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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ] Transition report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number: 333-51355
NUMATICS, INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Michigan 38-2955710
(State or Other Jurisdiction (I.R.S. EmployerIdentification
of Incorporation or Organization) Number)
1450 North Milford Road, Milford, Michigan 48357
(Address of Principal Executive Offices) (Zip Code)
(248) 887-4111
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
9 5/8% Series B Subordinated Notes Due 2008
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [x] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. $0 (Registrant's common equity
has no trading market.)
Indicate the number of shares outstanding of each of registrant's classes
of common stock, as of the latest practicable date: Common Stock
21,276.6 shares as of March 29, 1999
DOCUMENTS INCORPORATED BY REFERENCE: None
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CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS
---------------------------------------------
This Form 10-K report, including the information provided under item 1
and under item 7, contains forward-looking statements, which can be
identified by the use of the future tense or other forward-looking terms
such as "may," "intend," "will," "expect," "anticipate," "plan,"
"management believes," "estimate," "continue," "should," "strategy," or
"position" or the negatives of those terms or other variations on them or
by comparable terminology. In particular, any statements, express or
implied, concerning future operating results or the ability to generate net
sales, income, or cash flow to service indebtedness are forward-looking
statements. Investors are cautioned that reliance on any of those forward-
looking statements involves risks and uncertainties and that, although
Numatics' management believes that the assumptions on which those forward-
looking statements are based are reasonable, any of those assumptions could
prove to be inaccurate. As a result, the forward-looking statements based
on those assumptions also could be incorrect, and actual results may differ
materially from any results indicated or suggested by those assumptions.
The uncertainties in this regard include, but are not limited to, those
identified in "Risk Factors" under item 1. In light of these and other
uncertainties, the inclusion of a forward-looking statement in this report
should not be regarded as a representation by Numatics that its plans and
objectives will be achieved. All forward-looking statements are expressly
qualified by the cautionary statements contained in this paragraph and in
"Risk Factors" below. Numatics undertakes no duty to update any forward-
looking statements.
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PART I
ITEM 1. BUSINESS
Numatics, Incorporated ("Numatics" and, together with its
subsidiaries, the "Company") is a global manufacturer and marketer, both
directly and through its subsidiaries, of pneumatic valves, actuators, and
related specialty products. The Company's principal market is the United
States, in which it is the largest manufacturer in its core
productdirectional control, base mounted, 4-way pneumatic valves. The
Company also conducts operations in several foreign countries, including
Canada, Germany, England, Italy, France, the Netherlands, Hungary, Taiwan,
and Mexico.
History
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The Company's operating history began in 1990, when senior management
of Numatics' predecessor, led by Numatics' Chairman, CEO, and President,
John Welker, formed Numatics, and Numatics purchased the assets of the
predecessor company (including the stock of its Canadian and German
subsidiaries) from the predecessor's founder, William Carls, in a
leveraged buyout (the "1990 Buyout"). Mr. Welker and his management team
held a 20% ownership interest in Numatics after the 1990 Buyout, with the
remaining 80% held primarily by two venture capital investors. The 1990
Buyout was funded with $61.8 million in debt, $8.0 million in junior
subordinated convertible debt, $6.0 million in equity contributions, and
$9.2 million in cash.
In 1992, Numatics acquired the 80% equity interest it continutes to
hold in its subsidiary, Micro-Filtration, Inc. In 1994, Numatics formed
Numatech, Inc., retaining an 88% equity interest in that subsidiary, and
Numation, Inc., retaining a 90% equity interest in that subsidiary. In
1995, Numatics acquired 80% equity interests in two other subsidiaries,
Ultra Air Products, Inc., and MicroSmith, Inc. Numatics now holds a 90%
interest in MicroSmith, Inc. In accordance with the Company's management
philosophy,the managers of Micro Filtration, Numatech, Numation, Ultra Air
, and MicroSmith own all of the equity in these subsidiaries not owned by
Numatics. The stock they own is non-voting stock; the Company owns all of
the voting stock of each subsidiary. Also in 1995, Numatics purchased 12%
of the stock of Univer SpA, the largest manufacturer of pneumatic products
in Italy.
By the end of 1995, Numatics senior management had increased their
share of Numatics' common stock to 30% through performance incentives.
Effective December 31, 1995, Numatics redeemed the remaining equity
interests of the outside investors (the "1995 Recapitalization"), and the
management team became 100% owners of the outstanding common stock. The
redemption of the outside investors' equity interests in the 1995
Recapitalization was funded with $97.3 million in debt, including $30.0
million in a senior subordinated note (the "Old Subordinated Note")
with a detachable warrant for 6% of Numatics' common stock.
The detachable warrant was exercised on March 24, 1998. On the same
day, Numatics issued $115.0 million of transfer-restricted 9 5/8% senior
subordinated notes, guaranteed by all of Numatics domestic subsidiaries
(the "Interim Notes"), the proceeds of which were used to repay the Old
Subordinated Note and pay a $6 million dividend on Numatics' common stock,
with the balance being paid against the Company's then outstanding bank
debt.
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At the same time as the Interim Note issuance, the Company also
entered into a new bank credit facility, which included term loans of
$29.0 million, $4.0 million, and $2.0 million to Numatics and its German
and Canadian subsidiaries, respectively, and revolving credit facilities,
including letters of credit, of $32.0 million and $3.0 million to Numatics
and its German subsidiary, respectively. This facility (the "New Credit
Facility"), which continues in effect at present, is guaranteed by all of
Numatics' domestic subsidiaries, and the facility and those guarantees are
secured by substantially all the assets of Numatics and its domestic
subsidiaries and, with respect to the loans to Numatic's foreign
subsidiaries, substantially all the assets of those subsidiaries.
Additional information concerning the New Credit Facility is provided below
under "Risk Factors--Leverage," "--Subordination," and "--Dependence upon
John Welker," item 7, and note 2 to the Company's consolidated financial
statements filed with this Form 10-K as exhibit 99.1.
In September 1998, in an exchange offer registered under the
Securities Act of 1933, the Interim Notes were exchanged for Series B 9
5/8% senior subordinated notes having identical terms, except for the
absence of transfer restrictions, and guaranteed by the same subsidiaries
(the "Series B Notes"). Some additional information concerning the Series
B Notes and the indenture under which they were issued is provided below
under "Risk Factors--Leverage," "--Subordination," and "--Possible
Inability to Repurchase Series B Notes Upon a Change in Control," and in
note 2 to the Company's 1998 consolidated financial statements. More
extensive information concerning the Series B Notes is contained in the
Form S-4 registration statement (SEC File No. 333-51355) under which the
Series B Notes were registered for purposes of the exchange offer, which
can be found at the SEC's web site (www.sec.gov).
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Risk Factors
------------
As noted above under "Cautions Regarding Forward-Looking Statements,"
the information provided under this item 1, as well as elsewhere in this
Form 10-K report, includes forward-looking statements. Although management
believes that the plans, intentions, and expectations concerning the
Company reflected in those forward-looking statements are reasonable, it
can give no assurance that those plans, intentions, or expectations will be
achieved. Important factors that could cause actual results to differ
materially from those included in or suggested by any forward-looking
statements are set forth below and elsewhere in this report. All forward-
looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Risk Factors set
forth below.
Leverage. The Company is highly leveraged. On December 31, 1998, the
Company had total indebtedness of approximately $160.4 million and an
accumulated deficiency of approximately $75.3 million. As of that date, the
aggregate debt of the Company to which the Series B Notes are subordinated
("Senior Debt"), which includes borrowings under the New Credit Facility,
was approximately $45.4 million, and approximately $24.5 million would have
been available for additional borrowing under the New Credit Facility,
subject to borrowing base limitations. All outstanding Senior Debt was owed
by Numatics and its German and Canadian subsidiaries and none by its
domestics subsidiaries that have guaranteed the Series B Notes (the
"Guarantors"), except that the Guarantors have guaranteed Numatics'
borrowings under the New Credit Facility. The indenture governing the
Series B Notes permits the incurrence of additional indebtedness, including
Senior Debt, by Numatics and its subsidiaries in the future, subject to
certain limitations.
The Company's current annual debt service requirement is approximately
$17.0 million. The Company's ability to make scheduled payments of
principal of or interest on, or to refinance, its indebtedness (including
the Series B Notes) will depend on its future performance, which to some
extent is subject to general economic, financial, competitive, legislative,
regulatory, and other factors that are beyond its control. Based upon the
Company's current level of operations and future business which has been
awarded, management believes that cash flow from operations and available
cash, together with available borrowings under the New Credit Facility,
will be adequate to meet the Company's future liquidity needs until the
scheduled expiration of the New Credit Facility, at which time the Company
would expect to replace the New Credit Facility. However, there can be no
assurance that the Company's business will generate sufficient cash flow
from operations, that anticipated growth opportunities and operating
improvements will be realized, or that future borrowings will be available
under the New Credit Facility in an amount sufficient to enable the Company
to service its indebtedness, including the Series B Notes, or to fund its
other liquidity needs. The New Credit Facility, the term loans under it,
and a $2.5 million industrial revenue bond for which the Company is
responsible under the facility mature prior to the maturity of the Series B
Notes, and there can be no assurance that the Company will be able to
replace the New Credit Facility, or refinance any other indebtedness, on
commercially reasonable terms or at all.
The degree to which the Company is leveraged could have important
consequences to investors, including, but not limited to, making it more
difficult for the Company to satisfy its obligations with respect to the
Series B Notes, increasing the Company's
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vulnerability to general adverse economic and industry conditions, limiting
the Company's ability to obtain additional financing to fund future working
capital, capital expenditures, and other general corporate requirements, or
to fund acquisitions, requiring the dedication of a substantial portion of
the Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such
cash flow to fund working capital, capital expenditures, research and
development or other general corporate purposes, limiting the Company's
flexibility in planning for, or reacting to, changes in its business and
the industries it serves, and placing the Company at a competitive
disadvantage compared to less leveraged competitors. In addition, the
indenture governing the Series B Notes and the New Credit Facility contain
financial and other restrictive covenants that limit the ability of the
Company to, among other things, borrow additional funds. Failure by the
Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company.
Subordination. The Series B Notes are subordinated in right of payment
to all of Numatics' current and future Senior Debt (as defined in the
indenture governing the Series B Notes), and the guarantees of the Series B
Notes by the Guarantors (the "Subsidiary Guarantees") are subordinated in
right of payment to all current and future Senior Debt of the Guarantors.
As defined in the governing indenture, the term Senior Debt includes the
New Credit Facility and the Guarantors' guarantees of that facility. The
New Credit Facility is secured by substantially all of the assets of
Numatics and its domestic subsidiaries as well as all of the outstanding
voting stock of Numatics' domestic subsidiaries, and by 66% of the capital
stock of the Numatics' foreign subsidiaries. Due to these subordination
provisions, upon any distribution to creditors of Numatics or any Guarantor
in a liquidation or dissolution of Numatics or the Guarantor or in a
bankruptcy, reorganization, insolvency, receivership, or similar proceeding
relating to Numatics, a Guarantor, or the property of Numatics or a
Guarantor, the holders of Senior Debt of Numatics or the Guarantor,
respectively, will be entitled to be paid in full before any payment may be
made with respect to the Series B Notes or the related Subsidiary
Guarantee. In addition, under the governing indenture, payments with
respect to the Series B Notes and the Subsidiary Guarantees will be blocked
in the event of a payment default on Designated Senior Debt (defined in the
indenture to include the New Credit Facility and the related guarantees of
that facility) and may be blocked for up to 179 days each year in the event
of certain non-payment defaults on Designated Senior Debt.
In the event of a bankruptcy, liquidation, or reorganization of
Numatics or a Guarantor, holders of the Series B Notes will participate
ratably with all holders of subordinated indebtedness of Numatics or the
Guarantor that is deemed to be of the same class as the Series B Notes, and
potentially with all general creditors of Numatics or the Guarantor other
than holders of Senior Debt, based upon the respective amounts owed to each
holder or creditor, in the remaining assets of Numatics or the Guarantor.
In any of the foregoing events, there can be no assurance that Numatics or
any or all of the Guarantors would have sufficient assets to pay amounts
due on the Series B Notes. As a result, holders of Series B Notes may
receive less, ratably, than the holders of other debt of Numatics or of a
Guarantor, including Senior Debt.
The Company derives a significant portion of its revenue from
Numatics' foreign subsidiaries, which have not guaranteed the Series B
Notes. Holders of indebtedness of, and
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trade creditors of, those foreign subsidiaries generally would be entitled
to payment of their claims from the assets of the affected subsidiaries
before any of those assets are made available for distribution to Numatics.
The indenture governing the Series B Notes permits the incurrence of
substantial additional indebtedness by Numatics' foreign subsidiaries and
permits investments by Numatics or other subsidiaries in those
subsidiaries. In the event of a bankruptcy, liquidation, or reorganization
of a subsidiary that has not guaranteed the Series B Notes, holders of any
of that subsidiary's indebtedness will have a claim to the assets of the
subsidiary that is prior to Numatics' interest in those assets. As of
December 31, 1998, the total liabilities of subsidiaries that have not
guaranteed the Series B Notes was $12.8 million.
Dependence upon John Welker. The Company's continued success will be
substantially dependent upon the efforts of John Welker. Mr. Welker has
been Numatics' Chairman, President, and Chief Executive Officer since the
1990 Buyout. He also owns over 74% and controls the vote of 94% of
Numatics' outstanding common stock, which means he is in a position to
elect its Board of Directors and to control its management, policies, and
operations. When he acts in his capacity as a Numatics shareholder, Mr.
Welker does not owe fiduciary duties to holders of Series B Notes or other
Numatics' investors.
The Company could be adversely affected if Mr. Welker were to become
unwilling or unable to continue as head of Numatics' management team. It
is an event of default under the New Credit Facility if Mr. Welker ceases
to be the President and Chief Executive Officer of Numatics or ceases to
have the ability to elect a majority of its directors and if he is not
replaced by a person satisfactory to the New Credit Facility lenders. The
Company maintains $15 million of key-man life insurance on Mr. Welker's
life, but that amount would not be sufficient to retire all existing
indebtedness under the New Credit Facility should it become necessary to do
so.
Possible Inability to Repurchase Series B Notes upon a Change in
Control. The indenture governing the Series B Notes requires Numatics to
offer to repurchase all outstanding Series B Notes at 101% of their
principal amount plus accrued and unpaid interest to the date of repurchase
if a Change in Control (as defined in the indenture) should occur.
However, there can be no assurance that sufficient funds will be available
at the time of any Change of Control to make any required repurchases of
Series B Notes tendered or that restrictions in the New Credit Facility
will allow Numatics to make the required repurchases.
The Company also is permitted under the indenture to enter into
certain transactions, including certain recapitalizations, that would not
constitute a Change of Control but would increase the amount of outstanding
Senior Debt or indebtedness on a parity with the Series B Notes.
Absence of Patent Protection. The Company relies on unpatented
proprietary technology to produce its core products, particularly its
"lapped spool and sleeve" pneumatic valve manufacturing technology. To
protect its trade secrets and other proprietary information, the Company
requires employees, consultants, advisors, and collaborators who have
access to this technology to enter into confidentiality agreements and
limits access to certain of its proprietary processes. However, there can
be no assurance
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that these agreements or procedures will provide meaningful protection for
the Company's trade secrets, know-how, or other proprietary information in
the event of any unauthorized use, misappropriation, or disclosure of such
trade secrets, know-how, or other proprietary information. If the Company
is unable to maintain the proprietary nature of its technology,
particularly its "lapped spool and sleeve" valve manufacturing technology,
the Company could be materially adversely affected.
Industry Overview
-----------------
The fluid power industry has grown out of manufacturers' needs to
automate repetitive tasks that previously had been performed manually. The
industry can generally be divided into two major segments: hydraulics (use
of liquids) and pneumatics (use of air or inert gas). While hydraulics can
produce higher forces and, in some applications, better control, pneumatics
generally provide faster speeds, lower cost, greater ease of use, and a
more environmentally clean process. The Company competes only in the
pneumatic segment of the fluid power market.
Major components utilized in the pneumatic fluid power process include
valves, actuators (cylinders), and air preparation equipment. A pneumatic
system begins when air enters a compressor and the volume of air is
reduced. The air then flows through a dryer and excess moisture is removed.
(Typically, a pneumatic system contains a single compressor and an air
dryer.) The dry air then flows through a system header to multiple
workstations in a plant. At a workstation, the dry air flows initially
through an FRL (filter, regulator, and lubricator). In the FRL, a filter
removes particulates from the air, a regulator reduces and stabilizes
downstream pressure, and a lubricator adds the appropriate amount of oil to
the air, when necessary. This conditioned air then enters a valve.
A valve is the primary pneumatic component that controls the intake
and withdrawal of air into the actuator, with the valve's movement
typically controlled by a solenoid. In the Company's "lapped spool and
sleeve" valve, the position of the spool determines the direction of the
air as it flows into the actuator. The flow of air from the valve causes
the actuator rod to extend or retract, thereby moving a specific load. In
many cases, an automated component, such as a gripper or guiding unit, may
be attached to the actuator for material handling purposes.
In the United States (the Company's principal market), sales of
directional control valves make up the largest segment of pneumatic valve
sales, and 4-way valves are the dominant type of directional control valves
utilized. Because of their versatility, base mounted valves make up the
large majority of pneumatic valve sales in the United States.
Certain market segments to which the Company sells its products have
been reducing the number of suppliers they deal with, including pneumatic
component suppliers. As a result, companies within these market segments
increasingly have used suppliers that can provide a full line of pneumatic
components. Continuing the product line expansion begun by the Company's
predecessor in the late 1980s, the Company now offers its customers a full
line of pneumatic components, including valves, actuators, and specialty
products such as air preparation products, specialty valves, and grippers
and guiding units. Management believes its array of products provides a
competitive advantage against single component suppliers.
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Applications for pneumatic fluid power are numerous and diverse and
can be found in virtually every major industry. Some of the largest
industries that use pneumatic fluid power systems include packaging,
automotive, machine tool, material handling, food and beverage, textile,
printing, electronics/semiconductor, robotics, paper, and medical
equipment. Pneumatic components primarily are used in automated
manufacturing applications, but also can serve other functions, as do
certain of the Company's specialty valves used in oxygen concentrators sold
by medical equipment manufacturers. Management believes there are a number
of general industry trends favoring the increasing use of automation, such
as greater emphasis on productivity, factory utilization, and continuing
cost reduction efforts.
Products
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The Company offers a complete line of pneumatic components, which can
be described in three groups: valves, actuators, and specialty products.
The Company's core product historically has been pneumatic valves. Over
recent years, the Company has expanded into additional product lines. While
the Company's net sales in core valve products have increased significantly
over the past five years, its overall dependence on valves has decreased
through its product diversification strategy. The table that follows
illustrates this diversification trend since 1993.
1993 1998
---- ----
Net Sales................... $85.0 million $139.4 million
Valves...................... 79.3% 59.6%
Actuators................... 7.3% 12.7%
Specialty Products.......... 13.4% 27.7%
----- -----
Total.......................... 100.0% 100.0%
Valves. The Company is widely regarded as a leading manufacturer of
high quality pneumatic valves used in fluid power applications. In a
pneumatic system, the valve controls the flow of compressed air to an
actuator (cylinder). The valve is the most important and complex component
in any pneumatic system.
The Company's success is largely derived from its proprietary "lapped
spool and sleeve" technology developed by the Company's founder in the
1950s. The original design is used in the Company's valves today. However,
the "lapped spool and sleeve" manufacturing process has been improved
continuously. The inner (spool) and outer (sleeve) components are a matched
set, with the sleeve remaining stationary and the spool moving inside it to
produce the switching of air flow. The sealing of the spool and sleeve is
accomplished by the minute clearance between the two parts, measured in
millionths of an inch, rather than by using soft rubber seals as in other
designs. This minute clearance provides an air bearing, which avoids any
metal-to-metal contact and allows frictionless movements, virtually
eliminating heat and wear. This results in extremely long product life.
Numatics' "lapped spool and sleeve" has been found to operate within
original manufacturing tolerances after more than one billion cycles.
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The patent on the "lapped spool and sleeve" product expired in 1973.
However, the process for manufacturing the "lapped spool and sleeve" to the
required tolerances remains a trade secret. The Company continues to
closely guard this trade secret and limits the number of visitors and
employees who have access to the manufacturing process. Several competitors
have attempted to imitate the process, but management believes none has
been able to duplicate the "lapped spool and sleeve" to the same high
quality tolerances.
The Company manufactures a wide variety of valves, most of which can
broadly be described as directional control, 4-way valves. Additionally,
the Company manufactures and markets 3-way valves and a variety of other
valves for specific customer applications.
The Company's valve sales were $83.9 million, $90.0 million, and $83.0
million in 1996, 1997, and 1998, respectively.
Actuators. In a pneumatic system, the actuator serves as an "arm" for
an automated task, allowing an object to be moved. In 1988, Numatics'
predecessor company began offering actuators (cylinders) to complement its
well-established line of valves. These were standard tie-rod cylinders,
made to National Fluid Power Association specifications. The Company
continued the actuator business after the 1990 Buyout.
During 1994, the Company introduced its "M" series actuator, a non-
repairable miniature cylinder. In 1995, it introduced a new rodless
cylinder based on technology acquired in connection with its purchase for
$2.0 million of 12.0% of the stock of Univer, the largest manufacturer of
pneumatic products in Italy with sales in 1997 of approximately $30.0
million. Newer products include rotary actuators and a variety of small
actuators.
The Company's actuator sales were $13.1 million, $16.3 million, and
$17.8 million in 1996, 1997, and 1998, respectively.
Specialty Products. The Company's specialty products include air
preparation products, such as FRLs and air dryers, and other specialty
products, such as specialty valves and grippers and guiding units. Air
preparation products condition the air for use in the pneumatic system.
Specialty valves are miniature valves for custom applications. Grippers and
guiding units are material handling components, often serving as the
"hands" of an automated process.
Numatics' predecessor began offering FRLs in 1987, and the Company
continued that business after the 1990 Buyout. For several years, FRLs have
been produced for the Company under a private label arrangement by an
independent manufacturer. In 1997, the Company began manufacturing some of
its own FRL products, which are expected to replace a majority of the
private label products within the next few years.
The Company's other specialty products are manufactured through
Numatics' domestic subsidiaries Ultra Air Products, Inc., MicroSmith, Inc.,
Numatech, Inc., Numation, Inc., and Micro-Filtration, Inc.
Ultra Air Products manufacturers air dryers used to remove water from
compressed air systems. It distributes its products primarily through
industrial compressor distributors,
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rather than through the Company's valve distribution network, which has
presented the Company with some opportunities for cross-selling between the
two distributor groups.
MicroSmith designs and fabricates electronic componentry. The Company
uses this componentry in its valve products and also markets it to
independent customers.
Numatech manufactures specialty valves, many of which have been
designed by the Company for specific customer applications. Numatech's
principal products include miniature valves used primarily in the medical
and electronics industries. Management believes these valves have potential
applications in other industries.
Numation manufactures grippers and guiding units for the materials
handling industry, and Micro-Filtration manufactures coalescing filtration
products that remove contaminants from an air line.
The Company's specialty products sales were $35.0 million, $40.7
million, and $38.6 million in 1996, 1997, and 1998, respectively.
Engineering
-----------
The Company is widely recognized as an innovator in the design,
engineering, and manufacture of pneumatic components. The Company has a
dedicated group of engineers, both domestically and internationally.
Beginning with the "lapped spool and sleeve," the Company has continued to
produce engineering innovations which include the following:
. On-board electronics, which allow electronic signals to be passed
through a single input/output source at faster transmission speeds
. Electrical plug-in connections, which allow assembly of systems
without the need for costly wiring
. Integral speed controls and integral pressure controls, which are
mounted between the valve and manifold to provide a complete control
package
. Manifolding, which reduces piping and space and allows factory
assembly, reducing cost
. Direct solenoid, which eliminates unnecessary pilot valves,
improving reliability due to fewer parts
. Die cast magnesium valves, providing maximum weight reduction and
cost savings
. "Nu-Plex," the first fully integrated serial control system for
fluid power applications.
. Aluminum cast valve bodies, which reduces the weight and cost of
valves that had previously been made of bronze, cast iron, and
brass
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. "Numasizing," the first precise method of determining component size
so as to accurately match desired performance with a valve
configuration that uses the smallest amount of energy to get the job
done.
The Numasizing process is based on a computerized database containing
empirical data from more than 250,000 test firings of pneumatic cylinders
under different conditions. Numasizing is used at all of the Company's
locations throughout the world. The Company conducts seminars on Numasizing
for its customers and offers its distributors a proprietary program to
enable them to use Numasizing in helping to design efficient systems for
their customers.
Customers, Marketing, and Distribution
--------------------------------------
The Company's customers consist of end users, machinery manufacturers
(which incorporate the Company's products in their machines), and
distributors. As is common practice in the U.S. market, end users and
machinery manufacturers generally purchase the Company's products through
its network of distributors. Alternatively, in international markets,
customers typically purchase directly from the Company. In some cases, the
end user will specify the Company's products, regardless of distribution
channel. The products sold by the Company are utilized in a diverse group
of industries, and no one customer accounted for more than 4.2 % of total
net sales in 1998.
Approximately 53.0% of the Company's net sales in 1998 were from sales
to distributors. The Company believes it maintains excellent relationships
with its distributor network, which consists of over 100 distributors,
including over 70 in North America, 14 in Europe, 14 in Asia and 6 in South
America. Some of these distributors have been with the Company at least 40
years, and the average tenure of its distributors in the United States is
20 years.
The Company's North American distributors are pneumatics specialists
who sell only pneumatic components and do not sell hydraulic components. In
most cases, the Company's products represent these distributors' principal
source of income. Additionally, the only pneumatic valves these
distributors carry are Numatics' valves. The Company maintains an
interactive relationship with its distributors, conducting periodic
meetings in several cities and intensive training programs while
encouraging feedback. The Company employs 8 regional managers in North
America to train and assist its distributors. The Company's distributors
purchase products from the Company and maintain their own inventories.
The Company has a direct sales force of 132 employees, who sell to
over 9,000 direct customers worldwide, of which a significant portion are
outside the United States. The Company also has maintained direct selling
efforts with certain large end users and machinery manufacturers in North
America.
Manufacturing
-------------
The Company has eight domestic manufacturing facilities, including six
in
11
<PAGE>
Michigan and one each in Ohio and Tennessee. The Company also has
manufacturing plants in Ontario, Canada and in Germany. The Company's core
valve products primarily are manufactured in its Highland, Michigan
facility, which also is the Company's headquarters. The final machining
and matching of the Company's proprietary "lapped spool and sleeve" valve
components are carried out in a specially designed, temperature and
humidity controlled area. This process is highly confidential. Visitors
and employees who do not require access are not permitted in the facility,
nor are equipment suppliers. All equipment setup for such operations is
performed by the Company's own employees.
The Company has adopted "lean manufacturing" and "kaizen" initiatives
to improve quality, production efficiencies and customer service by
reducing waste, inventory levels, floor space and lead times. The Company
believes its commitment to continuous improvement will further enhance its
competitive position and allow the Company to execute its growth strategy
while minimizing the need for significant additional capacity. The Company
has converted many facilities from a traditional batch process to a flow
system utilizing manufacturing "cells" based on specific product
categories. Although in the relatively early stage of implementation, the
Company's lean manufacturing initiatives already have resulted in facility
consolidation, improved manufacturing throughput, increased on time
shipping performance, and supplier rationalization.
The Company stresses quality control in all of its manufacturing and
distribution facilities, and each valve is individually tested to meet
specific tolerances before it can be shipped. Currently, the facilities in
Germany and Canada are ISO certified. The majority of the Company's
domestic facilities were ISO certified by the end of 1998, and all its
facilities are scheduled to be ISO certified by mid-2000. The Company
believes that achieving ISO certification at each of its manufacturing
facilities is a significant factor in maintaining its competitive position.
Components and Raw Materials
----------------------------
The principal raw materials and components used in manufacturing the
Company's products are aluminum castings, stainless steel, solenoids, and
screw machine parts. All of these items are readily available from multiple
suppliers, and the Company also produces a substantial portion of its own
requirements of solenoids and screw machine parts. The Company purchases a
significant portion of its aluminum castings from Taiwanese suppliers
through its subsidiary in Taiwan, which has a dedicated staff of
professionals responsible for sourcing and quality control. The Company has
never experienced significant difficulty in acquiring needed parts and raw
materials, and management believes the Company is not substantially
dependent on any particular supplier.
Competition
-----------
The markets in which the Company operates are highly competitive.
Competition is based primarily on quality, price, timely delivery, service,
and breadth of product line. The markets in which the Company competes are
highly fragmented, and many of its competitors do not currently offer the
full range of products sold by the Company. The Company has competed
successfully in its core pneumatic valve business, and it has been able to
increase net sales with its actuators and specialty products as well.
However, some of the Company's competitors are significantly larger and
have greater financial and other
12
<PAGE>
resources than the Company, which may afford them more flexibility in
competing with the Company in the future.
The Company has the largest U.S. market share in its core product of
directional control, base mounted, 4-way pneumatic valves. The Company's
most significant competitors in North America are Parker Hannifin, SMC
Pneumatics and MAC Valves. Some of the Company's major competitors in the
valve market outside North America are SMC Pneumatics, Festo, and CKD. The
actuator and specialty products markets have different competitors such as
Norgren IMI, Wilkerson, Phd., Robohand, Lee, and Clippard.
International Operations
------------------------
Numatics, Ltd. in Ontario, Canada and Numatics GmbH in Germany operate
manufacturing facilities, both of which are ISO certified. Numatics, Ltd.
markets a full line of the Company's products to the Canadian market and
manufactures, among other products, lockout valves for the Company's
worldwide needs. Numatics GmbH manufactures some of the Company's products
and markets a full line of Numatics' components to customers in Europe and
Africa. Numatics GmbH maintains a dedicated engineering staff which works
together with the Company's North American engineering personnel. Numatics'
other foreign operations primarily are sales and distribution facilities.
International sales accounted for approximately 18.3% of the Company's
1998 net sales, and international assets accounted for approximately 18.6%
of its total assets as of December 31, 1998. For additional financial
information regarding foreign sales and exports, see Note 6 of the notes to
the Company's audited consolidated financial statements filed as exhibit
99.1 to this Form 10-K.
Employees
---------
At February 28, 1999, the Company had 918 employees. Approximately 100
of those employees at that time were represented by the United Auto Workers
under a contract expiring on March 17, 2002. The Company considers its
employee relations to be good.
Environmental Matters
---------------------
The Company's plant on North Milford Road in Highland, Michigan, is
the site of a groundwater contamination problem that became known in the
early 1980s. The contamination was caused by a chemical (trichloroethylene)
that was used for many years to degrease parts but which has not been used
at the site since the early 1970s. A soil vapor extraction system was used
to clean up the soil contamination, and a pump and treat system has been
installed to purge the groundwater. The soil cleanup has been completed,
but completion of the groundwater remediation is expected to take
approximately another nine years. Based on past expenditures and its
current evaluation of site conditions, the management expects to spend
approximately $75,000 annually to complete the groundwater remediation. The
Company has recorded a reserve for these future expenditures, which at
December 31, 1998 was approximately $700,000. Management believes this
reserve will be adequate to complete the remediation, although actual
expenditures will depend on actual site conditions and other factors and
are subject to change.
13
<PAGE>
In 1989, a fluid spill site containing PCBs was discovered at the
Company's East Highland Road facility in Highland, Michigan. The source of
the PCBs is believed to be a transformer that was accidentally ruptured in
1973 while sitting on the ground awaiting disposal. The area of the spill
has been disturbed by subsequent paving of a portion of the area and soil
removal following a non-PCB waste oil spill. Management estimates that
future soils remedial work at this site will cost approximately $250,000 to
$300,000.
In 1982, a spill of chromic acid and water occurred at the site of the
Company's Owosso, Michigan facility. Soils contaminated by this spill have
been remediated, and groundwater tested on a monthly basis. Test data shows
no future remediation is required. The Company has submitted a closure
report to the Michigan Department of Environmental Quality and is awaiting
agency approval of the report.
The sites discussed above are the only sites where the Company to date
has identified any environmental contamination. However, most of the
Company's facilities have been in operation for many years, and several of
the facilities have undergone little or no invasive testing to determine
the presence or absence of environmental contamination. Except as
discussed above concerning the three identified sites, compliance by the
Company with federal, state, and local laws and regulations pertaining to
the discharge of material into the environment has not had any material
effect upon the Company conducting its business, and management currently
does not anticipate that compliance with these laws and regulations in the
future will have any material effect upon the Company in conducting its
business. However, due to the nature of its current operations (and those
of its predecessor), and the history of industrial uses at some of its
facilities, the Company does face some risk of additional exposure to
environmentally-related liabilities.
ITEM 2. PROPERTIES
The Company conducts its business in Company-owned facilities,
totaling approximately 350,350 square feet, and leased facilities, totaling
approximately 101,900 square feet, of office, engineering, manufacturing
and warehouse space. All of these facilities are suitable to meet the
current capacity needs of the Company's various business units. Leases
expire at various times through 2003, and the Company generally has
extension options.
The table that follows provides additional information concerning each
of these facilities.
14
<PAGE>
<TABLE>
<CAPTION>
LOCATION SQUARE FEET TYPE OF INTEREST USES
- -------- ----------- ---------------- ----
<S> <C> <C> <C>
United States
N. Milford Rd., Company headquarters;
Highland, MI 76,000 Owned valve components
Franklin, TN 68,000 Owned Actuators
Sandusky, MI 57,300 Owned Valves and solenoids
Lapeer, MI 40,000 Owned FRLs
Detroit, MI 36,000 Leased Air dryers
Owosso, MI 22,100 Owned Valve part processing;
warehousing
Wixom, MI 12,400 Leased Specialty valves
E. Highland Rd.,
Highland, MI 12,250 Owned Warehousing
Westlake, OH 12,000 Leased Grippers and guiding units
Wixom, MI 8,400 Owned Distribution facility
Scottsdale, AZ 2,900 Leased Electronic componentry
design and fabrication
Rochester, NY 2,700 Leased Distribution facility
International
St. Augustin, Germany 33,300 Owned Valves and actuators
London, ON, Canada 21,700 Owned Valves and actuators
Leighton Buzzard,
England 11,300 Owned Distribution and sales
Taipei, Taiwan 8,000 Leased Distribution and sales
Brescia, Italy 7,700 Leased Distribution and sales
Vancouver, BC, Canada. 6,000 Leased Distribution and sales
Puebla, Mexico 5,000 Leased Distribution and sales
Montreal, QB, Canada 3,600 Leased Distribution and sales
Paris, France 3,400 Leased Distribution and sales
Waardenburg,
The Netherlands 1,600 Leased Distribution and sales
Budapest, Hungary 600 Leased Distribution and sales
</TABLE>
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Various legal matters arising during the normal course of business are
pending against the Company. Management does not expect that the ultimate
liability, if any, of these matters will have a material effect on future
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of Numatics' shareholders during the
quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Numatics' only authorized class of equity security is its common
stock. On March 29, 1999, there were nine holders of the outstanding
shares of the common stock, all but one of whom were Numatics employees.
The common stock has no public trading market, all of outstanding shares
are subject to transfer restrictions, and the shares held by employees are
subject to a Numatics repurchase option. See item 11 under "Compensation
Committee Interlocks and Insider Participation."
To date, no dividends have been paid on the common stock, except
for a $6 million extraordinary dividend paid on March 26, 1998 with a
portion of the proceeds of the Interim Note Offering that closed on March
24, 1998. The agreements governing the New Credit Facility and the
indenture governing the Series B Notes substantially limit the payment of
future dividends on the common stock, and no such dividends are expected to
be declared or paid for the foreseeable future.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Selected Financial Data (in thousands)
Year Ended December 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net Sales $139,415 $147,097 $132,015 $125,808 $104,649
Cost of sales 87,956 93,785 81,676 77,967 64,284
-------- -------- -------- -------- --------
Gross profit 51,459 53,312 50,339 47,841 40,365
Marketing, engineering, general and
administrative expenses 30,771 31,830 28,253 29,567 23,964
Michigan single business tax (1) (609) 945 885 872 708
-------- -------- -------- -------- --------
Operating income 21,297 20,537 21,201 17,402 15,693
Interest and other financing
expenses 15,927 17,021 16,763 5,560 3,036
Other (income) expense 236 1,348 535 1,436 (119)
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary item 5,134 2,168 3,903 10,406 12,776
Income tax provision 2,283 904 1,895 4,837 5,358
-------- -------- -------- -------- --------
Income before extraordinary item 2,851 1,264 2,008 5,569 7,418
Extraordinary item, net of income
tax (2) 4,918 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (2,067) $ 1,264 $ 2,008 $ 5,569 $ 7,418
======== ======== ======== ======== ========
OTHER FINANCIAL DATA
Cash provided by (used in)
operating activities $ 7,578 $ 11,047 $ 13,096 $ 6,142 $ 10,700
Cash used in investing activities (6,913) (7,808) (5,392) (6,750) (4,378)
Cash provided by (used in)
financing activities (245) (3,391) (7,429) 201 (6,285)
EBITDA (3) 26,137 25,931 25,811 24,167 23,090
Depreciation and amortization 5,449 5,000 4,489 6,413 6,820
Capital expenditures 6,605 7,881 5,594 3,744 4,379
BALANCE SHEET DATA
Working capital $ 37,724 $ 27,469 $ 28,189 $ 28,109 $ 22,495
Total assets 109,212 98,535 93,987 93,441 75,967
Total long-term debt (4) 160,375 135,696 136,273 138,523 33,776
Total shareholders' equity
(deficit) (4) (75,292) (69,930) (70,864) (72,637) 19,944
Preferred stock dividend (5) -- -- -- 1,200 1,023
Common stock dividend 6,000 -- -- -- --
</TABLE>
______________________
(1) The Michigan Single Business Tax is a state tax which is calculated
based on operating activity and capital expenditure levels and is in lieu of a
state income tax.
(2) In 1998, represents $1.6 million (net of income taxes) write off of
deferred financing costs, $2.1 million (net of income taxes)for the
amortization of the previously unamortized discount on the Old Subordinated
Notes and $1.2 million (net of income taxes) for prepayment penalties
associated with the repayment of the Old Subordinated Notes.
(3) "EBITDA" represents the sum of operating income plus depreciation and
amortization (less amortization of deferred financing costs) and Michigan Single
Business Tax. 1997 EBITDA was adversely affected by special charges consisting
of: (a) fees related to a onetime lean manufacturing consulting project of $1.1
million; (b) costs related to an unsuccessful acquisition attempt of $0.5
million; and (c) facility closing and moving costs totaling $0.3 million.
Information regarding EBITDA is presented because management believes (i) it is
a widely accepted financial indicator of a company's ability to incur and
service debt, (ii) it reflects the non-cash effect on earnings of amortization
and depreciation expense, and (iii) it is the basis on which compliance with
certain of the financial covenants contained in the New Credit Facility is
proncipally determined. However, EBITDA does not purport to represent cash
provided by operating activities as reflected in the Company's consolidated
statements of cash flow, is not a measure of financial performance under
generally accepted accounting principles, and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles. Also, the measure of EBITDA may
not be comparable to similar measures reported by other companies.
(4) Shareholders' deficit and increase in long-term debt results
primarily from the 1995 Recapitalization.
(5) Preferred stock was redeemed in 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's financial statements and the notes thereto, included elsewhere in
this report.
Overview
--------
The Company is a leading global manufacturer and marketer of pneumatic
components. The Company's net sales are principally derived from the sale
of its products worldwide to over 9,000 customers, including a network of
over 100 distributors. In recent years, the Company has diversified its
revenue base through its expanded product lines and increase in
international sales. In the U.S., the Company's products are principally
sold through a network of 52 distributors who purchase and stock
Numatics' products. In non-U.S. markets, a majority of sales are derived
from direct customers.
17
<PAGE>
The Company's cost of sales consists primarily of raw materials,
labor, manufacturing overhead and purchased product costs. The Company has
generally had success in passing through price increases in raw materials
to its customers, although there can be no assurance that it will be able
to continue to do so. The Company has implemented "lean manufacturing" and
"kaizen" initiatives, which it believes can provide benefits through
reduced waste, lower inventory levels and better utilization of plant floor
space. While the Company has experienced growth through its expanded
product lines, certain new products generally have lower gross margins
during periods of development and introduction than the Company's
traditional valve products.
Marketing, engineering, general and administrative expenses have been
impacted in recent years by, among other things, the opening of certain
sales offices in Europe, as the Company identifies opportunities to further
grow its international net sales. In 1997, marketing, engineering, general
and administrative expenses included costs related to a facility closure
and the move of a major facility.
Results of Operations
---------------------
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net Sales. The Company's net sales for 1998 decreased 5.2%, or $7.7
million, from $147.1 million in 1997 to $139.4 million in 1998. Net sales
in North America decreased 4.8%, or $5.7 million, while international sales
decreased 7.2%, or $2.0 million. This decrease is a result of the overall
softness felt in the pneumatic market, which started during the second
quarter of 1998.
Gross Profit. Gross profit for 1998 increased to 36.9% of net sales
from 36.2% in 1997. This improvement is a result of cost containment
efforts undertaken to help offset the lower sales volume caused by the
softness in the pneumatic market.
Marketing, Engineering, General and Administrative. Marketing,
engineering, general and administrative costs decreased $1.1 million in
1998, ending the year at $30.8 million. This decrease is a result of cost
containment efforts undertaken to help offset the lower sales volume caused
by the softness in the pneumatic market.
Single Business Tax. Single business tax for 1998 was a credit of
$0.6 million compared to an expense of $0.9 million in 1997. The credit
resulted from filing amended returns in March 1998 for the years 1992 to
1996 due to a tax ruling that redefined the reported sales that are
included in the calculation of the tax, which favorably impacted the
Company.
Operating Income. Operating income in 1998 was $21.3 million, or
15.3% of sales, compared to $20.5 million, or 14.0% of sales, in 1997.
This $0.8 million increase is principally attributed to reduced single
business tax expense, as explained above.
Interest and Other Financing Expenses. Interest rate reductions
achieved through refinancing the Old Subordinated Note
18
<PAGE>
in March 1998 resulted in a $1.1 million reduction in interest expense in
1998 compared to 1997.
Other (Income) Expense. Other expense consists primarily of
unrealized foreign exchange gains and losses. The $1.1 million reduction
in expense for 1998 compared to 1997 is a result of the weakening of the
U.S. dollar against major foreign currencies.
Income Taxes. The Company's income taxes at the statutory rate differ
from its recorded income tax expense due to international rate differences
and other various differences. At December 31, 1998, the Company had net
operating loss carryforwards of approximately $2.5 million, primarily at
its German subsidiary. Those loss carryforwards expire in 2009.
Extraordinary Item. The extraordinary item in 1998 resulted from the
write off of unamortized debt financing costs related to the refinancing of
the Company's debt of $1.6 million, net of taxes, a write off of previous
unamortized discount on the Old Subordinated Debt of $2.1 million, net of
taxes, and a prepayment penalty of $1.2 million, net of taxes. The amount
is reported net of $2.5 million tax benefit.
Net Income (Loss). Due to the factors discussed above, including the
extraordinary item related to the early retirement of debt, net income
decreased $3.3 million, to a loss of $2.1 million for 1998.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Net Sales. The Company's net sales for 1997 increased 11.4%, or $15.1
million, to $147.1 million from $132.0 million in 1996. International net
sales increased 9.0%, or $2.3 million despite the strengthening of the U.S.
dollar relative to the German mark and certain other foreign currencies.
North American net sales increased 12.0%, or $12.8 million. The majority
of the increase, both in North America and internationally, can be
attributed to new product releases and expanded market penetration.
Gross Profit. Gross profit for 1997 increased 5.9%, or $3.0 million,
to $53.3 million from $50.3 million in 1996. The increase in gross profit
was attributable to higher net sales in 1997 compared to 1996. As a
percentage of net sales, gross profit declined to 36.2% in 1997 compared to
38.1% in 1996. The decline in gross profit percentage was primarily the
result of pricing pressures on product sales at the Company's European
operations due to difficult economic conditions in Europe. Additionally,
costs associated with a facility move and new product startup costs
contributed to the lower gross margin percentage in 1997.
Marketing, Engineering, General and Administrative. Marketing,
engineering, general and administrative expenses for 1997 increased 12.7%,
or $3.6 million, to $31.8 million from $28.3 million in 1996. As a
percentage of net sales, marketing, engineering, general and administrative
expenses increased to 21.6% in 1997 compared to 21.4% in 1996. The
increase in marketing, engineering, general and administrative expenses for
1997 was primarily attributable to expenses associated with a special lean
manufacturing project consulting fee, costs related to the closure of a
facility and the move of a facility. The remainder of the increase was
principally due to higher marketing and engineering costs to support the
Company's product lines and geographic expansion.
19
<PAGE>
Operating Income. Principally as a result of the foregoing, operating
income in 1997 decreased 3.1%, or $0.7 million, to $20.5 million from $21.2
million in 1996. As a percentage of net sales, operating income decreased
to 14.0% in 1997 compared to 16.1% in 1996.
Interest Expense. Interest expense in 1997 increased 3.1%, or $0.5
million, to $16.5 million from $16.0 million in 1996 due to the issuance of
additional Old Subordinated Notes in 1997. This increase was partially
offset by a reduction in bank debt in 1997.
Other (Income) Expense. Other expenses increased 152.0%, or $0.8
million, to $1.3 million from $0.5 million in 1996. Included in other
expenses for 1997 is a $1.2 million unrealized foreign exchange loss
related to intercompany loans.
Net Income. Due to the factors discussed above, net income decreased
37.1%, or $0.7 million, to $1.3 million from $2.0 million in 1996.
Liquidity and Capital Resources
-------------------------------
Historically, the Company has utilized cash from operations and
borrowings under its credit facilities to satisfy its operating and capital
needs and to service its indebtedness.
Cash provided by operating activities was $7.6 million in 1998,
compared to $11.0 million in 1997. This $3.5 million reduction is
primarily due to interest payments on the Company's subordinated
indebtedness, offset by cash generated by the Company's trade accounts
receivable. Working capital was $37.7 million at December 31, 1998,
compared with $27.5 million at December 31, 1997. This $10.2 million
increase is primarily attributable to a $5.1 million increase in
inventories relating to buildups associated with new product introductions,
as well as to higher inventory levels resulting from decreased sales
levels, a $2.3 million increase in other current assets, and a $3.6 million
decrease in the current portion of long-term debt.
Net cash used in investing activities in 1998 was $6.9 million,
compared to $7.8 million in 1997. This $0.9 million decrease reflects the
Company's construction in 1997 of a new 68,000 square foot manufacturing
facility for its actuator operations in Franklin, Tennessee.
Net cash used in financing activities was $0.1 million, compared to
$3.3 million in 1997. The 1998 amount includes the net results of
refinancing the Company's debt together with the payment of a $6.0 million
dividend on Numatics' common stock.
Total assets were $109.2 million at December 31, 1998, compared to
$98.5 million at December 31, 1997. This increase includes the increased
working capital assets mentioned above, together with a $2.6 million
increase in net property, plant, and equipment. Total debt outstanding was
$160.4 million at December 31, 1998, compared to $142.8 million at December
31, 1997. This increase was caused by the costs and expenditures
associated with the refinancing of the Company's debt, together with the
$6.0 million dividend.
20
<PAGE>
On March 24, 1998, Numatics issued $115,000,000 of 9 5/8% senior
subordinated notes (subsequently exchanged for the Series B Notes), the
proceeds of which were utilized to repay the Old Subordinated Notes and pay
the $6.0 million dividend, with the balance being paid against the
Company's outstanding bank debt. At the same time, the Company entered into
a new bank credit facility (the "New Credit Facility"), which included (i)
term loans of $29.0 million, $4.0 million and $2.0 million to Numatics and
its German and Canadian subsidiaries, respectively and (ii) revolving
credit facilities, including letters of credit, of $32.0 million and $3.0
million to Numatics and its German subsidiary, respectively. The revolving
credit facilities permit each of Numatics and its German subsidiary to
borrow up to the lesser of the total amount of its respective revolving
credit facility or a borrowing base computed as a percentage of inventory
and accounts receivable. Interest on term loans to Numatics' Canadian and
German subsidiaries and on the revolving facilities accrues at an annual
rate based on an applicable margin over NBD Bank's prime rate, or LIBOR.
Management estimates that the borrowing base limitations would have limited
the Company's revolving credit availability to approximately $28.4 million
as of December 31, 1998. All borrowings under the revolving credit
facilities mature in March 2004. The term loans are payable in quarterly
installments, which quarterly installments totaled $1.6 million in 1998,
and will total $2.5 million for 1999, $3.0 million for 2000, $3.5 million
for 2001, $4.0 million for 2002, $4.9 million for 2003, $8.4 million for
2004, and $7.1 million for 2005. The New Credit Facility is guaranteed by
all of Numatics' domestic subsidiaries, and the facility and those
guarantees are secured by substantially all the assets of Numatics and its
domestic subsidiaries and, with respect to the loans to Numatics' foreign
subsidiaries, by substantially all the assets of such subsidiaries. The New
Credit Facility includes certain financial and operating covenants, which
among other things restrict the ability of the Company to incur additional
indebtedness, make investments, and take other actions.
Impact of the Year 2000 Issue
-----------------------------
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activities.
The Company implemented an assessment project to address the Year 2000
Issue including information technology (IT) and non-IT systems. The
Company has determined that it will be required to modify or replace
significant portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Company has contracts
in place with external resources and has allocated internal resources to
replace or reprogram and test the software for Year 2000 modifications.
The Company has initiated remediation and testing and is implementing an
action plan to address the Year 2000 Issue. Management estimates that the
majority of testing will be completed by the end of the second quarter of
1999 and that the Year 2000 project will be completed by the end of the
third quarter of 1999. A number of third party audits are being performed
and others are planned. Management presently believes that, with
modifications to existing software and
21
<PAGE>
conversions to new software, the Year 2000 Issue can be mitigated. However,
if such modifications and conversions are not made, or not completed
timely, the Year 2000 Issue could cause production interruptions that could
have a material impact on the operations of the Company. The Company is
developing contingency plans and will continue to do so throughout the
program.
The Company has initiated formal communications with its significant
suppliers and large customers to determine the extent to which the Company
is vulnerable to those third parties' failure to remediate their own Year
2000 Issue. While management expects a successful resolution of all
issues, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be converted in a timely manner, or
that a failure to convent by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company has determined it has no exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
The Company plans to complete the Year 2000 project by the end of the
third quarter, 1999. The total cost of the Year 2000 project is estimated
to be $4.2 million and is being funded through operating cash flows. Of
the total project cost, approximately $3.0 million is attributable to the
purchase of new software and hardware, which will be capitalized. The
remaining $1.2 million represents maintenance and repair of existing
systems and other project costs and will be expensed as incurred over the
next year. As of December 31, 1998, the Company had expended approximately
$2.6 million related to the assessment activities, the development of a
remediation plan, and the implementation of the remediation plan in
connection with its Year 2000 project.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans, and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
Other Matters
-------------
As further discussed in item 11, under "Compensation Committee
Interlocks and Insider Participation," Numatics, Mr. Welker, and all of the
Company's other employee-shareholders are parties to an agreement under
which the Company has the option, but not the obligation, to redeem the
shares of any such shareholder upon the happening of certain events,
including death, disability, or termination of employment. This agreement
covers 94.0% of the Numatics' shares currently outstanding (100.0% at
December 31, 1997). At December 31, 1998, the total redemption value of
these optioned shares was $39.9 million. The indenture governing the Series
B Notes contains substantial limitations on Numatics' ability to redeem
shares but does permit redemptions, including limited cash redemptions, in
certain cases. If one of the triggering events were to occur, the Numatics
Board of Directors would decide whether to exercise the option based on the
facts and circumstances existing at that time. In making such a
determination, the Board could be expected to
22
<PAGE>
consider the following factors, among others: the limitations contained in
the Indenture, the Company's ability to pay or finance the redemption
price, the Company's other anticipated cash needs, and other then-existing
business and economic conditions.
Each of the management shareholders of certain Numatics subsidiaries
(Numation, Numatech, Micro-Filtration, Ultra Air, and Microsmith) is
required to sell his subsidiary shares to Numatics (or the subsidiary) upon
such shareholder's (i) death, (ii) permanent disability or (iii)
termination of employment with the Company. The price to be paid by the
Company for such shares will be determined by a formula based upon a
multiple of earnings of the relevant subsidiary. The obligations of the
Company to purchase such shares are not subject to any limitations.
However, the payment of these amounts may be prohibited by the terms of the
Indenture. Currently, the amounts that would be payable under these
agreements are not material to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to the levels of indebtedness subject to
interest rate fluctuation is contained in Note 2 to the consolidated
financial statements filed with this Form 10-K as exhibit 99.1.
Information with respect to the Company's level of business outside the
United States that is subject to foreign currency exchange rate market risk
is contained in Note 6 to those consolidated financial statements under
the caption "Segment and Geographic Information." Those note hereby are
incorporated in this item by reference.
Interest Rate Risk
------------------
The Company is subject to market risk associated with adverse changes
in interest rates and foreign currency exchange rates, but does not hold
any market risk sensitive instruments for trading purposes. The Company had
total debt of $160.4 million at December 31, 1998, of which $44.2 million
was variable rate debt. The Company measures its interest rate risk by
estimating the net amount by which potential future net earnings would be
impacted by hypothetical changes in market interest rates related to all
interest rate sensitive assets and liabilities. Assuming a hypothetical 20%
increase from the interest rates in effect as of December 31, 1998 and
consistent levels of debt and cash, the estimated reduction in future
earnings, net of tax, would be approximately $ 0.5 million.
Foreign Currency Risk
---------------------
The Company mitigates its foreign currency exchange rate risk
principally by establishing local production and sales facilities in the
markets it serves and by invoicing customers in the same currency as the
source of the products. The Company also monitors its foreign currency
exposure in each country and implements strategies to respond to changing
economic and political environments.
As of December 31, 1998, the Company's net assets (defined as current
assets less current liabilities) subject to foreign currency translation
risk are $17.0 million. The potential decrease in net assets from a
hypothetical 10% adverse change in quoted foreign currency exchange rates
would be approximately $1.7 million.
23
<PAGE>
The sensitivity analysis presented assumes a parallel shift in foreign
currency exchange rates. Exchange rates rarely move in the same direction.
This assumption may overstate the impact of changing exchange rates on
individual assets and liabilities denominated in a foreign currency.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated in this item by
reference to the Company's audited consolidated financial statements filed
with this Form 10-K as exhibit 99.1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table that follows sets forth the name, age at December 31, 1998,
and position with the Company of each person who currently is a Numatics
director or an executive officer of the Company. Information concerning the
business experience for at least the past five years of each of the persons
named is provided after the table. All Numatics directors are elected for
terms of one year and until their successors are elected and qualified.
Name Age Position
---- --- --------
John H. Welker 58 Chairman, President and Chief
Executive Officer
Robert P. Robeson 52 Vice President, Treasurer,
Secretary and Chief Financial
Officer
David K. Dodds 50 Vice President--Sales & Marketing
Henry Fleischer 75 Vice President--Research &
Development
Donald E. McGeachy 63 Vice President--Engineering
David M. Tenniswood 62 Director
Albert A. Koch 56 Director
John P. Musat 53 Director
Tim R. Palmer 41 Director
24
<PAGE>
John H. Welker has been with Numatics (and its predecessor) for a
total of 33 years. He has been Numatics' Chairman of the Board, President,
and CEO since 1990. He was President of Numatics' predecessor from 1983
until the 1990 Buyout and prior to 1983 held a variety of management
positions within that predecessor company.
Robert P. Robeson joined Numatics' predecessor as Chief Financial
Officer in 1988. He continued in that capacity with Numatics in 1990 and
also was named Vice President, and its Treasurer and Secretary. Prior to
joining Numatics' predecessor, Mr. Robeson was CFO of Gelman Sciences, a
publicly traded company.
David K. Dodds has been Vice President-Sales & Marketing since 1994.
Prior to that, he was President of Numatics, Ltd., the Company's Canadian
subsidiary, a position he was appointed to in 1980.
Henry Fleischer has been Vice President-Research & Development since
1992. He joined Numatics' predecessor in 1968 as Chief Engineer and held a
variety of positions from then until the 1990 Buyout and his subsequent
appointment to Vice President in 1992.
Donald E. McGeachy has been Vice President-Engineering since 1992. He
has been with Numatics (or its predecessor) since 1964, was the
predecessor's Chief Engineer from 1975 until the 1990 Buyout and continued
as Numatics' Chief Engineer until 1992.
David M. Tenniswood was Vice President-European Operations of the
Company from 1996 through March 31, 1998. He has been a Numatics Director
since 1990. Prior to 1996, Mr. Tenniswood was President of the Controls
Group at MascoTech for ten years.
Albert A. Koch has been a Numatics Director since 1990. He has been a
Managing Principal of Jay Alix & Associates since 1995. Prior to joining
Jay Alix & Associates, he was a Managing Director of Equity Partners of
America, Ltd. (investment banking and financial consulting).
John P. Musat has been a Numatics Director since 1996. He is a Senior
Vice President at MascoTech Forming Technologies-Braun and has been with
them since 1982.
Tim R. Palmer has been a Numatics Director since 1997. He currently is
a Managing Director of Charlesbank Capital Partners LLC, which manages the
private equity and real estate investment portfolios of the Harvard
University endowment fund. He has been with Charlesbank Capital Partners
LLC since 1990 and also serves on the boards of The WMF Group, Ltd. and
several private companies.
25
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Information
--------------------------------
The table that follows provides information, for the Company's last
completed fiscal year and its fiscal year ended December 31, 1997
concerning the compensation of John H. Welker, Numatics' CEO, and the four
other individuals who were the highest paid executive officers of Numatics
during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation (1)
-----------------------
All Other
Name and Principal Position Year Salary Bonus Compensation (2)
--------------------------- ---- ------- ----- ----------------
<S> <C> <C> <C> <C>
John H. Welker......................... 1998 $301,020 $110,500 $5,000
Chairman, President and CEO 1997 251,020 160,500 5,000
Robert P. Robeson.................... 1998 137,600 62,470 5,000
Vice President, Treasurer, 1997 134,600 62,008 5,000
and CFO
David K. Dodds......................... 1998 127,760 55,022 5,000
Vice President--Sales 1997 125,760 56,444 5,000
and Marketing
Donald E. McGeachy................ 1998 109,800 44,523 4,977
Vice President--Engineering 1997 107,800 48,430 5,000
Henry Fleischer................... 1998 97,520 41,575 4,689
Vice President 1997 95,520 42,911 4,681
Research & Development
---------------
</TABLE>
(1) Does not include perquisites and other personal benefits provided
to named executives, the incremental cost of which to the Company in each
case was less than 10% of the pertinent executive's salary and bonus for
the year.
(2) For each executive and in each year, includes a $2,000 Company
contribution to the Company's deferred contribution and employee savings
plan and a Company matching contribution to that plan based on the
executive's contribution.
Welker Employment Agreement
---------------------------
Numatics has an agreement with John Welker for his employment as CEO
through December 31, 2003. Under this agreement, he is entitled to salary
at specified rates ($300,000 for 1998, $325,000 for 1999, increasing
annually thereafter to $440,000 for 2003), and to a cash performance bonus
supplementing his salary determined pursuant to a formula based on the
Company's operating performance relative to its operating budget. The
agreement also contemplates that Numatics' Board of Directors annually will
consider whether he should be paid a discretionary bonus, whether or not a
performance bonus also is payable.
26
<PAGE>
During the term of the agreement, Numatics is entitled to terminate
Mr. Welker's employment at any time for any reason, upon 60 days' prior
notice to him, and also is entitled to terminate him for "cause" or in
certain cases of "permanent disability" (as defined in the agreement), upon
less prior notice. If the Company were to terminate him not for cause or
permanent disability, or terminated him for permanent disability without
having maintained certain disability insurance in effect for his benefit,
he would be entitled to continuation of his regular salary for a one-year
period commencing on his termination date. In addition, if Mr. Welker were
to die while employed by the Company, the equivalent of his regular salary
for a 60-day period thereafter would be payable to his estate.
The agreement imposes non-competition obligations upon Mr. Welker
during his employment and for one year thereafter and also imposes
confidentiality obligations upon him, which continue for five years after
his employment termination date.
Deferred Compensation Plan
--------------------------
In connection with the 1990 Buyout, Numatics adopted a "top-hat" non-
qualified deferred compensation plan, under which a small group of
management-level employees could become entitled to receive future
distributions of equity interests in Numatics if certain conditions
thereafter were satisfied. In connection with the 1995 Recapitalization,
the plan was amended to change the type of distributions to be made under
the plan to cash, limit the employees eligible to participate in the plan
to those then participating, specify a fixed distribution amount for each
participating employee, and change the terms and conditions for payouts.
In general, under the plan as currently in effect, if a plan
participant's employment with the Company continues until his death,
retirement at or after age 65, or disability (determined as specified in
the plan), or if a participant remains in active Company service through
the later of (a) November 29, 2002 or (b) the twelfth anniversary of the
commencement of his employment and his employment thereafter terminates
other than in an Involuntary Discharge for Cause (as defined in the plan),
which involuntary discharge would cause the forfeiture of his right to any
distribution, then Numatics would become obligated to pay his distribution,
without interest, in regular installments over a five-year period
commencing within 60 days of his employment termination date. Similar five-
year installment payment obligations also would arise under the plan with
respect to all participants if Numatics elected to terminate the plan or
if a Company Change in Control (as defined in the plan) should occur.
However, the current terms of the plan also provide for a pro rata
reduction in the amounts of annual installment payments to distributees and
for lengthening the installment payment period, if Numatics becomes
obligated to make payments to more than one distributee at the same time,
to the extent (if any) necessary to prevent total annual payments to the
distributees in excess of 3.0% of the Company's prior year earnings before
interest, taxes, depreciation, and amortization. In addition, the plan
provides that no distribution payments whatsoever may be made prior to
January 31, 2004.
Eight of the Company's employees participate in this plan, including
all of the named executives. The distribution amounts for the named
executives are as follows: Mr.
27
<PAGE>
Welker, $2,643,546; Mr. Robeson, $105,398; Mr. Dodds, $151,757;
Mr. Fleischer, $130,656; Mr. McGeachy, $151,757.
Directors' Compensation
-----------------------
Numatics pays a meeting fee of $1,600 to each director not also
employed by the Company for each meeting of the Numatics Board of Directors
that he attends. Employee directors are not paid any additional
compensation for Board service. Mr. Palmer's compensation is paid to
Charlesbank Capital Partners LLC pursuant to that company's policies.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
All decisions concerning the 1998 compensation of the Company's
executive officers were made by the Numatics Board of Directors. The
current directors, Messrs. Welker, Tenniswood, Koch, Musat and Palmer,
served on the Board throughout 1998; no other person served as a director
at any time during the year. Except as described below, no current or
former officer and no current employee of Numatics or of any of its
subsidiaries participated in deliberations of the Board concerning
executive compensation during 1998.
Mr. Welker is the controlling shareholder of Numatics and its
Chairman, CEO, and President. Until March 24, 1998, Mr. Tenniswood also
was an executive officer of the Company. None of the other directors is or
ever has been an officer or employee of Numatics or of any of its
subsidiaries.
Mr. Palmer is a Managing Director of an affiliate of the company that
held the Old Subordinated Notes, which were prepaid from the proceeds of
the offering of Interim Notes.
Numatics advanced $185,000 to Mr. Welker during 1996 to purchase the
stock of a departing executive, all of which loan remains outstanding. In
February 1998, Numatics advanced an additional $400,000 to Mr. Welker, all
of which also remains outstanding. These loans are unsecured, bear interest
at 6.5% per annum, and are payable on demand.
Numatics, Mr. Welker, each other current executive officer of the
Company, and all of its other employees who own Numatics' stock are party
to a shareholder agreement that gives Numatics the option, but not the
obligation, to purchase the shares of any shareholder party, including Mr.
Welker, if the shareholder ceases to be a Company employee due to his
death, his Total and Permanent Disability or Involuntary Discharge Without
Cause (each as defined in the agreement), his retirement at or after age
65, or his resignation (if after the later of (i) November 29, 2002 or (ii)
the twelfth anniversary of his date of hire by Numatics or its predecessor)
for a redemption price to be determined by a formula intended to
approximate the shares' fair market value at the time of employment
termination. This agreement covers 94.0% of the outstanding shares of
Numatics common stock, 74.12% of which are held by Mr. Welker.
28
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Over 5% Owners
--------------
So far as is known to the Company, the only persons who are beneficial
owners (within the meaning of SEC Rule 13d-3) of over 5.0% of Numatics'
outstanding common shares are: (a) John H. Welker, whose ownership
information is set forth below under "Management and Directors" and who
maintains an address at the Company's principal executive office; and (b)
Harvard Private Capital Holdings, Inc. (the address of which is c/o
Charlesbank Capital Partners LLC, 600 Atlantic Avenue, Boston,
Massachusetts 02210), which holds 1,276.60 shares, representing 6.0% of the
outstanding shares.
Management and Directors
------------------------
The table that follows sets forth the beneficial ownership (for
purposes of SEC Rule 13d-3) of shares of Numatics' common stock by each
Numatics director, each executive officer named in the Summary Compensation
Table above, and all directors and current executive officers as a group.
<TABLE>
<CAPTION>
Name of Beneficial Owner Shares Owned Percentage Owned
------------------------ ------------ ----------------
<S> <C> <C>
John H. Welker(1) 20,000.00 94.00%
Robert P. Robeson 627.13 2.95%
David K. Dodds 903.05 4.24%
Henry Fleischer 777.61 3.65%
Donald E. McGeachy 903.05 4.24%
David M. Tenniswood 0 --
Albert A. Koch 0 --
John P. Musat 0 --
Tim R. Palmer(2) 0 --
All directors and executive officers
as a group (9 persons)(1)(2) 20,000.00 94.00%
---------------------------
</TABLE>
(1) Mr. Welker has sole voting and dispositive power over 15,769.57
(74.12%) of the reported shares, which are his own, and sole voting power
over all other outstanding shares, excluding those owned by Harvard Private
Capital Holdings, pursuant to a voting agreement among Numatics, Mr. Welker
and all of Numatics' other shareholders who are Company employees.
(2) Excludes shares owned by Harvard. Mr. Palmer is a Managing
Director of an affiliate of Harvard Private Capital Holdings. He disclaims
beneficial ownership of these shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is included under
item 12 and incorporated herein by this reference.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. (All contained in Exhibit 99.1 to this
report. Page numbers shown below.)
Consolidated Financial Statements
Numatics, Incorporated
Years ended December 31, 1998, 1997, and 1996
with Report of Independent Auditors
-----------------------------------
Page in
Exhibit 99.1
------------
Report of Independent Auditors 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity
(Deficiency) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
2. Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts
(found at page F-1 of this report)
3. Exhibits. The following exhibits are filed with this Form
10-K or incorporated herein by reference:
Exhibit No. Description
- ----------- -----------
*3.1.1 Article of Incorporation of Numatics, as amended
*3.1.2 Bylaws of Numatics
*3.2.1 Articles of Incorporation of Numation, Inc., as amended
*3.3.2 Bylaws of Numation, Inc., as amended
*3.2.1 Articles of Incorporation of Numatech, Inc., as amended
*3.3.2 Bylaws of Numatech, Inc., as amended
*3.4.1 Articles of Incorporation of Micro-Filtration, Inc. as amended
*3.4.2 Bylaws of Micro-Filtration, Inc., as amended
*3.5.1 Articles of Incorporation of Ultra Air Products, Inc. as
amended
*3.5.2 Bylaws of Ultra Air Products, Inc., as amended
*3.6.1 Articles of Incorporation of Microsmith, Inc., as amended
*3.6.2 Bylaws of Microsmith, Inc., as amended
*3.7.1 Articles of Incorporation of I.A.E. Incorporated
*3.7.2 Bylaws of I.A.E. Incorporated
*4.1.1 Indenture, dated as March 23, 1998, among Numatics, the
Guarantors identified there, and First Trust National
Association, as trustee (including forms of Interim Notes
and related Subsidiary Guarantees)
*4.1.2 A/B Exchange Registration Rights Agreement, dated as of March
23, 1998, among Numatics, the Guarantors, and the initial
purchasers of the Interim Notes
*4.1.3 Form of Series B Notes (including related Subsidiary
Guarantees by the Guarantors indentified in Indenture)
4.1.4 Supplemental Indenture, dated as of January 25, 1999, by
which Empire Air Systems, Inc. became a Guarantor
*4.2.1 Amended and Restated Loan Agreement, dated March 23, 1998,
among Numatics, Numatics GmbH, Numatics, LTD., NBD Bank, as
Administrative Agent, BankBoston, N.A., as Documentation
Agent, and the Lenders party thereto
*4.2.2 Amended and Restated Guaranty Agreement, dated as of March 23,
1998, by Numatics and the Guarantors in favor of NBD Bank,
as Administrative Agent, and BankBoston, N.A., as
Documentation Agent
4.2.3 Form of Empire Air Systems Guaranty Agreement by Empire Air
Systems, Inc. in favor of NBD Bank, as administrative agent
*10.1 Purchase Agreement dated March 18, 1998 among the initial
purchasers of the Interim Notes, Numatics, and the
Guarantors
*10.2.1 Securities Purchase Agreement, dated as of January 3, 1996,
between Numatics and Harvard Private Capital Holdings
*10.2.2 Numatics, Incorporated Tag-Along and Drag-Along Agreement,
dated January 3, 1996, among Numatics, Harvard Private
Capital Holdings, and shareholders of Numatics
*10.2.3 Registration Agreement, dated as of January 3, 1996, between
Numatics and Harvard Private Capital Holdings
*10.2.4 Form of Guaranty Agreement between Harvard Private Capital
Holdings and I.A.E. Incorporated, dated as of March 23, 1998
(Each of the other guarantors has executed an Amended and
Restated Guaranty Agreement in substantially the same form.)
*10.2.5 Agreement, dated as of March 23, 1998, between Numatics and
Harvard Private Capital Holdings
*10.3 Amended and Restated Stock Transfer Agreement, dated December
28, 1995, among Numatics, John H. Welker, individually and
as trustee of the John H. Welker Trust u/a dtd December 28,
1995, David K. Dodds, Donald E. McGeachey, Henry Fleischer,
individually and as trustee of the Henry Fleischer Trust u/a
dtd March 10, 1993, Robert P. Robeson, John A. Acuff, Bruce
W. Hoppe, David King, and Philip Robinson
+10.3.1 First Amendment, dated June 30, 1998, to Amended and Restated
Stock Transfer Agreement
*10.4 Voting Agreement, dated as November 29, 1990, among Numatics
(under its former name, Numatics Acquisition Corporation)
and certain shareholders of Numatics
*10.5 Employment Agreement, dated January 3, 1996, between Numatics
and John H. Welker**
*10.6 Employment Agreement, dated September 15, 1996, between
Numatics and David M. Tenniswood**
*10.7 Numatics, Incorporated Amended and Restated Deferred
Compensation Plan, adopted December 28, 1995, and related
acknowledgements by Eligible Employees (as therein
defined)**
21.1 List of subsidiaries of Numatics
*27.1 Financial Data Schedule
*99.1 Consolidated Financial Statements--Numatics, Incorporated--
Years ended December 31, 1998, 1997 and 1996 with Report of
Independent Auditors
________________________
* Incorporated by reference to exhibit (having the same exhibit number) to
Registration Statement on Form S-4 filed on April 29, 1998
(File No. 333-51355)
+ Incorporated by reference to Amendment No. 1 to Registration Statement on Form
S-4 filed on July 10, 1998 (File No. 333-51355)
**Indicates contract or compensatory plan or arrangement with one or more
Numatics executive officers and/or directors
(b) Reports on Form 8-K. No reports on Form 8-K were filed by
Numatics during the three months ended December 31, 1998.
30
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - Valuation and Qualifying Accounts
(in thousands)
Column A Column B Column C Column D Column E
Addition
Balance at Charged to Balance at
Beginning of Costs and Deductions- End of
Description Period Expenses Describe Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31,1998
Accounts receivable allowance 60 32 34 (1) 58
Inventory reserve 892 282 180 (2) 994
Deferred tax asset valuation
allowance 1066 0 601 (3) 465
Year ended December 31, 1997
Accounts receivable allowance 132 102 174 (1) 60
Inventory reserve 1029 509 646 (2) 892
Deferred tax asset valuation
allowance 1371 0 305 (3) 1066
Year ended December 31, 1996
Accounts receivable allowance 222 76 166 (1) 132
Inventory reserve 1218 223 412 (2) 1029
Deferred tax asset valuation
allowance 274 1097 0 1371
(1) Uncollectible accounts charged off net of recoveries
(2) Reduction in inventory reserves for inventory disposed of during the year
(3) Utilization of foreign net operating loss carry-forwards.
</TABLE>
F-1
<PAGE>
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.
NUMATICS, INCORPORATED
By:/s/ John H. Welker
--------------------------------
John H. Welker
President and Chief Executive
Officer
Date: March 31, 1999
Pursuant to the requirements of Section 13 or 15(d) 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.
Name Capacity Date
---- -------- ----
/s/ John H. Welker President and Chief Executive March 31,1999
- ---------------------------- Officer and Director
John H. Welker
/s/ Robert P. Robeson Vice President, Treasurer and March 31,1999
- ---------------------------- Chief Financial Officer (also
Robert P. Robeson principal accounting officer)
Director March__, 1999
- ----------------------------
David M. Tenniswood
Director March__, 1999
- ----------------------------
Albert A. Koch
/s/ John P. Musat Director March 31,1999
- ----------------------------
John P. Musat
/s/ Tim R. Palmer Director March 31,1999
- ----------------------------
Tim R. Palmer
S-1
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
*3.1.1 Article of Incorporation of Numatics, as amended
*3.1.2 Bylaws of Numatics
*3.2.1 Articles of Incorporation of Numation, Inc., as amended
*3.3.2 Bylaws of Numation, Inc., as amended
*3.2.1 Articles of Incorporation of Numatech, Inc., as amended
*3.3.2 Bylaws of Numatech, Inc., as amended
*3.4.1 Articles of Incorporation of Micro-Filtration, Inc. as amended
*3.4.2 Bylaws of Micro-Filtration, Inc., as amended
*3.5.1 Articles of Incorporation of Ultra Air Products, Inc. as
amended
*3.5.2 Bylaws of Ultra Air Products, Inc., as amended
*3.6.1 Articles of Incorporation of Microsmith, Inc., as amended
*3.6.2 Bylaws of Microsmith, Inc., as amended
*3.7.1 Articles of Incorporation of I.A.E. Incorporated
*3.7.2 Bylaws of I.A.E. Incorporated
*4.1.1 Indenture, dated as March 23, 1998, among Numatics, the
Guarantors there identified, and First Trust National
Association, as trustee (including forms of Interim Notes
and related Subsidiary Guarantees)
*4.1.2 A/B Exchange Registration Rights Agreement, dated as of March
23, 1998, among Numatics, the Guarantors, and the initial
purchasers of the Interim Notes
*4.1.3 Form of Series B Notes (including related Subsidiary
Guarantees by the Guarantors identified in Indenture)
4.1.4 Supplemental Indenture, dated as of January 25, 1999,
Numatics, by which Empire Air Systems, Inc.,became a
Guarantors
*4.2.1 Amended and Restated Loan Agreement, dated March 23, 1998,
among Numatics, Numatics GmbH, Numatics, LTD., NBD Bank, as
Administrative Agent, BankBoston, N.A., as Documentation
Agent, and the Lenders party thereto
E-1
<PAGE>
*4.2.2 Amended and Restated Guaranty Agreement, dated as of March 23,
1998, by Numatics and the Guarantors in favor of NBD Bank,
as Administrative Agent, and BankBoston, N.A., as
Documentation Agent
4.2.3 Form of Empire Air Systems Guaranty Agreement by Empire Air
Systems, Inc. in favor of NBD Bank, as administrative agent
*10.1 Purchase Agreement dated March 18, 1998 among the initial
purchasers of the Interim Notes, Numatics, and the
Guarantors
*10.2.1 Securities Purchase Agreement, dated as of January 3, 1996,
between Numatics and Harvard Private Capital Holdings
*10.2.2 Numatics, Incorporated Tag-Along and Drag-Along Agreement,
dated January 3, 1996, among Numatics, Harvard Private
Capital Holdings, and shareholders of Numatics
*10.2.3 Registration Agreement, dated as of January 3, 1996, between
Numatics and Harvard Private Capital Holdings
*10.2.4 Form of Guaranty Agreement between Harvard Private Capital
Holdings and I.A.E. Incorporated, dated as of March 23, 1998
(Each of the other guarantors has executed an Amended and
Restated Guaranty Agreement in substantially the same form.)
*10.2.5 Agreement, dated as of March 23, 1998, between Numatics and
Harvard Private Capital Holdings
*10.3 Amended and Restated Stock Transfer Agreement, dated December
28, 1995, among Numatics, John H. Welker, individually and
as trustee of the John H. Welker Trust u/a dtd December 28,
1995, David K. Dodds, Donald E. McGeachey, Henry Fleischer,
individually and as trustee of the Henry Fleischer Trust u/a
dtd March 10, 1993, Robert P. Robeson, John A. Acuff, Bruce
W. Hoppe, David King, and Philip Robinson
+10.3.1 First Amendment, dated June 30, 1998, to Amended and Restated
Stock Transfer Agreement
*10.4 Voting Agreement, dated as November 29, 1990, among Numatics
(under its former name, Numatics Acquisition Corporation)
and certain shareholders of Numatics
*10.5 Employment Agreement, dated January 3, 1996, between Numatics
and John H. Welker**
E-2
<PAGE>
*10.6 Employment Agreement, dated September 15, 1996, between
Numatics and David M. Tenniswood**
*10.7 Numatics, Incorporated Amended and Restated Deferred
Compensation Plan, adopted December 28, 1995, and related
acknowledgements by Eligible Employees (as therein
defined)**
21.1 List of subsidiaries of Numatics
27.1 Financial Data Schedule
*99.1 Consolidated Financial Statements--Numatics, Incorporated--
Years ended December 31, 1998, 1997 and 1996 with Report of
Independent Auditors
________________________
* Incorporated by reference to exhibit (having the same exhibit number) to
Registration Statement on Form S-4 filed on April 29, 1998
(File No. 333-51355)
+ Incorporated by reference to Amendment No. 1 to Registration Statement on Form
S-4 filed on July 10, 1998 (File No. 333-51355)
**Indicates contract or compensatory plan or arrangement with one or more
Numatics executive officers and/or directors
E-3
<PAGE>
Exhibit 4.1.4
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
January 25, 1999, among Empire Air Systems, Inc. a New York Corporation (the
"Guaranteeing Subsidiary"), a subsidiary of Numatics, Incorporated (or its
permitted successor), a Michigan corporation (the "Company"), the other
Guarantors (as defined in the Indenture referred to herein) and First Trust
National Association, as trustee under the indenture referred to below (the
"Trustee").
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture (the "Indenture"), dated as of March 23, 1998 providing for
the issuance of an aggregate principal amount of up to $215,000,000 of 9-5/8%
Senior Subordinated Notes due 2008 (the "Notes");
WHEREAS, the Indenture provides that under certain circumstances the
Guaranteeing Subsidiary shall execute and deliver to the Trustee a supplemental
indenture pursuant to which the Guaranteeing Subsidiary shall unconditionally
guarantee all of the Company's Obligations under the Notes and the Indenture on
the terms and conditions set forth herein (the "Subsidiary Guarantee"); and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Guaranteeing Subsidiary and the Trustee mutually covenant and agree for the
equal and ratable benefit of the Holders of the Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
2. Agreement to Guarantee. The Guaranteeing Subsidiary hereby agrees as
follows:
(a) Along with all Guarantors named in the Indenture, to
jointly and severally Guarantee to each Holder of a Note authenticated
and delivered by the Trustee and to the Trustee and its successors and
assigns, irrespective of the validity and enforceability of the
Indenture, the Notes or the obligations of the Company hereunder or
thereunder, that:
(i) the principal of and interest on the Notes will
be promptly paid in full when due whether at maturity, by
acceleration, redemption or
1
<PAGE>
otherwise, and interest on the overdue principal of and
interest on the Notes, if any, if lawful, and all other
obligations of the Company to the Holders or the Trustee
hereunder or thereunder will be promptly paid in full or
performed, all in accordance with the terms hereof and
thereof; and
(ii) in case of any extension of time of payment or
renewal of any Notes or any of such other obligations, that
same will be promptly paid in full when due or performed in
accordance with the terms of the extension or renewal, whether
at stated maturity, by acceleration or otherwise. Failing
payment when due of any amount so guaranteed or any
performance so guaranteed for whatever reason, the Guarantors
shall be jointly and severally obligated to pay the same
immediately.
(b) The obligations hereunder shall be unconditional,
irrespective of the validity, regularity or enforceability of the Notes
or the Indenture, the absence of any action to enforce the same, any
waiver or consent by any Holder of the Notes with respect to any
provisions hereof or thereof, the recovery of any judgment against the
Company, any action to enforce the same or any other circumstance which
might otherwise constitute a legal or equitable discharge or defense of
a guarantor.
(c) The following is hereby waived: diligence presentment,
demand of payment filing of claims with a court in the event of
insolvency or bankruptcy of the Company, any right to require a
proceeding first against the Company, protest, notice and all demands
whatsoever.
(d) This Subsidiary Guarantee shall not be discharged except
by complete performance of the obligations contained in the Notes and
the Indenture.
(e) If any Holder or the Trustee is required by any court or
otherwise to return to the Company, the Guarantors, or any Custodian,
Trustee, liquidator or other similar official acting in relation to
either the Company or the Guarantors, any amount paid by either to the
Trustee or such Holder, this Subsidiary Guarantee, to the extent
theretofore discharged, shall be reinstated in full force and effect.
(f) The Guaranteeing Subsidiary shall not be entitled to any
right of subrogation in relation to the Holders in respect of any
obligations guaranteed hereby until payment in full of all obligations
guaranteed hereby.
2
<PAGE>
(g) As between the Guarantors, on the one hand, and the
Holders and the Trustee, on the other hand, (x) the maturity of the
obligations guaranteed hereby may be accelerated as provided in Article
VI of the Indenture for the purposes of this Subsidiary Guarantee,
notwithstanding any stay, injunction or other prohibition preventing
such acceleration in respect of the obligations guaranteed hereby, and
(y) in the event of any declaration of acceleration of such obligations
as provided in Article VI of the Indenture such obligations (whether or
not due and payable) shall forthwith become due and payable by the
Guarantors for the purpose of this Subsidiary Guarantee.
(h) The Guarantors shall have the right to seek contribution
from any non-paying Guarantor so long as the exercise of such right
does not impair the rights of the Holders under the Subsidiary
Guarantee.
(i) Pursuant to Section 11.03 of the Indenture, after giving
effect to any maximum amount and any other contingent and fixed
liabilities that are relevant under any applicable Bankruptcy or
fraudulent conveyance laws, and, to the extent relevant, after giving
effect to any collections from, rights to receive contribution from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under Article XI of the Indenture,
the Subsidiary Guarantee shall not result in the obligations of such
Guarantor under its Subsidiary Guarantee constituting a fraudulent
transfer or conveyance or being improper or prohibited under applicable
state law.
3. Execution and Delivery. Each Guaranteeing Subsidiary agrees that the
Note Guarantees shall remain in full force and effect notwithstanding any
failure to endorse on each Note a notation of such Subsidiary Guarantee.
4. Guaranteeing Subsidiary May Consolidate Etc. on Certain Terms.
(a) The Guaranteeing Subsidiary may not consolidate with or
merge with or into (whether or not such Guarantor is the surviving
Person) another corporation, Person or entity whether or not affiliated
with such Guarantor unless:
(i) subject to Section 11.05 of the Indenture, the
Person formed by or surviving any such consolidation or merger
(if other than a Guarantor or the Company) unconditionally
assumes all the obligations of such Guarantor, pursuant to a
supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Notes, the Indenture
and the Subsidiary Guarantee on the terms set forth herein or
therein; and
(ii) immediately after giving effect to such
transaction, no Default or Event of Default exists.
3
<PAGE>
(b) In case of any such consolidation, merger, sale or
conveyance and upon the assumption by the successor corporation, by
supplemental indenture, executed and delivered to the Trustee and
satisfactory in form to the Trustee, of the Subsidiary Guarantee
endorsed upon the Notes and the due and punctual performance of all of
the covenants and conditions of the Indenture to be performed by the
Guarantor, such successor corporation shall succeed to and be
substituted for the Guarantor with the same effect as if it had been
named herein as a Guarantor. Such successor corporation thereupon may
cause to be signed any or all of the Subsidiary Guarantees to be
endorsed upon all of the Notes issuable hereunder which theretofore
shall not have been signed by the Company and delivered to the Trustee.
All the Subsidiary Guarantees so issued shall in all respects have the
same legal rank and benefit under the Indenture as the Subsidiary
Guarantees theretofore and thereafter issued in accordance with the
terms of the Indenture as though all of such Subsidiary Guarantees had
been issued at the date of the execution hereof.
(c) Except as set forth in Articles IV and V of the Indenture,
and notwithstanding clauses (a) and (b) above, nothing contained in the
Indenture or in any of the Notes shall prevent any consolidation or
merger of a Guarantor with or into the Company or another Guarantor, or
shall prevent any sale or conveyance of the property of a Guarantor as
an entirety or substantially as an entirety to the Company or another
Guarantor.
5. Releases.
(a) In the event of a sale or other disposition of all of the
assets of any Guarantor, by way of merger, consolidation or otherwise,
or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other
disposition, by way of merger, consolidation or otherwise, of all of
the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all or
substantially all of the assets of such Guarantor) will be released and
relieved of any obligations under its Subsidiary Guarantee. The
obligation to apply the Net Proceeds of such sale or other disposition
in accordance with the applicable provisions of the Indenture,
including without limitation Section 4.10 of the Indenture, shall
continue to be enforceable. Upon delivery by the Company to the Trustee
of an Officers' Certificate and an Opinion of Counsel to the effect
that such sale or other disposition was made by the Company in
accordance with the provisions of the Indenture, including without
limitation Section 4.10 of the Indenture, the Trustee shall execute any
documents reasonably required in order to evidence the release of any
Guarantor from its obligations under its Subsidiary Guarantee.
4
<PAGE>
(b) Any Guarantor not released from its obligations under its
Subsidiary Guarantee shall remain liable for the full amount of
principal of and interest on the Notes and for the other obligations of
any Guarantor under the Indenture as provided in Article X of the
Indenture.
6. No Recourse Against Others. No past, present or future director,
officer, employee, incorporator, stockholder or agent of the Guaranteeing
Subsidiary, as such, shall have any liability for any obligations of the Company
or any Guaranteeing Subsidiary under the Notes, any Subsidiary Guarantees, the
Indenture or this Supplemental Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of the
Notes by accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver may
not be effective to waive liabilities under the federal securities laws and it
is the view of the Commission that such a waiver is against public policy.
7. NEW YORK LAW TO GOVERN. THE INTERNAL LAW OF THE STATE OF NEW YORK
SHALL GOVERN AND BE USED TO CONSTRUE THIS SUPPLEMENTAL INDENTURE BUT WITHOUT
GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT
THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
8. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
9. Effect of Headings. The Section headings herein are for convenience
only and shall not affect the construction hereof.
10. The Trustee. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the recitals contained herein, all of which
recitals are made solely by the Guaranteeing Subsidiary and the Company.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated:
EMPIRE AIR SYSTEMS, INC., a New York
corporation
By: Robert P. Robeson
-----------------------------------
Robert P. Robeson
Secretary/Treasurer
U.S. BANK TRUST NATIONAL ASSOCIATION,
formerly known as FIRST TRUST NATIONAL
ASSOCIATION, as Trustee
By: James D. Khami
------------------------------------
Name: James D. Khami
Title: Vice President
6
<PAGE>
Exhibit 4.2.3
-------------
Form of
EMPIRE AIR SYSTEMS GUARANTY AGREEMENT
-------------------------------------
THIS EMPIRE AIR SYSTEMS GUARANTY AGREEMENT, dated as of February , 1999
----
(this "Guaranty"), is made by EMPIRE AIR SYSTEMS, INC., a New York corporation
(the above corporation and each other corporation, if any, making this Guaranty
referred to, collectively, as the "Guarantors" and, individually as a
----------
"Guarantor"), in favor of NBD BANK, a Michigan banking corporation, as
---------
administrative agent (in such capacity, the "Administrative Agent") for the
benefit of itself, BANKBOSTON, N.A., a national banking association, as
documentation agent (in such capacity, the "Documentation Agent" and,
collectively with the Administrative Agent, the "Agents") and the lenders (the
"Lenders") now or hereafter parties to the Loan Agreement described below.
WITNESSETH:
A. The Agents and the Lenders have entered into the Amended and Restated
Loan Agreement dated as of March 23, 1998 (as amended or modified from time to
time, including any agreement entered into in substitution therefor, the "Loan
Agreement") with Numatics, Incorporated, a Michigan corporation (the "Company"),
Numatics GmbH, a corporation organized and existing under the laws of the
Federal Republic of Germany ("Numatics GmbH"), and Numatics Ltd., a corporation
organized and existing under the laws of Canada ("Numatics Ltd." and,
collectively with the Company and Numatics GmbH, the "Borrowers") pursuant to
which, among other things, the Lenders have agreed, subject to the terms and
conditions thereof, to extend credit to the Borrowers.
B. The Guarantors and the Borrowers and the Company's other subsidiaries
are engaged as an integrated group and the integrated operation requires
financing on such a basis that credit supplied to the Borrowers can be made
available from time to time to the Company and its subsidiaries, including
without limitation the Guarantors, as required for the continued successful
operation of the Company and its subsidiaries and the integrated operation as a
whole. The Company and the Borrowers have requested that the Lenders lend and
make credit available to the Borrowers for the purpose of financing the
integrated operations of the Company and its subsidiaries with the Guarantors
expecting to derive benefit, directly or indirectly, from the loans and letters
of credit extended by the Lenders to the Borrowers, both in their separate
capacity and as a member of the integrated group, inasmuch as the successful
operation and condition of each Guarantor is dependent upon the continued
successful performance of the functions of the integrated group as a whole.
<PAGE>
C. The Guarantors desire that the Agents and the Lenders enter into the
Loan Agreement for the purposes described above and are willing to enter into
this Guaranty in order to provide inducement to the Lenders to enter into the
Loan Agreement, each Guarantor has reviewed and is familiar with the Loan
Agreement, the Notes, the Security Documents and all documents, agreements,
instruments and certificates evidencing or otherwise pertaining thereto and to
any other indebtedness, obligations and liabilities of the Borrowers to the
Lenders, being herein collectively referred to as the "Operative Documents") and
each Guarantor has determined that it is in its best interest and to its
financial benefit that the Borrowers enter into the Loan Agreement and the
transactions contemplated thereby, and that it enter into this Guaranty.
NOW, THEREFORE, as an inducement to the Lenders to enter into and continue
from time to time such transactions with the Borrowers, the parties agree with
the Lenders as follows:
1. Guarantee of Obligations. A. Each Guarantor hereby, jointly and
------------------------
severally:
(i) guarantees to the Lenders, as principal obligor and not as surety
only, the prompt payment, when due, whether by scheduled maturity, acceleration
or otherwise, any and all Advances made to the Borrowers pursuant to the Loan
Agreement and accrued and unpaid interest thereon (including interest which may
otherwise cease to accrue by operation of any insolvency law, rule, regulation
or interpretation thereof) when due, whether by scheduled maturity, acceleration
or otherwise, and all other indebtedness of the Borrowers to the Lenders,
whether now existing or hereafter arising, including, without limitation,
default interest, indemnification payments and all reasonable costs and expenses
incurred by the Administrative Agent in connection with enforcing any
obligations of any Borrower thereunder, including without limitation the
reasonable fees and disbursements of counsel;
(ii) guarantees to the Agents and the Lenders the prompt and punctual
performance and observance of each and every term, covenant or agreement
contained in the Operative Documents, within any grace period applicable
thereto, to be performed or observed on the part of the Borrowers;
(iii) guarantees to the Lenders the prompt payment of all
indebtedness, obligations and liabilities of the Borrowers or any Subsidiary in
respect of any interest rate or currency swap agreements or other similar
transactions with any Lender;
(iv) guarantees to the Lenders the prompt and complete payment of any
and all other indebtedness, obligations and liabilities of each of the Borrowers
and their respective Subsidiaries to any Agent or any Lender, whether now
existing or
GUARANTY AGREEMENT
------------------
2
<PAGE>
hereafter arising, direct or indirect (including without limitation,
any participation interest acquired by any Lender in such indebtedness,
obligations or liabilities of any Borrower to any other person), absolute or
contingent, joint and/or several, secured or unsecured, arising by operation of
law or otherwise, and whether incurred by any Borrower as principal, surety,
endorser, guarantor, accommodation party or otherwise, including without
limitation any increase in the indebtedness, obligations and liabilities
guaranteed hereby (and each Guarantor hereby acknowledges and agrees that any
such increase shall be guaranteed hereby); and
(v) agrees to make prompt payment to the Administrative
Agent, on demand, of any and all reasonable costs and expenses incurred by the
Administrative Agent in connection with enforcing the obligations of the
Guarantors hereunder, including, without limitation the reasonable fees and
disbursements of counsel.
All of the above-described indebtedness, obligations,liabilities and
undertakings are collectively referred to as the "Guaranteed.
----------
Obligations". It is expressly understood and agreed that, for purposes of this
- -----------
Guaranty, references to the Lenders shall include, and the benefit of this
Guaranty shall extend to, all foreign branches and all foreign affiliates of
each of the Lenders and the Guaranteed Obligations shall include all of the
above-described indebtedness, obligations, liabilities and undertakings whether
owed to each of the Lenders or to any of such foreign branches or foreign
affiliates.
(b) If for any reason any duty, agreement or obligation of any
Borrower contained in the Operative Documents shall not be performed or observed
by any Borrower as provided therein, or if any amount payable under or in
connection with the Operative Documents shall not be paid in full when the same
becomes due and payable, each Guarantor undertakes, but without duplication, to
perform or cause to be performed, within any grace period applicable thereto,
each of such duties, agreements and obligations and to pay forthwith each such
amount to the Administrative Agent for the benefit of the Lenders regardless of
any defense or setoff or counterclaim which any Borrower may have or assert, and
regardless of any other condition or contingency.
(c) The books and records of each of the Lenders and any certificate
delivered by any Lender to the Guarantors in respect thereof, shall be prima
facie evidence of the amount owing and unpaid in respect of the Guaranteed
Obligations. The failure to record any such information on such books and
records shall not, however, limit or otherwise affect the obligations of any
Borrower to pay such amount or the obligations of the Guarantors hereunder with
respect thereto.
2. Nature of Guaranty. This Guaranty is an absolute, unconditional and
------------------
irrevocable guaranty of payment and not a guaranty of collection and is wholly
independent of and in addition to other rights and remedies of the Lenders and
the Agents and is not contingent upon the pursuit by any Agent or any Lender of
any such rights and
GUARANTY AGREEMENT
------------------
3
<PAGE>
remedies, such pursuit being hereby waived by each Guarantor. The obligations of
each Guarantor under this Guaranty are joint and several with any other
guarantor of the Guaranteed Obligations, and such obligations of each Guarantor
may be enforced against each Guarantor separately or against any two or more
jointly, or against some separately or some jointly.
3. Waivers and Other Agreements. Each Guarantor hereby unconditionally
----------------------------
(a) waives any requirement that the Lenders or the Agents upon the occurrence of
any default under any of the Operative Documents by any Borrower, first make
demand upon, or seek to enforce remedies against, such Borrower before demanding
payment under or seeking to enforce this Guaranty, (b) covenants that this
Guaranty will not be discharged except by complete performance of all
obligations of the Borrowers contained in the Operative Documents, (c) agrees
that this Guaranty shall remain in full force and effect without regard to, and
shall not be affected or impaired, without limitation, by any- invalidity,
irregularity or unenforceability in whole or in part of the Operative Documents
or any limitation on the liability of any Borrower thereunder, or any limitation
on the method or terms of payment thereunder which may now or hereafter be
caused or imposed in any manner whatsoever (including, without limitation, usury
laws), (d) waives diligence, presentment and protest with respect to, and any
notice of default or dishonor in the payment of any amount at any time payable
by any Borrower under or in connection with the Operative Documents, and further
waives any requirement of notice of acceptance of, or other formality relating
to, this Guaranty and (e) agrees that the Guaranteed Obligations shall include
any amounts paid by any Borrower to the Lenders which may be required to be
returned to any Borrower, or to any representative or to a trustee, custodian or
receiver for any Borrower. The obligations of each of the Guarantors hereunder
shall be complete and binding forthwith upon the execution of this Guaranty by
it and subject to no condition, whatsoever, precedent or otherwise.
4. Obligations Absolute. The obligations, covenants, agreements and duties
--------------------
of each Guarantor under this Guaranty shall not be released, affected or
impaired by any of the following whether or not undertaken with notice to or
consent of the Guarantor: (a) any assignment or transfer, in whole or in part,
of any of the Guaranteed Obligations or the Operative Documents although made
without notice to or consent of the Guarantor, or (b) any waiver by the Lenders
or the Agents, or by any other person, of the performance or observance by any
Borrower of any of the agreements, covenants, terms or conditions contained in
the Operative Documents, or (c) any indulgence in or the extension of the time
for payment by any Borrower of any amounts payable under or in connection with
the Operative Documents or of the time for performance by any Borrower of any
other obligations under or arising out of the Operative Documents, or the
extension or renewal thereof, or (d) the modification, amendment or waiver
(whether material or otherwise) of any duty, agreement or obligation of any
Borrower set forth in the Operative Documents (the modification, amendment or
waiver from time to time of the Operative Documents being expressly authorized
without further notice to or consent of the Guarantor), or (e)
GUARANTY AGREEMENT
------------------
4
<PAGE>
the voluntary or involuntary liquidation, sale or other disposition of all or
substantially all of the assets of any Borrower, or any receivership,
insolvency, bankruptcy, reorganization, or other similar proceedings, affecting
any Borrower or any of its assets, or (f) the release of any security, if any,
for the obligations of any Borrower under any of the Operative Documents, or the
impairment of or failure to perfect an interest in any such security, or (g) the
merger or consolidation of any Borrower or any of the Guarantors with any other
person, or (h) the release or discharge of any Borrower or any Guarantor from
the performance or observance of any agreement, covenant, term or condition
contained in the Operative Documents or this Guaranty, by operation of law or
otherwise, or (i) the running of any limitation period otherwise applicable, or
(j) any exercise or non-exercise of any right, remedy, power or privilege in
respect of this Guaranty or any of the Operative Documents, including without
limitation the release, discharge or variance of the liability of any Guarantor,
or (k) any other cause whether similar or dissimilar to the foregoing which
would release, affect or impair the obligations, covenants, agreements or duties
of the Guarantor hereunder.
5. Indemnity. As a separate, additional and continuing obligation, each
---------
Guarantor, jointly and severally, unconditionally and irrevocably undertakes and
agrees with the Lenders and the Agents that, should the Guaranteed Obligations
not be recoverable from any Guarantor under paragraph 1 for any reason
whatsoever (including, without limitation, by reason of any provision of the
Operative Documents or any other undertaking or obligation arising by law or
otherwise in connection therewith being or becoming void, unenforceable, or
otherwise invalid under any applicable law) then, notwithstanding any knowledge
thereof by the Lenders or the Agents at any time, each Guarantor as sole,
original and independent obligor, upon demand by the Administrative Agent, will
make payment to the Administrative Agent for the benefit of the Lenders of the
Guaranteed Obligations by way of a full indemnity in such currency and otherwise
in such manner as is provided in the Operative Documents or in accordance with
such other undertaking or obligation, as the case may be.
6. International Transaction. This Guaranty arises in the context of an
-------------------------
international transaction, and the specification of payment to any Agent or any
Lender in a specific currency at a specific place and time pursuant to the
Operative Documents is of the essence. Such specified currency shall be the
currency of account and payment. The obligation of the Guarantors hereunder
shall not be discharged by an amount paid in any other currency or at another
place or time, whether pursuant to a judgment or otherwise, to the extent that
the amount so paid, on prompt conversion into the applicable currency and
transfer to the Administrative Agent at the place for payment under normal
banking procedure, does not yield the amount of such currency due under this
Guaranty and the related Operative Documents. In the event that any payment,
whether pursuant to a judgment or otherwise, upon conversion and transfer, does
not result in payment of the amount of such currency due under the Operative
Documents, the Lenders and the
GUARANTY AGREEMENT
------------------
5
<PAGE>
Agents shall have an independent cause of action against the Guarantors for
the currency deficiency.
7. Judgments. If for purposes of obtaining judgment in any court it becomes
---------
necessary to convert any currency due hereunder or under any Operative Document,
as the case may be, into any other currency, the conversion shall be made at the
Administrative Agent's spot rate of exchange prevailing on the day before the
day on which the judgment is given. In the event there is a change in the
Administrative Agent's spot rate of exchange between the day before the day on
which the judgment is given and the date of payment of such judgment, the
Guarantors will pay such additional amount, if any, or be credited for such
lesser amount as may be necessary to ensure that the amount paid on such date is
the amount in such other currency which when converted at the Administrative
Agent's spot rate of exchange prevailing on the date of payment would yield the
same amount of the currency due hereunder or under any Operative Document, as
the case may be, as would have resulted from a conversion on the day before the
day on which such judgment was given. Any amount due from the Guarantors under
this paragraph 7 will be due as a separate debt and shall not be affected by
judgment being obtained for any other sum due under or in respect of this
Guaranty.
8. No Setoff or Deduction. All payments of the Guaranteed Obligations
----------------------
hereunder shall be made by the Guarantors without setoff or counterclaim, and
free and clear of, and without deduction or withholding for, or on account of,
any present or future taxes, levies, imposts, duties, fees, assessments, or
other charges of whatever nature, imposed by any governmental authority, or by
any department, agency or other political subdivision or taxing authority. If
such taxes, levies, imposts, duties, fees, assessments or other charges are
imposed, the Guarantors will pay such additional amounts as may be necessary so
that payment of the Guaranteed Obligations, after withholding or deduction for
or on account thereof, will not be less than any amount provided to be paid
hereunder or under any Operative Document, as the case may be, and, in any such
case, the Guarantors will furnish to the Administrative Agent certified copies
of all tax receipts evidencing the payment of such amounts within 45 days after
the date any such payment is due pursuant to applicable law.
9. Defaults. The occurrence of any one or more of the following events or
--------
conditions shall be deemed an "Event of Default" under this Guaranty:
(a) Any Guarantor shall fail to pay when due any amount payable under
this Guaranty; or
(b) Any representation or warranty made by the Guarantor in this
Guaranty, or in any certificate, report, financial statement or other document
is furnished by or on behalf of any Guarantor shall prove to have been incorrect
in any material respect when made or deemed made; or
GUARANTY AGREEMENT
------------------
6
<PAGE>
(c) Any Guarantor shall fail to perform or observe any term, covenant
or agreement contained in this Guaranty beyond any period of grace, if any,
provided with respect thereto; or
(d) Any event of default under the Loan Agreement.
10. Remedies. (a) Upon the occurrence and during the continuance of any
--------
Event of Default, the Administrative Agent on behalf of the Lenders may, in
addition to the remedies provided in the Operative Documents, exercise and
enforce any and all other rights and remedies available to the Agents or any
Lender, whether arising under this Guaranty or the Operative Documents or under
applicable law, in any manner deemed appropriate by the Administrative Agent and
the Lenders, including suit in equity, action at law, or other appropriate
proceedings, whether for the specific performance (to the extent permitted by
law) of any covenant or agreement contained in this Guaranty or the Operative
Documents or in aid of the exercise of any power granted in this paragraph 10.
(b) Upon the occurrence and during the continuance of any Event of
Default, each of the Lenders may at any time and from time to time, without
notice to any Guarantor or any Borrower (any requirement for such notice being
expressly waived by each Guarantor and each Borrower) set off and apply against
any and all of the obligations of any Guarantor or each Borrower now or
hereafter existing under this Guaranty or any Operative Document any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by the Lenders to or for the
credit or the account of any Guarantor or any Borrower and any property of any
Guarantor or any Borrower from time to time in possession of any Lender,
irrespective of whether or not such Lender shall have made any demand hereunder
and although such obligations may be contingent and unmatured. Each of the
Lenders agrees to provide notice to such Guarantor or such Borrower, as the case
may be, within a reasonable period of time after the exercise of its set off
rights. The Guarantors and the Borrowers each hereby grant to each Lender a lien
on and security interest in all such deposits, indebtedness and property as
collateral security for the payment and performance of the obligations of the
Guarantors and the Borrower under this Guaranty and the Operative Documents.
(c) The rights of the Lenders and the Agents under this paragraph 10
are in addition to other rights and remedies (including, without limitation,
other rights of setoff) which any Agent or any Lender may have. After the
occurrence and during the continuance of any Event of Default, the Lenders and
the Administrative Agent may apply any payments and other amounts received in
respect of the Guaranteed Obligations in such manner as they may determine to
any obligations of the Borrowers, the Guarantors [or any of their respective
subsidiaries or affiliates owing to the Lenders].
GUARANTY AGREEMENT
------------------
7
<PAGE>
11. Waiver. Each Guarantor agrees that it will not at any time insist upon
------
or plead, or in any manner whatever claim or take any benefit or advantage of
any applicable present or future stay, extension or moratorium law, which may
affect observance or performance of the provisions of this Guaranty or any
Operative Document; nor will it claim, take or insist upon any benefit or
advantage of any present or future law providing for the evaluation or appraisal
of any security for its obligations hereunder or of the Borrowers under this
Guaranty or any Operative Document prior to any sale or sales thereof which may
be made under or by virtue of any instrument governing the same; nor will it,
after any such sale or sales claim or exercise any right, under any applicable
law, to redeem any portion of such security so sold.
12. Amendments, Etc. No amendment or waiver of any provision of this
---------------
Guaranty, nor consent to any departure by any Guarantor therefrom, shall be
effective unless the same shall be in writing and signed by the Lenders and the
Administrative Agent, and then such amendment, waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. Each such amendment, waiver or consent shall be binding upon the
Borrowers, whether or not undertaken with notice to or the consent of the
Borrowers. Each Borrower, by accepting and entering into any loans, credit and
other banking transactions with the Lenders, shall be deemed to have
acknowledged and agreed to the terms and conditions hereof, including without
limitation paragraphs 9 and 10 hereof. Each Guarantor agrees from time to time
to provide to the Lenders such confirmation thereof as any Lender may request.
13. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be delivered or sent to the Guarantors at the respective
address set forth next to the name of each Guarantor on the signature pages
hereof and in the manner, and with respect to the Administrative Agent at the
address, provided in accordance with Section 8.2 of the Loan Agreement.
14. Conduct No Waiver; Remedies Cumulative. The obligations of the
--------------------------------------
Guarantors under this Guaranty are continuing obligations and a fresh cause of
action shall arise in respect of each default hereunder. No course of dealing on
the part of any Agent or any Lender, nor any delay or failure on the part of any
Agent or any Lender in exercising any right, power or privilege hereunder or
under any Operative Document shall operate as a waiver of such right, power or
privilege or otherwise prejudice any Agent's or any Lender's rights and remedies
hereunder or thereunder; nor shall any single or partial exercise thereof
preclude any further exercise thereof or the exercise of any other right, power
or privilege. No right or remedy conferred upon or reserved to any Agent or any
Lender under this Guaranty is intended to be exclusive of any other right or
remedy, and every right and remedy shall be cumulative and in addition to every
other right or remedy given hereunder or under any Operative Document or now or
hereafter existing under any applicable law. Every right and remedy given by
this Guaranty or under any Operative
GUARANTY AGREEMENT
------------------
8
<PAGE>
Document or by applicable law to any Agent or any Lender may be exercised
from time to time and as often as may be deemed expedient by an agent or any
Lender.
15. Reliance on and Survival of Various Provisions. All terms, covenants,
----------------------------------------------
agreements, representations and warranties of the Guarantors made herein or in
any certificate or other document delivered pursuant hereto shall be deemed to
be material and to have been relied upon by the Agents and the Lenders,
notwithstanding any investigation heretofore or hereafter made by the Agents and
the Lenders or on their behalf.
16. No Investigation. Each Guarantor hereby waives unconditionally any
----------------
obligation which, in the absence of this provision, the Agents and the Lenders
might otherwise have to investigate or to assure that there has been compliance
with the law of any jurisdiction with respect to the Guaranteed Obligations
recognizing that, to save both time and expense, the Guarantors have requested
that the Agents and the Lenders not undertake such investigation.
17. Governing Law, This Guaranty is a contract made under, and the rights
-------------
and obligations of the parties hereunder, shall be governed by and construed in
accordance with, the laws of the State of Michigan applicable to contracts to be
made and to be performed entirely within such State without regard to the choice
of law principle of such State. Each Guarantor agrees that any legal action or
proceeding with respect to this Guaranty or the transactions contemplated hereby
or by the Operative Documents or related hereto or thereto shall be brought in a
court in the State of Michigan, or a court of the United States of America
sitting in the State of Michigan, and each Guarantor hereby submits to and
accepts generally and unconditionally the jurisdiction of those courts with
respect to its person and property, and irrevocably consents to the service of
process in connection with any such action or proceeding by personal delivery to
the Guarantors or by mailing thereof by registered or certified mail, postage
prepaid, to the Guarantors or by mailing thereof by registered or certified
mail, postage prepaid, to the Guarantors at the address as provided from time to
time in paragraph 13. Each Guarantor further agrees upon the request of the
Administrative Agent to appoint an agent for service of process and to maintain
such an agent in the State of Michigan for such purpose. Notwithstanding the
foregoing, nothing in this paragraph shall affect the right of the Agents or the
Lenders to serve process in any other manner permitted by law or limit the right
of the Agents or the Lenders to bring any such action or proceeding against any
Guarantor or its property in the courts of any other jurisdiction. Each
Guarantor hereby irrevocably waives any objection to the laying of venue of any
such suit or proceeding in the above-described courts.
18. Headings, Etc. The headings of the various subdivisions hereof are
-------------
for convenience of reference only and shall in no way modify any of the terms or
provisions hereof. If any provision of this Guaranty refers to any action to be
taken by any person,
GUARANTY AGREEMENT
------------------
9
<PAGE>
or which such person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such person,
whether or not expressly specified in such provision.
19. Integration and Severability; Enforceability. This Guaranty and the
--------------------------------------------
Operative Documents embody the entire agreement and understanding between the
Guarantors and the Lenders, and supersede all prior agreements and
understandings, relating to the subject matter hereof. In any case one or more
of the obligations of any Guarantor or any Borrower under this Guaranty or any
Operative Document shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
obligations of such Guarantor or any Borrower shall not in any way be affected
or impaired thereby, and such invalidity, illegality or unenforceability in one
jurisdiction shall not affect the validity, legality or enforceability of the
obligations of any Guarantor or any Borrower under this Guaranty or any
Operative Document in any other jurisdiction. It is expressly acknowledged and
agreed that the obligations of any Guarantor under this Guaranty shall not in
any way be affected or impaired by any invalidity, illegality or
unenforceability of any obligation of any Borrower under any Operative Document.
If at any time all or any portion of the obligation of any Guarantor under this
Guaranty would otherwise be determined by a court of competent jurisdiction to
be invalid, unenforceable or avoidable under Section 548 of the federal
Bankruptcy Code or under a similar applicable law of any jurisdiction, then
notwithstanding any other provisions of this Guaranty to the contrary such
obligation or portion thereof of such Guarantor under this Guaranty shall be
limited to the greatest of (i) the value of any quantifiable economic benefits
accruing to such Guarantor as a result of this Guaranty, (ii) an amount equal to
95% of the excess on the date the relevant liabilities were incurred of the
present fair saleable value of the assets of such Guarantor over the amount of
all liabilities of such Guarantor, contingent or otherwise, and (iii) the
maximum amount for which this Guaranty is determined to be enforceable.
20. Subordination, Subrogation. Etc. Each Guarantor agrees that any present
-------------------------------
or future indebtedness, obligations or liabilities of the Borrowers to the
Guarantor shall be fully subordinate and junior in right and priority of payment
to any present or future indebtedness, obligations or liabilities of the
Borrowers to the Lenders. Each Guarantor waives any right of subrogation,
reimbursement, indemnity, exoneration, assignment, implied contract or any other
claim whatsoever it may now or hereafter have against any Borrower, including
without limitation any rights of recourse to security for the debts and
obligations of any Borrower, unless and until the Guaranteed Obligations shall
have been irrevocably paid in full.
21. Counterpart Execution. This Guaranty may be signed upon any number of
---------------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument. This Guaranty shall
become effective
GUARANTY AGREEMENT
------------------
10
<PAGE>
as to each Guarantor when a counterpart hereof shall have been signed by such
Guarantor.
22. Waiver of Jury Trial. The Lenders and the Agents in accepting this
--------------------
Guaranty, and each Guarantor, after consulting or having had the opportunity to
consult with counsel, knowingly, voluntarily and intentionally waive any right
any of them may have to a trial by jury in any litigation based upon or arising
out of this Guaranty, any Operative Document or any related instrument or
agreement or any of the transactions contemplated by this Guaranty or any
Operative Document or related hereto or thereto. Neither the Lenders and the
Agents nor any Guarantor shall seek to consolidate, by counterclaim or
otherwise, any such action in which a jury trial has been waived with any other
action in which a jury trial cannot be or has not been waived. These provisions
shall not be deemed to have been modified in any respect or relinquished by the
Lenders, the Agents or the Guarantors except by a written instrument executed by
all of them.
[The rest of this page intentionally left blank.]
GUARANTY AGREEMENT
------------------
11
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly
executed and to be delivered as of the day and year first set forth above.
Address for Notice: EMPIRE AIR SYSTEMS, INC.
c/o Numatics Incorporated By:
1450 Milford Road -------------------------------
Highland, Michigan 48357 Its:
Attention: Chief Financial Officer -------------------------------
Facsimile No.: (810) 887-2142
GUARANTY AGREEMENT
------------------
12
<PAGE>
Exhibit 21.1
List of Subsidiaries of Issuer
Percentage of
Shares Owned
by Issuer
-------------
Micro-Filtration, Inc.; incorporated in Michigan 80%
Numation Inc.; incorporated in Michigan 90%
Numatech Inc.; incorporated in Michigan 88%
I.A.E. Incorporated; incorporated in Michigan 100%
Ultra Air Products, Inc.; incorporated in Michigan 80%
Microsmith, Inc.; incorporated in Arizona 90%
Numatics B.V.; organized in the Netherlands 100%
Numatics S.A. de C.V.; organized in Mexico 100%
Numatics S.A.R.L.; organized in France 100%
Numatics Ltd.; organized in the United Kingdom 100%
Numatics Ltd.; organized in Canada 100%
NAC Beteilingungs GmbH; organized in Germany 100%
Numatics GmbH; organized in Germany 100%
Numatics K.F.T.; organized in Hungary 100%
Numatics Ltd; organized in Taiwan 95%
Numatics S.R.L.; organized in Italy 100%
Univer GmbH; organized in Germany 100%
Empire Air Systems, Inc.; incorporated in New York 100%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-1-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,121,142 701,072
<SECURITIES> 0 0
<RECEIVABLES> 21,665,615 22,174,234
<ALLOWANCES> 58,394 61,000
<INVENTORY> 33,064,783 27,953,158
<CURRENT-ASSETS> 60,282,938 53,049,316
<PP&E> 59,073,202 53,503,467
<DEPRECIATION> (27,049,324) (24,064,119)
<TOTAL-ASSETS> 109,211,645 98,535,253
<CURRENT-LIABILITIES> 22,558,714 25,580,227
<BONDS> 156,917,908 135,696,137
0 0
0 0
<COMMON> 4,602,151 1,500,000
<OTHER-SE> (79,098,886) (71,031,763)
<TOTAL-LIABILITY-AND-EQUITY> 109,211,645 98,535,253
<SALES> 139,414,542 147,097,265
<TOTAL-REVENUES> 139,414,542 147,097,265
<CGS> 87,955,957 93,784,880
<TOTAL-COSTS> 30,162,018 32,775,774
<OTHER-EXPENSES> 236,455 1,348,059
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15,926,521 17,020,961
<INCOME-PRETAX> 5,133,591 2,167,591
<INCOME-TAX> 2,282,713 903,768
<INCOME-CONTINUING> 2,850,878 1,263,823
<DISCONTINUED> 0 0
<EXTRAORDINARY> (4,918,000) 0
<CHANGES> 0 0
<NET-INCOME> (2,067,122) 1,263,823
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
Exhibit 99.1
Consolidated Financial Statements
Numatics, Incorporated
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
<PAGE>
Report of Independent Auditors
Board of Directors
Numatics, Incorporated
We have audited the accompanying consolidated balance sheets of Numatics,
Incorporated as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity (deficit), and cash flows for each of
the three years in the period ended December 31, 1998. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as 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 consolidated financial position of
Numatics, Incorporated and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
March 5, 1999
Detroit, Michigan
<PAGE>
Numatics, Incorporated
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,121,142 $ 701,072
Trade receivables, less allowances of $58,000
in 1998 and $61,000 in 1997 21,607,221 22,174,234
Inventories 33,064,783 27,953,158
Other current assets 4,489,792 2,220,852
----------------------------------
Total current assets 60,282,938 53,049,316
Other assets:
Goodwill, net of accumulated amortization 6,479,487 6,839,952
Other intangible assets, net of accumulated
amortization 5,781,321 4,492,380
Deferred income taxes 2,000,730 2,323,362
Investment in affiliates 2,157,893 2,000,000
Other 485,398 390,895
----------------------------------
16,904,829 16,046,589
Properties:
Land 1,524,383 1,631,658
Buildings and improvements 11,620,518 12,072,592
Machinery and equipment 45,928,301 39,799,217
----------------------------------
59,073,202 53,503,467
Less accumulated depreciation (27,049,324) (24,064,119)
----------------------------------
32,023,878 29,439,348
----------------------------------
$109,211,645 $ 98,535,253
==================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------------
<S> <C> <C>
Liabilities and accumulated deficiency
Current liabilities:
Accounts payable trade $ 8,498,737 $ 9,641,314
Accrued expenses 5,379,770 2,225,444
Compensation and employee benefits 4,876,073 4,574,794
Taxes, other than income and
single business tax 100,079 427,349
Income and single business tax 246,983 1,651,266
Current portion of long-term debt 3,457,072 7,060,060
--------------------------------
Total current liabilities 22,558,714 25,580,227
Long-term debt, less current portion 156,917,908 135,696,137
Deferred retirement benefits 4,202,480 3,202,440
Deferred income taxes 269,399 536,428
Redeemable warrant - 3,102,138
Minority interest in subsidiaries
(redeemable upon the happening of
certain events outside the control
of the Company: $1,285,640 in 1998
and $1,112,173 in 1997) 554,822 348,445
Accumulated deficiency:
Common stock $.01 par value, 250,000 shares
authorized; 21,276 shares outstanding and
related additional paid in capital 4,602,151 1,500,000
Accumulated deficiency (79,098,886) (71,031,763)
Equity adjustment from foreign currency
translation (794,943) (398,799)
---------------------------------
(75,291,678) (69,930,562)
---------------------------------
$109,211,645 $ 98,535,253
=================================
</TABLE>
See accompanying notes.
3
<PAGE>
Numatics, Incorporated
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Net sales $139,414,542 $147,097,265 $132,015,363
Costs and expenses:
Cost of products sold 87,955,957 93,784,880 81,676,256
Marketing, engineering, general
and administrative 30,771,234 31,830,324 28,253,122
Single business tax (609,216) 945,450 885,150
------------------------------------------------
Operating income 21,296,567 20,536,611 21,200,835
Other expenses:
Interest and other financing
expenses 15,926,521 17,020,961 16,763,096
Other 236,455 1,348,059 534,949
------------------------------------------------
Income before income taxes and
extraordinary item 5,133,591 2,167,591 3,902,790
Income taxes 2,282,713 903,768 1,895,006
------------------------------------------------
Income before extraordinary
item 2,850,878 1,263,823 2,007,784
Extraordinary item - early
extinguishment of debt, net of
income taxes of $2,534,000 (4,918,000) -- --
------------------------------------------------
Net income (loss) $ (2,067,122) $ 1,263,823 $ 2,007,784
================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Numatics, Incorporated
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Class A Common Stock
And Related Additional
Paid in Capital $.01 par Retained
250,000 Shares Authorized Earnings Currency Total
Shares Amount (Deficiency) Translation Amount
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 20,000 $1,500,000 $(74,303,370) $ 166,578 $(72,636,792)
Net income for 1996 2,007,784 2,007,784
Equity adjustment from
foreign currency
Translation (234,907) (234,907)
----------------------------------------------------------------------
Comprehensive income for 1996 1,772,877
----------------------------------------------------------------------
Balance, December 31, 1996 20,000 1,500,000 (72,295,586) (68,329) (70,863,915)
Net income for 1997 1,263,823 1,263,823
Equity adjustment from
foreign currency
translation (330,470) (330,470)
----------------------------------------------------------------------
Comprehensive income for 1997 1,028,916
----------------------------------------------------------------------
Balance, December 31, 1997 20,000 1,500,000 (71,031,763) (398,799) (69,930,562)
Net loss for 1998 (2,067,122) (2,067,122)
Equity adjustment from
foreign currency
translation (396,144) (396,144)
----------------------------------------------------------------------
Comprehensive loss for 1998 (2,463,266)
----------------------------------------------------------------------
Redemption of warrant 1,276 3,102,151 3,102,151
Dividends (6,000,001) (6,000,001)
----------------------------------------------------------------------
Balance, December 31, 1998 21,276 $4,602,151 $(79,098,886) $(794,943) $(75,291,678)
======================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Numatics, Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (2,067,122) $ 1,263,823 $ 2,007,784
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 4,130,129 3,547,742 3,212,672
Amortization 1,319,083 1,452,065 1,275,887
Deferred interest expense 2,059,894 7,313,204 6,154,299
Extraordinary item - early extinguishment of debt 4,918,000 - -
Minority interest in earnings 206,377 103,218 93,104
Deferred taxes 56,992 (119,748) 499,723
Deferred retirement benefits 1,000,040 738,205 708,350
Unrealized foreign currency (gains) losses (227,776) 1,191,826 233,135
Changes in operating assets and liabilities:
Trade receivables 574,473 (2,200,958) (1,071,434)
Inventories (4,962,350) (3,653,789) 1,733,855
Other current accounts (1,162,181) (833,655) (147,858)
Accounts payable and accrued expenses 1,871,894 1,006,333 (1,908,611)
Compensation and employee benefits 295,247 600,539 (156,175)
Taxes, other than income and single business tax (327,270) (33,337) 19,361
Income and single business taxes (107,151) 671,640 442,291
-----------------------------------------------------------
Net cash provided by operating activities 7,578,279 11,047,108 13,096,383
Investing activities
Capital expenditures (6,605,293) (7,880,756) (5,594,374)
Other investments (308,001) 72,681 202,380
-----------------------------------------------------------
Net cash used in investing activities (6,913,294) (7,808,075) (5,391,994)
Financing activities
Proceeds from long-term borrowing 153,721,799 - -
Debt repayments (138,471,530) (4,915,021) (8,019,709)
Debt issuance costs (5,195,248) - (322,995)
Extraordinary item - early extinguishment of debt (4,194,345) - -
Dividends paid (6,000,001) - -
Other 13 1,600,603 1,062,605
-----------------------------------------------------------
Net cash used in financing activities (139,312) (3,314,418) (7,280,099)
Effect of exchange rate changes on cash (105,603) (76,941) (149,005)
-----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 420,070 (152,326) 275,285
Cash and cash equivalents at beginning of year 701,072 853,398 578,113
-----------------------------------------------------------
Cash and cash equivalents at end of year $ 1,121,142 $ 701,072 $ 853,398
===========================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
December 31, 1998
1. Significant Accounting Policies
Nature of the Business
The Company develops and manufactures pneumatic components for automated
machinery used in various industries.
Principles of Consolidation
The consolidated financial statements include the accounts of Numatics,
Incorporated, its wholly owned subsidiaries and its majority owned subsidiaries
(the "Company") after elimination of intercompany accounts, transactions and
profits.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company sells its products principally to domestic and international
distributors. Management performs ongoing evaluations of its accounts
receivable, and credit losses have been minimal and within management's
expectations.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, with cost determined by
use of the first-in, first-out method.
7
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
1. Significant Accounting Policies (continued)
Properties and Depreciation
Properties are stated on the basis of cost. Properties are depreciated over
their estimated useful lives ranging from three to forty years, principally by
the straight-line method. Expenditures for repairs and maintenance which do not
extend the life of the asset are expensed as incurred.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Deferred taxes are provided for the differences between financial statement and
income tax accounting.
Environmental Liabilities
The Company recognizes estimated environmental liabilities when a loss is
probable. Such liabilities are generally not subject to insurance coverage. The
Company's environmental liabilities were not material as of December 31, 1998
and 1997.
Revenue Recognition
The Company recognizes revenue when goods are shipped to the customer.
Fair Value of Financial Instruments
At December 31, 1998, the carrying amounts reported in the consolidated balance
sheets for cash and cash equivalents, accounts receivable, accounts payable,
debt and investments approximate fair value.
8
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
2. Long-Term Debt and Warrant
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-----------------------------------------
<S> <C> <C>
Senior subordinated notes due in 2008 bearing interest at 9.625% $115,000,000 -
Term loans payable in U.S. dollars in minimum quarterly
installments of $500,000 plus interest at LIBOR plus 3.125%
(8.40563% at December 31, 1998), due in 2004 18,539,957 $ 36,551,123
Term loans payable in U.S. dollars in minimum quarterly
installments of $37,500 plus interest at LIBOR plus 3.375%
(8.65563% at December 31, 1998), due in 2005 15,079,487 42,898,000
Senior subordinated note bearing interest at 18%,
face value $30,000,000 less discount plus deferred interest - 40,365,366
Revolving notes payable to banks, due in 2004 8,049,199 18,670,208
Williamston County Tennessee Industrial Revenue Bond 2,500,000 2,500,000
Other 1,206,337 1,771,500
-----------------------------------------
160,374,980 142,756,197
Less current maturities 3,457,072 7,060,060
-----------------------------------------
$156,917,908 $135,696,137
=========================================
</TABLE>
In 1998, Numatics, Inc. issued $115,000,000 of senior subordinated notes due
in 2008 and replaced its existing credit agreements with banks. In connection
with the issuance of those subordinated notes and new credit agreements, the
Company recognized as extraordinary items $2,150,000, net of taxes, for the
write-off of deferred financing costs, $1,591,000, net of taxes, for the
amortization of the previous unamortized discount on its previous senior
subordinated note and $1,177,000, net of taxes, for prepayment penalties
associated with the previous debt agreement.
9
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
2. Long-Term Debt and Warrant (continued)
The Company entered into credit agreements with banks in 1998 that included two
term loans payable in U.S. dollars and a revolving note payable. Amounts due
under the credit agreements are senior to amounts due under the senior
subordinated note due in 2008. The credit agreements provide for the calculation
of interest based on LIBOR plus a variable rate. The variable rate is subject to
change based on a periodic recalculation of funded debt to earnings before
interest, taxes, depreciation and amortization. The revolving loan portion of
the agreement defines a formula for a borrowing base and establishes maximum
borrowing amounts ($32,000,000 in the U.S. and $3,000,000 in Germany). The
credit agreements contain various covenants including requirements for minimum
earning levels, leverage ratios and cash flow ratios, and certain dividend
restrictions. The Company was in compliance with all of these debt covenants as
of December 31, 1998.
The Company has pledged substantially all of its tangible and intangible assets
as collateral for the debt outstanding.
Minimum contractual maturities of long-term liabilities for the years following
1998 are as follows: 1999-$3,457,000; 2000-$3,283,000; 2001-$3,566,000; 2002-
$4,235,000 thereafter $145,834,000. In addition, the Company is required to make
a payment on the term loans in an amount equal to 50% of excess cash flow, as
defined in the agreements.
Interest paid approximated $17,973,000 in 1998 (which includes $7,452,000 from
the write off of deferred financing fees, amortization of unamortized discount
on the previous senior subordinated debt and prepayment penalties associated
with the previous debt agreement), $9,606,000 in 1997 and $9,009,000 in 1996.
In connection with the issuance of the Company's previous senior subordinated
note in 1995, the Company issued an excercisable warrant, redeemable at the
option of the holder at a price computed at a multiple of earnings as defined in
the warrant agreement, with rights to purchase 1,276.60 shares of Class A common
stock for $.01 per share. The warrant was exercised in 1998.
10
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
3. Goodwill and Other Intangible Assets
Intangible assets at December 31 are comprised of the following:
<TABLE>
<CAPTION>
Amortization
Period
1998 1997 (years)
---------------------------------------------
<S> <C> <C> <C>
Product drawings $ 1,090,000 $ 1,090,000 15
Numasize software 1,021,000 1,021,000 10
Deferred financing costs 5,962,915 5,282,255 5 to 10
Goodwill 8,426,163 9,488,996 25
-----------------------------
16,500,078 16,882,251
Less accumulated
amortization 4,239,270 5,549,919
-----------------------------
$12,260,808 $11,332,332
=============================
</TABLE>
The Company periodically evaluates intangible assets for indicators of
impairment in value. If impairment is indicated, the Company evaluates its
related undiscounted cash flows and, if appropriate, revalues the asset based on
its fair values.
4. Income Taxes
The components of income before income taxes and extraordinary item consisted of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Domestic $3,266,000 $1,747,000 $2,102,000
International 1,868,000 421,000 1,801,000
-------------------------------------------
$5,134,000 $2,168,000 $3,903,000
===========================================
</TABLE>
11
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
4. Income Taxes (continued)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,074,000 $ 1,091,000 $ 278,000
Foreign 739,000 888,000 976,000
-------------------------------------------
1,813,000 1,979,000 1,254,000
Deferred (credit):
Federal 289,000 (429,000) 620,000
Foreign 181,000 (646,000) 21,000
-------------------------------------------
470,000 (1,075,000) 641,000
-------------------------------------------
$2,283,000 $ 904,000 $1,895,000
===========================================
</TABLE>
The reconciliation of income taxes computed at the United States federal
statutory tax rate to income tax expense is:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Income taxes at U.S. statutory
rate $1,745,421 $ 736,981 $1,326,949
International rate differences (284,518) (295,455) 368,757
Other 822,097 462,474 199,284
--------------------------------------------
$2,283,000 $ 904,000 $1,895,000
============================================
</TABLE>
No provision for U.S. federal income taxes has been made on the undistributed
earnings of the Canadian subsidiary for which earnings are considered
permanently invested ($4,474,000 at December 31, 1998, $3,884,000 at December
31, 1997, and $2,772,000 at December 31, 1996).
12
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
4. Income Taxes (continued)
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Deferred tax assets:
Intangible amortization $1,932,000 $ 2,150,000
Deferred compensation 1,956,000 1,595,000
Inventory 269,000 329,000
Other deferred assets 464,000 354,000
Net operating loss carryforward 871,000 2,146,000
-----------------------------
5,492,000 6,574,000
Valuation allowance (465,000) (1,066,000)
-----------------------------
5,027,000 5,508,000
Deferred tax liabilities:
Depreciation 2,289,000 2,513,000
Other deferred liabilities 390,000 369,000
Foreign currency exchange gains 617,000 839,000
-----------------------------
Total deferred tax liabilities 3,296,000 3,721,000
-----------------------------
Net deferred tax assets $1,731,000 $ 1,787,000
=============================
</TABLE>
The following table summarizes the Company's total provision for income taxes:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Income tax expense before
extraordinary item $ 2,282,713 $ 903,768 $ 1,895,006
Income tax benefit on
extraordinary item (2,534,000) -- --
-------------------------------------------------------
$ (251,287) $ 903,768 $ 1,895,006
=======================================================
</TABLE>
Income taxes paid approximated $500,000 in 1998, $315,000 in 1997, and
$1,800,000 in 1996.
The Company's net operating loss carryforwards primarily exist in its German
subsidiaries and expire in 2009.
13
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
5. Employee Benefit Plans
The Company has noncontributory defined benefit pension plans covering
substantially all United States hourly employees and employees of its Canadian
subsidiary. Benefits of the plans are based on years of service. The Company's
funding policy is consistent with the funding requirements of laws and
regulations.
The Company also provides postretirement benefits for certain domestic retirees
covered under Company-sponsored benefit plans. Participants in these plans may
become eligible for these benefits if they reach normal retirement age while
working for the Company. The Company's policy is to fund benefit costs as they
are provided, with retirees paying a portion of the costs.
Components of net periodic benefit cost are:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost $ 208,778 $ 209,785 $ 216,741 $ 185,468
Interest cost 517,926 486,379 631,317 561,871
Expected return on assets (595,512) (521,338) - -
Amortization of unrecognized transition
obligation - - 265,789 265,789
Amortization of unrecognized prior
service cost 62,437 62,438 72,456 72,456
Amortization of unrecognized net
gain (13,946) - - -
---------------------------------------------------------------------------
Net period benefit cost $ 179,683 $ 237,264 $1,186,303 $1,085,584
===========================================================================
</TABLE>
Changes in benefit obligation are:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $6,492,321 $6,327,797 $7,512,805 $7,029,367
Service cost 208,778 209,785 216,741 185,468
Interest cost 517,926 486,379 631,317 561,871
Actuarial (gain)/loss 110,894 (158,128) 305,889 30,892
Benefits paid (362,330) (373,512) (458,490) (294,793)
----------------------------------------------------------------------------
Benefit obligation at end of year $6,967,589 $6,492,321 $8,208,262 $7,512,805
============================================================================
</TABLE>
14
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
Changes in plan assets are:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of assets at beginning of
year $6,676,144 $5,830,177 - -
Actual return on assets 473,178 1,048,702 - -
Contributions 251,609 170,777 - -
Benefits paid (362,330) (373,512) - -
---------------------------------------------------------------------------
Fair value of assets at end of year $7,038,601 $6,676,144 - -
===========================================================================
</TABLE>
Funded status of the plans are:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1998 1997 1998 1997
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status as of end of year $ 71,012 $ 183,823 $(8,208,262) $(7,512,805)
Unrecognized transition - - 4,252,630 4,518,419
Unrecognized prior service cost 517,370 579,807 865,131 937,587
Unrecognized net (gain)/loss (678,643) (925,817) 393,596 87,707
----------------------------------------------------------------------------
Accrued benefit cost $ (90,261) $(162,187) $(2,696,905) $(1,969,092)
============================================================================
</TABLE>
The discount rate used in determining the present value of the accumulated
postretirement and pension benefit obligation was 8% in 1998 and 1997. The
expected long-term rate of return on pension assets was 9% in 1998 and 1997. The
assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.12% declining by .45% per year to an
ultimate rate of 6% in 2004. If the assumed healthcare cost trend rate was
increased 1% in all future years, the accumulated postretirement benefit
obligation would increase by $673,898 and the related expense would increase by
$73,951. If the assumed healthcare cost trend rate was decreased 1% in all
future years, the accumulated postretirement benefit obligation would decrease
by $571,295 and the related expense would decrease by $61,484.
The Company also has a noncontributory defined contribution pension plan
covering all United States salaried employees. The Company also has a
contributory 401(k) Plan, whereby the Company matches certain employee
contributions. Contributions to the defined contribution plan are based on
compensation. Total defined contribution expense was $680,000, $620,000 and
$550,000 for 1998, 1997 and 1996, respectively.
15
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
6. Segment and Geographic Information
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, in 1998. SFAS No. 131 established standards for
reporting information about operating segments in annual financial statements.
It also established standards for related disclosures about products and
services and geographic areas. Operating segments are defined as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-makers. The Company reports
it segments based on geographic area. The operating segments' accounting
policies are consistent with those described in Note 1.
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Net sales:
North America $113,868,485 $119,577,505 $106,769,838
International 25,546,057 27,519,760 25,245,525
---------------------------------------------
$139,414,542 $147,097,265 $132,015,363
=============================================
1998 1997 1996
---------------------------------------------
Depreciation and amortization:
North America $ 4,772,884 $ 3,761,459 $ 3,812,343
International 676,328 1,238,348 676,216
---------------------------------------------
$ 5,449,212 $ 4,999,807 $ 4,488,559
=============================================
1998 1997 1996
---------------------------------------------
Operating Income:
North America $20,375,126 $20,490,870 $ 19,732,612
International 921,441 45,741 1,468,223
---------------------------------------------
$21,296,567 $20,536,611 $ 21,200,835
=============================================
1998 1997 1996
----------------------------------------------
Long-lived Assets
North America $32,208,926 $30,455,847 $28,111,373
International 6,294,439 5,823,453 6,523,114
----------------------------------------------
$38,503,365 $36,279,300 $34,634,487
==============================================
</TABLE>
16
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
7. Guarantor and Non-Guarantor Subsidiaries
The $115 million of 9 5/8% senior subordinated notes issued by Numatics, Inc. in
1998 are guaranteed by the Company's United States subsidiaries in which it
owns 100% of the voting stock. Each of the Guarantor Subsidiaries has fully and
unconditionally guaranteed, on a joint and several basis, the obligation to pay
principal, premium, if any, and interest and Liquidated Damages, if any, on the
Notes.
The following supplemental consolidating condensed financial statements present:
1. Consolidating condensed balance sheets as of December 31, 1998 and
1997, consolidating condensed statements of operations for the years
ended December 31, 1998, 1997 and 1996 and consolidating condensed
statements of cash flows for the years ended December 31, 1998, 1997
and 1996.
2. Numatics, Incorporated (the Parent), combined Guarantor Subsidiaries
and combined Non-Guarantor Subsidiaries (consisting of the Parent's
foreign subsidiaries).
3. Elimination entries necessary to consolidate the parent and all of its
subsidiaries.
Management does not believe that separate financial statements of the Guarantor
Subsidiaries are material to investors. Therefore, separate financial statements
and other disclosures concerning the Guarantor Subsidiaries are not presented.
17
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
7. Guarantor and Non-Guarantor Subsidiaries (continued)
Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trade receivables $ 11,050,466 $2,531,514 $ 8,025,241 $ 21,607,221
Inventories 17,459,136 4,255,940 12,422,707 $ (1,073,000) 33,064,783
Other 2,739,585 266,581 1,496,130 - 4,502,296
-------------------------------------------------------------------------
Total current assets 31,249,187 7,054,035 21,944,078 (1,073,000) 59,174,300
Goodwill, net of
accumulated amortization 1,519,533 - 3,594,597 1,365,357 6,479,487
Other 19,674,487 41,707 154,660 (8,057,979) 11,812,875
Intercompany amounts 24,534,213 326,447 4,648,545 (29,509,205) -
Property, plant and
equipment, net of
accumulated depreciation 26,239,969 827,492 4,956,417 - 32,023,878
-------------------------------------------------------------------------
$103,217,389 $8,249,681 $35,298,297 $(37,274,827) $109,490,540
=========================================================================
Accounts payable and accrued
expenses $ 8,915,518 $1,431,386 $ 3,531,603 $ - $ 13,878,507
Compensation and
employee benefits 3,897,935 111,927 866,211 - 4,876,073
Current portion of
long-term debt 2,955,049 - 502,023 - 3,457,072
Other 498,788 39,344 87,825 - 625,957
-------------------------------------------------------------------------
Total current liabilities 16,267,290 1,582,657 4,987,662 22,837,609
Long-term debt less current
portion 149,328,788 - 7,589,120 - 156,917,908
Other 4,202,480 - 269,399 554,822 5,026,701
Intercompany amounts 8,353,841 4,398,682 16,756,682 (29,509,205) -
Accumulated deficiency (74,935,010) 2,268,342 5,695,434 (8,320,444) (75,291,678)
-------------------------------------------------------------------------
$103,217,389 $8,249,681 $35,298,297 $(37,274,827) $109,490,540
=========================================================================
</TABLE>
18
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
7. Guarantor and Non-Guarantor Subsidiaries (continued)
Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trade receivables $ 11,078,207 $2,188,502 $ 8,907,525 $ 22,174,234
Inventories 15,366,392 2,607,696 10,890,070 $ (911,000) 27,953,158
Other 1,550,468 179,705 1,191,751 - 2,921,924
-------------------------------------------------------------------------
Total current assets 27,995,067 4,975,903 20,989,346 (911,000) 53,049,316
Goodwill, net of
accumulated amortization 457,195 - 3,704,800 2,677,957 6,839,952
Other 9,069,132 1,707 135,798 9,206,637
Intercompany amounts 32,664,385 224,501 4,179,442 (37,068,328) -
Property, plant and
equipment, net of
accumulated depreciation 24,183,658 670,466 4,585,224 - 29,439,348
-------------------------------------------------------------------------
$ 94,369,437 $5,872,577 $33,594,610 $(35,301,371) $ 98,535,253
=========================================================================
Accounts payable and accrued
expenses $ 7,167,784 $1,356,896 $ 3,342,078 $ - $ 11,866,758
Compensation and
employee benefits 3,533,317 164,571 876,906 - 4,574,794
Current portion of
long-term debt 6,172,595 - 887,465 - 7,060,060
Other 911,508 46,416 1,120,691 - 2,078,615
-------------------------------------------------------------------------
Total current liabilities 17,785,204 1,567,883 6,227,140 25,580,227
Long-term debt less current
portion 129,260,490 - 6,435,647 - 135,696,137
Other 6,841,006 - - 348,445 7,189,451
Intercompany amounts 8,961,055 3,122,466 16,179,742 (28,263,263) -
Accumulated deficiency (68,359,966) 1,182,228 4,633,729 (7,386,553) (69,930,562)
-------------------------------------------------------------------------
$ 94,487,789 $5,872,577 $33,476,258 $(35,301,371) $ 98,535,253
=========================================================================
</TABLE>
19
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
7. Guarantor and Non-Guarantor Subsidiaries (continued)
Statement of Operations
Year ended December 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $97,078,969 $17,143,371 $50,749,202 $(25,557,000) $139,414,542
Costs and expenses 79,775,555 15,478,431 48,064,301 (25,200,312) 118,117,975
--------------------------------------------------------------------------------------------------
Operating income 17,303,414 1,664,940 2,684,901 (356,688) 21,296,567
Interest and other 20,842,115 578,609 1,736,588 206,377 23,363,689
--------------------------------------------------------------------------------------------------
Net income/(loss) $(3,538,701) $ 1,086,331 $ 948,313 $ (563,065) $ (2,067,122)
==================================================================================================
</TABLE>
Statement of Operations
Year ended December 31, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $104,177,704 $13,826,800 $52,979,761 $(23,887,000) $147,097,265
Costs and expenses 86,526,823 13,270,334 50,511,809 (23,748,312) 126,560,654
--------------------------------------------------------------------------------------------------
Operating income 17,650,881 556,466 2,467,952 (138,688) 20,536,611
Interest and other 16,896,743 179,675 2,093,152 103,218 19,272,788
--------------------------------------------------------------------------------------------------
Net income $ 754,138 $ 376,791 $ 374,800 $ (241,906) $ 1,263,823
==================================================================================================
</TABLE>
Statement of Operations
Year ended December 31, 1996
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $93,366,673 $10,391,257 $48,338,433 $(20,081,000) $132,015,363
Costs and expenses 76,233,562 9,741,393 44,856,573 (20,017,000) 110,814,528
---------------------------------------------------------------------------------------------------
Operating income 17,133,111 649,864 3,481,860 (64,000) 21,200,835
Interest and other 16,347,186 231,710 2,480,683 133,472 19,193,051
---------------------------------------------------------------------------------------------------
Net income $ 785,925 $ 418,154 $ 1,001,177 $ (197,472) $ 2,007,784
===================================================================================================
</TABLE>
20
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
7. Guarantor and Non-Guarantor Subsidiaries (continued)
Statement of Cash Flows
Year ended December 31, 1998
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $ 7,934,705 $ (763,635) $ 407,209 $ - $ 7,578,279
Cash flows from investing
activities:
Capital expenditures (5,386,891) (304,467) (913,935) - (6,605,293)
Other investments (179,429) (137,864) 9,292 - (308,001)
--------------------------------------------------------------------------
Net cash used in investing
activities (5,566,320) (442,331) (904,643) - (6,913,294)
Cash flows from financing
activities:
Debt repayments 5,422,639 - 438,032 - 5,860,671
Other (5,999,988) - 70,309 (175,907) (6,105,586)
--------------------------------------------------------------------------
Net cash used in financing
activities (577,349) - 508,341 (175,907) (244,915)
Intercompany accounts (1,848,856) 1,172,137 500,812 175,907 -
--------------------------------------------------------------------------
Net increase (decrease) in
cash (57,820) (33,829) 511,719 - 420,070
Cash and cash equivalents, at
beginning of year 169,311 102,480 429,281 - 701,072
--------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 111,491 $ 68,651 $ 941,000 $ - $ 1,121,142
==========================================================================
</TABLE>
21
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
7. Guarantor and Non-Guarantor Subsidiaries (continued)
Statement of Cash Flows
Year ended December 31, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $11,270,566 $(419,388) $ 195,930 $ - $11,047,108
Cash flows from investing
activities:
Capital expenditures (6,701,675) (320,413) (858,668) - (7,880,756)
Other investments 72,681 (25,673) 25,673 - 72,681
--------------------------------------------------------------------------
Net cash used in investing
activities (6,628,994) (346,086) (832,995) - (7,808,075)
Cash flows from financing
activities:
Debt repayments (4,198,225) - (716,796) - (4,915,021)
Other 1,600,603 - (43,602) (33,339) 1,523,662
--------------------------------------------------------------------------
Net cash used in financing
activities (2,597,622) - (760,398) (33,339) (3,391,359)
Intercompany accounts (2,043,822) 679,595 1,330,888 33,339
--------------------------------------------------------------------------
Net increase (decrease) in
cash 128 (85,879) (66,575) - (152,326)
Cash and cash equivalents, at
beginning of year 169,183 188,359 495,856 - 853,398
--------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 169,311 $ 102,480 $ 429,281 $ - $ 701,072
==========================================================================
</TABLE>
22
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
7. Guarantor and Non-Guarantor Subsidiaries (continued)
Statement of Cash Flows
Year ended December 31, 1996
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities $11,780,002 $(340,559) $ 1,656,940 $ - $13,096,383
Cash flows from investing
activities:
Capital expenditures (4,723,876) (101,938) (768,560) - (5,594,374)
Other investments 123,464 2,168 76,748 - 202,380
--------------------------------------------------------------------------
Net cash used in investing
activities (4,600,412) (99,770) (691,812) - (5,391,994)
Cash flows from financing
activities:
Debt repayments (7,805,556) - 2,328,380 (2,542,533) (8,019,709)
Debt issuance costs (44,277) - (278,718) - (322,995)
Other 1,065,533 - 13,694 (165,627) 913,600
--------------------------------------------------------------------------
Net cash used in financing
activities (6,784,300) - 2,063,356 (2,708,160) (7,429,104)
Intercompany accounts (278,216) 589,855 (3,019,799) 2,708,160
--------------------------------------------------------------------------
Net increase in cash 117,074 149,526 8,685 - 275,285
Cash and cash equivalents, at
beginning of year 52,109 38,833 487,171 578,113
--------------------------------------------------------------------------
Cash and cash equivalents, at
end of year $ 169,183 $ 188,359 $ 495,856 $ $ 853,398
==========================================================================
</TABLE>
23
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
8. Quarterly Financial Data (Unaudited)
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1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
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<S> <C> <C> <C> <C> <C>
Net sales $37,822,637 $35,391,579 $33,891,066 $32,309,260 $139,414,542
Gross profit 14,339,823 13,186,686 12,628,503 11,303,573 51,458,585
Income before
extraordinary item 1,402,219 1,027,294 933,812 (512,447) 2,850,878
Extraordinary item (4,918,000) - - - (4,918,000)
Net income (loss) (3,515,781) 1,027,294 933,812 (512,447) (2,067,122)
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
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Net sales $36,065,270 $37,313,418 $37,190,414 $36,528,163 $147,097,265
Gross profit 13,144,710 14,146,551 13,625,724 12,395,400 53,312,385
Net income (loss) 85,647 983,651 308,005 (113,480) 1,263,823
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