covenants of the new credit facility, all bank borrowings under the revolving credit agreement at February 28, 1998 were classified as long-term debt.
We also had access to short-term credit on an uncommitted basis with several major banks. At February 28, 1998 and March 1, 1997, respectively, $24.9 million and $10.0 million in bank borrowings were outstanding under these agreements. We may refinance these short-term borrowings on a long-term basis under the revolving credit agreements discussed above. Accordingly, our short-term bank borrowings, which were not expected to be paid within one year, were classified as long-term debt. The interest rate on the year-end bank borrowings under uncommitted credit facilities was 6.0%.
Selected information related to bank borrowings is as follows:
(Dollar amounts in thousands) 1998 1997 - ----------------------------------------- ----------- ------------ Average daily borrowings during the year $133,158 $ 79,420 Maximum borrowings outstanding during 158,294 126,400 the year Weighted average interest rate during 5.6% 6.1% the year ========================================= =========== ============
In 1998 and 1996, we entered into interest rate swap agreements that effectively converted a portion of our variable rate borrowings into fixed rate obligations. Under these agreements, which expire in 2001, we receive payments at variable rates while we make payments at fixed rates ranging from 5.7% to 6.3%. The net interest paid or received is included in interest expense. The amount of borrowings effectively converted at February 28, 1998 and March 1, 1997 was $70 million and $20 million, respectively.
In 1992, we entered into three interest rate swap agreements that effectively converted $25 million of our fixed rate, long-term borrowings into variable rate obligations. During 1993, we sold two of the swap agreements at net gains. The gains were recognized as reductions in interest expense through 1997. The third agreement expired in 1995.
The net book value of property and plant pledged as collateral under industrial development bonds was approximately $1.1 million at February 28, 1998.
7. INTEREST AND OTHER EXPENSE, NET
(In thousands) 1998 1997 1996 - ------------------------------ ---------- ---------- --------- Interest on debt $ 8,986 $ 6,713 $ 6,747 Other interest expense 460 1,367 273 - ------------------------------ ---------- ---------- --------- Total interest expense 9,446 8,080 7,020 Less interest income (2,112) (1,116) (1,323) - ------------------------------ ---------- ---------- --------- Interest expense, net $ 7,334 $ 6,964 $ 5,697 ============================== ========== ========== =========
Interest payments were $ 8,223,000, $6,180,000 and $7,095,000 in 1998, 1997 and 1996, respectively.
In 1996, other expense, net, consisted of charges totaling $4.3 million primarily related to write-off of a minority investment in a research and development venture and an adjustment to our insurance reserves, offset by the $4.2 million gain from the sale of the Nanik Window Coverings unit discussed in Note 12.
8. SHAREHOLDERS' EQUITY AND STOCK OPTION PLANS
During 1997, the Board of Directors approved a two-for-one stock split, in the form of a 100% stock dividend, payable to shareholders in February 1997. All share and per share data have been restated accordingly.
A class of 200,000 shares of junior preferred stock with a par value of $1.00 is authorized, but unissued.
We have a Shareholders' Rights Plan, under which each share of our outstanding common stock has an associated preferred share purchase right. The rights are exercisable only under certain circumstances, including the acquisition by a person or group of 10% of the outstanding shares of the Company's common stock. Upon exercise, the rights would allow holders of such rights to purchase common stock of Apogee or an acquiring company at a discounted price, which generally would be 50% of the respective stock's current fair market value.
The 1997 Stock Option Plan and 1987 Stock Option Plan (the "Plans") each provide for the issuance of up to 2,500,000 options to purchase Company stock. Options awarded under these Plans, either in the form of incentive stock options or nonstatutory options, are exercisable at an option price equal to the fair market value at the date of award. The 1987 Plan has expired and no new grants of stock options may be made under this Plan.
The 1987 Partnership Plan, a Plan designed to increase the ownership of Apogee stock by key employees, allows participants selected by the Compensation Committee of the Board of Directors to use earned incentive compensation to purchase Apogee common stock. The purchased stock is then matched by an equal award of restricted stock, which vests over a predetermined period. 2,200,000 common shares are authorized for issuance under the Plan. As of February 28, 1998, 1,937,000 shares have been issued under the Plan. We expensed $1,141,000, $2,145,000 and $666,000 in conjunction with the Partnership Plan in1998, 1997 and 1996, respectively.
A summary of option transactions under the Plans for 1998, 1997 and 1996 follows:
OPTIONS OUTSTANDING NUMBER OF AVERAGE OPTION PRICE SHARES EXERCISE PRICE RANGE - ----------------------------- ------------ -- ---------------- -- -------------- Balances, February 25, 1995 1,156,000 $ 6.00 $ 4.48- 9.46 Options granted 490,000 8.64 7.25- 8.80 Options exercised (174,000) 6.52 5.38- 8.13 Options canceled (68,000) 5.94 5.38- 7.94 - ----------------------------- ------------ -- ---------------- -- --------------
Balances, March 2, 1996 1,404,000 6.87 4.48- 9.46 Options granted 587,000 15.08 10.50-17.75 Options exercised (368,000) 5.83 5.38- 8.69 Options canceled (22,000) 7.53 5.38-15.06 - ----------------------------- ------------ -- ---------------- -- --------------
Balances, March 1, 1997 1,601,000 10.11 4.48-17.75 Options granted 485,000 16.09 11.31-25.00 Options exercised (372,000) 6.86 5.38-16.50 Options canceled (230,000) 12.38 5.38-16.75 - ----------------------------- ------------ -- ---------------- -- -------------- Balances, February 28, 1998 1,484,000 $12.53 4.48-25.00 - ----------------------------- ------------ -- ---------------- -- --------------
The following table summarizes information about stock options outstanding and exercisable at February 28, 1998.
We have adopted the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, no compensation cost has been recognized with respect to our 1987 Stock Option Plan. Had compensation cost for the Plan been determined based on the fair value methodology prescribed by SFAS 123, our net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
(In thousands, except per 1998 1997 1996 share data) - -------------------------------- --------- --------- --------- Net earnings (loss) - as ($51,055) $26,220 $17,835 reported Net earnings (loss) - pro forma (53,001) 25,221 17,493 Earnings (loss) per share diluted (1.84) 0.93 0.65 - as reported Earnings (loss) per share diluted (1.91) 0.90 0.64 - pro forma ================================ ========= ========= =========
The above pro forma amounts may not be representative of the effects on reported net earnings (loss) for future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996:
1998 1997 1996 - -------------------------------- --------- ---------- ---------- Dividend yield 1.2% 1.1% 1.5% Expected volatility 60.0% 60% 60% Risk-free interest rate 7.0% 7.0% 6.0% Expected lives 10 years 7.5 years 5 years ================================ ========= ========== ==========
9. UNUSUAL ITEMS
During 1998, we recorded a pre-tax charges of $96.1 for unusual items in our Building Products & Services segment. This is presented separately as a component of income from operations in the Consolidated Results of Operations. The amount included nonrecurring charges of $26.0 million and $35.9 million recorded in the third and fourth quarter, respectively, related to our international curtainwall operations. In addition, unusual items included operating losses totaling $34.2 million, representing the net operating results for European curtainwall operations which were deconsolidated as described in Principles of Consolidation in Note 1. A summary of the items included is as follows:
- ------------------------------ ------------- Net operating loss of European $34,243 curtainwall operations Estimated costs associated with exit from European curtainwall, 34,858 including completion of certain projects Estimated loss on construction 13,972 contract, including penalties Estimated costs related to resolution of legal 7,372 proceedings Restructuring activities and 5,686 other - ------------------------------ ------------- Total $96,131 ============================== =============
The $26.0 million charge included amounts for the estimated loss on a disputed construction contracts in Europe, including the accrual of certain penalty amounts, and a provision for the accrual of legal and related costs associated with the resolution of legal proceedings related to organizational changes in its majority-owned European curtainwall unit. In June 1997, the Company reorganized its European management team and, subsequently, several lawsuits were initiated between Apogee and the minority shareholder based on, among other items, allegations of breach of contract and fiduciary duty, and misrepresentation. Restructuring activities involved the closing of the segment's Asian offices and the rationalization of its project management, engineering and European manufacturing capacity. The charge for restructuring included amounts for severance and termination benefits for employees in France, Asia and the US. , the write-down of property and equipment and other long-term assets to their estimated net salable value and other items such as lease termination costs. We reduced manufacturing capacity in France and reduced project management and engineering costs in France and the US.
The $35.9 million charges reflected the estimated costs associated with exiting our European operations, including the completion of certain remaining projects. In March 1998, in accordance with a February 26, 1998 resolution of our Board of Directors, the five operating companies comprising our European curtainwall operations filed for bankruptcy or commenced liquidation, effectively relinquishing control over those entities. Accordingly, the net operating results for European curtainwall operations are included as a single figure as indicated above.
At February 1998, accruals totaling $47.2 million represented the estimated future cash outflows associated with the exit from our European curtainwall operations. These cash expenditures are expected to be made within the next one to two years. The primary component of the accrual relates to the completion of certain remaining projects. Other costs included in the above figure are provisions for severance and termination benefits, and legal and related costs associated with the proceedings noted above.
10. INCOME TAXES
The components of income tax expense (benefit) for each of the last three fiscal years are as follows:
(In thousands) 1998 1997 1996 - ------------------------------ ---------- ---------- --------- Current: Federal $ $ 1,866 $ 6,559 (4,164) State and local (412) 955 910 Foreign -- 1,529 544 - ------------------------------ ---------- ---------- --------- Total current (4,576) 4,350 8,013 - ------------------------------ ---------- ---------- ---------
Deferred: Federal (8,233) 8,547 1,503 State and local (316) 1,605 304 Foreign 700 (700) -- - ------------------------------ ---------- ---------- --------- Total deferred (7,849) 9,452 1,807 - ------------------------------ ---------- ---------- --------- Total income tax expense $(12,425) $ 13,802 $ 9,820 ============================== ========== ========== =========
Income tax payments, net of refunds, were $12,000,000, $11,520,000 and $10,878,000 in 1998, 1997 and 1996, respectively.
The differences between statutory federal tax rates and our consolidated effective tax rates are as follows:
1998 1997 1996 - -------------------------------- ------------ ----------- ----------- Statutory federal tax rate (35.0%) 35.0% 35.0% State and local income taxes, net of federal tax benefit (2.2) 5.1 3.0 Tax credits (1.5) (2.2) (0.5) Foreign items with no tax 1.8 8.3 0.8 benefit Valuation allowance 18.1 -- (0.6) Resolution of Revenue Agent -- (10.8) -- Exams Other, net (1.1) (0.5) (0.8) - -------------------------------- ------------ ----------- ----------- Consolidated effective tax rate (19.9%) 34.9% 36.9% ================================ ============ =========== ===========
Tax benefits for deductions associated with the 1987 Stock Option Plan and the 1987 Partnership Plan were $1,503,000 and $1,445,000 in 1998 and 1997, respectively. These benefits were added directly to additional paid-in capital and were not reflected in the determination of income tax expense.
Deferred tax assets and deferred tax liabilities at February 28, 1998 and March 1, 1997 are as follows:
1998 1997 -------------------------- -------------------------- (In thousands) CURRENT NONCURRENT CURRENT NONCURRENT - ------------------------- ------------ ------------- ------------- ------------ Accounts receivable $2,393 $ -- $2,660 $ -- Accrued insurance -- 3,715 -- 2,991 Deferred compensation (140) 4,071 191 4,447 Restructuring reserve 22,982 6 -- 26 Inventory 1,383 128 1,505 320 Depreciation 143 (6,235) 147 (6,522) Employee benefit plans (1,451) -- (1,451) -- Other 1,108 (3,291) 1,434 3,700 - ------------------------- ------------ ------------- ------------- ------------ 26,418 (1,606) 4,486 4,962 Less valuation allowance (12,200) -- -- (3,872) - ------------------------- ------------ ------------- ------------- ------------ Deferred tax assets (liability) $14,218 $(1,606) $4,486 $1,090 ========================= ============ ============= ============= ============
Our valuation allowance increased by $8,328,000 in 1998 and related primarily to a capital loss carryforward. The valuation allowances at February 28, 1998 and March 1, 1997 reflect amounts for foreign tax credits, general business tax credits, net operating loss carryforwards and capital loss carryforwards.
11. INVESTMENT IN AFFILIATED COMPANIES
We were party to a 1985 joint venture agreement with our 50% partner (JV Partner), forming Marcon Coatings, Inc. and its subsidiary, Viratec Thin Films, Inc. (Marcon/Viratec). The joint venture operated glass coating facilities. In November 1995, the JV Partner commenced litigation against us alleging claims for damages and seeking to have the Court order us to sell our 50% interest in the joint venture to the JV Partner. We filed counterclaims seeking to have the JV Partner's 50% interest sold to us. In March 1996, the Court ordered the JV Partner to sell the shares of stock representing its 50% interest in Marcon/Viratec to us upon payment of fair value for the shares as determined by the Court, or as agreed to by us and the JV Partner. In January 1997, we agreed to a comprehensive settlement of all claims and completed our purchase of the joint venture businesses from the JV Partner. We paid $41 million to the JV Partner for its 50% interest in the businesses and certain leased assets. Both parties agreed to irrevocably release each other from all outstanding claims related to the litigation, other than certain trade accounts payable in the ordinary course of business.
Reflecting the March 1996 Court order, Marcon/Viratec's assets, liabilities and results of operations were included in Apogee's consolidated financial statements beginning in 1997. Through 1996, our 50% ownership investment in Marcon/Viratec was accounted for using the equity method. Our equity in Marcon/Viratec's net earnings for 1996 is included in the accompanying Consolidated Results of Operations. A summary of assets, liabilities and results of operations for Marcon/Viratec for 1996 is presented below:
(In thousands) 1996 - ----------------------------- ------------ Current assets $ 11,950 Noncurrent assets 23,444 Current liabilities 19,098 Noncurrent liabilities 8,602 Net sales 46,297 Gross profit 8,981 Net earnings 1,183 - ----------------------------- ------------
12. EMPLOYEE BENEFIT PLANS
We maintain a qualified defined contribution pension plan that covers substantially all full-time, non-union employees. Contributions to the Plan are based on a percentage of employees' base earnings. We deposit pension costs with the trustee annually. All pension costs were fully funded or accrued as of year end. Contributions to the Plan were $4,344,000, $4,023,000 and $3,687,000 in 1998, 1997 and 1996, respectively.
We also maintain a 401(k) savings plan, which allows employees to contribute 1% to 13% of their compensation. Apogee matches 30% of the first 6% of the employee contributions. Our contributions to the Plan were $1,958,000, $1,805,000 and $1,495,000 in 1998, 1997 and 1996, respectively.
13. ACQUISITIONS AND DIVESTITURES
In 1998, our AutoGlass Segment purchased the assets of 10 retail auto glass stores in four separate transactions. The aggregate purchase price of the acquisitions was $0.8 million, including $0.2 million recorded as goodwill.
In 1997, as indicated in Note 11, we purchased our joint venture partner's 50% interest in Marcon Coatings, Inc. and its subsidiary, Viratec Thin Films, Inc. and certain leased assets. The aggregate purchase price, net of cash acquired, was $40.2 million. Liabilities of $11.8 million were assumed. The purchase price exceeded the fair value of net assets acquired by $34.5 million, which was recorded as goodwill and is being amortized over 40 years.
In 1997, our Auto Glass segment purchased the common stock of a 46-location retail auto glass replacement and repair company. The aggregate purchase price, net of cash acquired, was $10.4 million, consisting of $1.3 million in acquisition related expenditures and 215,000 shares of common stock valued at $9.1 million. Liabilities of $5.9 million were assumed. The purchase price exceeded the fair value of net assets acquired by $9.4 million, which was recorded as goodwill. The Auto Glass segment also made two smaller acquisitions of retail auto glass stores in 1997, purchasing assets for $0.1 million.
In 1996, our Auto Glass segment purchased the assets of 12 retail auto glass stores and one distribution center in five separate transactions. The aggregate purchase price of the acquisitions was $3.8 million, including $0.7 million recorded as goodwill. Promissory notes of $0.5 million were issued in connection with the transactions.
No liabilities were assumed in the 1996 transaction. All of the above transactions were accounted for by the purchase method. Accordingly, our consolidated financial statements include the net assets and results of operations from the dates of acquisition.
In 1996, we sold selected assets and liabilities of the Nanik Window Coverings unit (Nanik) for $17.6 million, realizing a $4.2 million gain included in "Other expense, net" in the accompanying Consolidated Results of Operations. Nanik accounted for less than 4% of consolidated net sales in 1996.
14. LEASES
As of February 28, 1998, we were obligated under noncancelable operating leases for buildings and equipment. Certain leases provide for increased rentals based upon increases in real estate taxes or operating costs. Future minimum rental payments under noncancelable operating leases are:
FISCAL YEAR (In thousands) - ------------------------------------ ---------------- 1999 $ 12,593 2000 9,950 2001 6,696 2002 4,688 2003 3,489 Thereafter 5,142 - ------------------------------------ ---------------- Total minimum payments $ 42,558 ==================================== ================
Total rental expense was $27,484,000, $23,551,000 and $22,155,000 in 1998, 1997 and 1996, respectively.
15. COMMITMENTS AND CONTINGENT LIABILITIES
We have ongoing letters of credit related to our risk management programs, construction contracts and certain industrial development bonds. The total value of letters of credit under which we are obligated as of February 28, 1998 was approximately $ 16,328,000. We have entered into a number of noncompete agreements. As of February 28, 1998, we were committed to make future payments of $3,613,000 under such agreements.
We have been a party to various legal proceedings incidental to our normal operating activities. In particular, like others in the construction industry, our construction business is routinely involved in various disputes and claims arising out of construction projects, sometimes involving significant monetary damages. Although it is impossible to predict the outcome of such proceedings, we believe, based on facts currently available to us, that none of such claims will result in losses that would have a material adverse effect on our financial condition.
16. FAIR VALUE DISCLOSURES
Estimated fair values of our financial instruments at February 28, 1998 and March 1, 1997 are as follows:
CARRYING AMOUNT ESTIMATED FAIR VALUE (In thousands) 1998 1997 1998 1997 - ------------------------------ ---------- --------- ---------- ---------- Long-term debt including current installments $153,646 $129,347 $153,629 $129,305 Interest rate swap agreements in a net -- -- 648 93 payable position ============================== ========== ========= ========== ==========
Estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, judgment is required in developing the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange.
For cash and cash equivalents, receivables, marketable securities and accounts payable, carrying value is a reasonable estimate of fair value. The carrying value of long-term debt that has variable interest rates is a reasonable estimate of fair value. For long-term debt with fixed interest rates, fair value is based on discounted projected cash flows using the rate at which similar borrowings could currently be made. The fair value of interest rate swaps is the difference between the present value of our future interest obligation at a fixed rate and the counterparty's obligation at a floating rate.
17. EARNINGS PER SHARE
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per share.
(In thousands) 1998 1997 1996 - -------------------------------- ----------- ----------- ----------- Basic earnings per share - weighted common shares 27,795 27,384 26,975 outstanding Weighted common shares assumed -- 673 283 upon exercise of stock option - -------------------------------- ----------- ----------- ----------- Diluted earnings per share - weighted common shares and common shares equivalent 27,795 28,057 27,258 outstanding ================================ =========== =========== ===========
18. QUARTERLY DATA (UNAUDITED)
(Dollar amounts in thousands, except per share data)
NET SALES QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $223,851 $228,608 $219,032 Second 246,015 253,154 222,186 Third 235,021 228,781 215,487 Fourth 207,944 240,234 214,442 - ------------------------------ ---------- ----------- ---------- Total $912,831 $950,777 $871,147 - ------------------------------ ---------- ----------- ---------- GROSS PROFIT QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $ 46,889 $ 36,387 $ 31,925 Second 60,435 42,316 31,824 Third 51,638 40,117 28,264 Fourth 20,439 32,981 26,510 - ------------------------------ ---------- ----------- ---------- Total $179,401 $151,801 $118,523 - ------------------------------ ---------- ----------- ---------- NET EARNINGS (LOSS) QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $ 6,774 $ 4,976 $ 3,481 Second 9,657 7,980 5,646 Third (10,435) 7,602 5,172 Fourth (57,051) 5,662 3,536 - ------------------------------ ---------- ----------- ---------- Total $ (51,055) $ 26,220 $ 17,835 - ------------------------------ ---------- ----------- ---------- EARNINGS (LOSS) PER SHARE BASIC* QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $ 0.24 $ 0.18 $ 0.13 Second 0.35 0.29 0.21 Third (0.37) 0.28 0.19 Fourth (2.06) 0.20 0.13 - ------------------------------ ---------- ----------- ---------- Total $ (1.84) $ 0.96 $ 0.66 - ------------------------------ ---------- ----------- ---------- EARNINGS (LOSS) PER SHARE DILUTED* QUARTER 1998 1997 1996 - ------------------------------ ---------- ----------- ---------- First $ 0.24 $ 0.18 $ 0.13 Second 0.34 0.28 0.21 Third (0.37) 0.27 0.19 Fourth (2.06) 0.20 0.13 - ------------------------------ ---------- ----------- ---------- Total $ (1.84) $ 0.93 $ 0.65 - ------------------------------ ---------- ----------- ----------
*Per share data adjusted to reflect the fiscal 1997 stock dividend.
19. BUSINESS SEGMENTS DATA
(In thousands) NET SALES 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $227,203 $192,827 $150,457 Auto glass 347,191 307,935 273,133 Building products & services 348,892 460,714 462,102 Intersegment elimination (10,455) (10,699) (14,545) - ------------------------------------------------------------------------- Net sales $912,831 $950,777 $871,147 - -------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $ 27,330 $ 19,908 $ 16,431 Auto glass 15,046 20,149 18,069 Building products & services (96,433) 5,557 (2,073) Corporate and other (1,210) 882 30 - ------------------------------------------------------------------------- Operating income (loss) $(55,267) $46,496 $32,457 - -------------------------------------------------------------------------
IDENTIFIABLE ASSETS 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $150,044 $132,005 $ 67,606 Auto glass 127,950 123,804 108,342 Building products & services 110,468 199,050 172,019 Corporate and other 75,659 46,105 38,169 - ------------------------------------------------------------------------- Total $464,121 $500,964 $386,136 - -------------------------------------------------------------------------
CAPITAL EXPENDITURES 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $19,737 $16,972 $ 4,171 Auto glass 11,955 15,340 12,954 Building products & services 4,770 3,194 5,096 Corporate and other 1,752 107 394 - ------------------------------------------------------------------------- Total $38,214 $35,613 $22,615 - -------------------------------------------------------------------------
DEPRECIATION & AMORTIZATION 1998 1997 1996 - ------------------------------------------------------------------------- Glass technologies $ 10,581 $ 7,810 $ 3,700 Auto glass 9,038 7,036 6,522 Building products & services 4,121 5,406 6,146 Corporate and other 250 206 160 - ------------------------------------------------------------------------- Total $23,990 $20,458 $16,528 - -------------------------------------------------------------------------
Apogee's Building Products & Services segment has subsidiaries in Europe and Asia. During 1998, 1997 and 1996, these foreign operations had net sales of $29,834,000, $120,318,000 and $114,305,000, respectively. Foreign operating losses for 1998, 1997 and 1996 were $115,709,000, $5,716,000 and $1,983,000, respectively. At February 28, 1998, March 1, 1997 and March 2, 1996, identifiable assets of the foreign subsidiaries totaled $11,417,000, $86,866,000 and $58,753,000, respectively. Foreign currency transaction gains or losses included in net earnings for 1997 and 1996 were immaterial. Foreign currency transaction losses for fiscal 1998 were $3.4 million.
Apogee's export net sales are less than 10% of consolidated net sales. No single customer, including government agencies, accounts for 10% or more of consolidated net sales. Segment operating income (loss) is net sales less cost of sales and operating expenses. Operating income does not include provision for interest expense or income taxes. "Corporate and other" includes miscellaneous corporate activity not allocable to business segments.
SCHEDULE II
APOGEE ENTERPRISES, INC. AND SUBSIDIARIES
Valuation and Quantifying Accounts (In thousands)
(1) Net of recoveries