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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, 1999
[_] 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)
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<S> <C>
Michigan 38-2955710
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification Number)
Organization)
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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: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [x] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
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 27, 2000
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 product: directional 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, Costa Rica and Mexico.
Numatics was incorporated in 1990 to purchase the assets of its predecessor
corporation. Its common stock is privately held, principally by management.
In 1998, in an exchange offer registered under the Securities Act of 1933,
Numatics issued $115.0 million of Series B 9 5/8% senior subordinated notes (the
"Series B Notes") in exchange for a substantially identical series of senior
subordinated notes it had issued in a private placement earlier that year. The
Series B Notes are guaranteed by all of Numatics' domestic subsidiaries. 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 1999 consolidated audited
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).
1999 Acquisitions
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During 1999, Numatics acquired the 20% equity interest in its subsidiary,
Micro-Filtration, Inc., which it did not hold previously, making Micro-
Filtration, Inc. a wholly owned subsidiary. Also during 1999, Numatics acquired
100% of the stock of Empire Air Systems, Inc.
Risk Factors
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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
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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, 1999, the
Company had total indebtedness of approximately $162.4 million and an
accumulated deficiency of approximately $73.9 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 its bank term loan and
revolving credit facility (the "Credit Facility"), was approximately $43.9
million, and approximately $20.8 million would have been available for
additional borrowing under the 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 domestic subsidiaries that have guaranteed
the Series B Notes (the "Guarantors"), except that the Guarantors have
guaranteed Numatics' borrowings under the 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
$18.3 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 Credit Facility, will be adequate to meet the Company's future
liquidity needs until the scheduled expiration of the Credit Facility, at which
time the Company would expect to replace the 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 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 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 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 vulnerability to general adverse economic and
industry conditions, limiting
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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
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 Credit Facility and the
Guarantors' guarantees of that facility. The 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 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
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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 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, 1999, the total
liabilities of subsidiaries that have not guaranteed the Series B Notes was
$12.1 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 1990. 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 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 Credit Facility lenders. The Company maintains $22.5
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
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
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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 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
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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.
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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.
Applications for pneumatic fluid power are numerous and diverse. 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.
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 remained strong 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 1994.
1994 1999
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Net Sales $104.6 million $140.1 million
Valves 75.4% 56.0%
Actuators 8.2% 14.2%
Specialty Products 16.4% 29.8%
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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, although, the
manufacturing process has
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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.
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 $90.0 million, $83.0 million, and $78.4
million in 1997, 1998, and 1999, respectively.
Actuators. In a pneumatic system, the actuator (or cylinder) serves as an
"arm" for an automated task, allowing an object to be moved.
The Company's actuator line includes: standard tie-rod cylinders, made to
National Fluid Power Association specifications, it's "M" series actuator, a
non-repairable miniature cylinder, a rodless cylinder based on technology it
acquired in connection with its purchase of 12% of the stock of Univer, a large
manufacturer of pneumatic products in Italy, rotary actuators, and a variety of
small actuators.
The Company's actuator sales were $16.3 million, $17.8 million, and $20.0
million in 1997, 1998, and 1999, 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.
For several years, FRLs have been produced for the Company under a private
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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, rather than through the Company's valve
distribution network.
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.
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 $40.7 million, $38.6 million,
and $41.8 million in 1997, 1998, and 1999, respectively.
Engineering
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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,
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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
. "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
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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 3.2 % of total net sales in 1999.
Approximately 60.0% of the Company's net sales in 1999 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.
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.
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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 seven
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 146 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
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The Company has six domestic manufacturing facilities, including four in
Michigan and one each in Ohio and Tennessee. The Company also has manufacturing
plants in Ontario, Canada and 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 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 domestic facilities are
scheduled to be ISO certified by mid-2001. 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
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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. 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.
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Competition
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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. However, some of the Company's competitors are
significantly larger and have greater financial and other resources than the
Company.
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
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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 15.2% of the Company's 1999 net
sales, and international assets accounted for approximately 17.5% of its total
assets as of December 31, 1999. 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
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At December 31, 1999, the Company had 935 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.
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Environmental Matters
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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 eight years.
Based on past expenditures and its current evaluation of site conditions,
management expects to spend approximately $70,000 annually to complete the
groundwater remediation. The Company has recorded a reserve for these future
expenditures, which at December 31, 1999 was approximately $600,000. 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.
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 Michigan Department of Environmental
Quality approved the closure report relating to this spill on September 9, 1999.
This facility was sold in December, 1999.
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 in 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.
13
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its business in Company-owned facilities, totaling
approximately 329,850 square feet, and leased facilities, totaling approximately
65,900 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.
<TABLE>
<CAPTION>
SQUARE TYPE OF
LOCATION FEET INTEREST USES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States
N. Milford Rd., Highland, MI 76,000 Owned Company headquarters; valve components
Franklin, TN 68,000 Owned Actuators
Sandusky, MI 57,300 Owned Valves and solenoids
Lapeer, MI 41,600 Owned FRLs and air dryers
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>
14
<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, 1999.
15
<PAGE>
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 21, 2000, 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 "Compensation Committee Interlocks and Insider
Participation" under item 11.
To date, no dividends have been paid on the common stock, except for a $6
million extraordinary dividend paid on March 26, 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
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $140,120 $139,415 $147,097 $132,015 $125,808
Cost of products sold 87,686 87,956 93,785 81,676 77,967
------------------------------------------------------------------------
Gross profit 52,434 51,459 53,312 50,339 47,841
Marketing, engineering, general
and administrative expenses 31,843 30,771 31,830 28,253 29,567
Michigan single business tax (1) 391 (609) 945 885 872
------------------------------------------------------------------------
Operating income 20,200 21,297 20,537 21,201 17,402
Interest and other financing
expenses 16,062 15,927 17,021 16,763 5,560
Other expense 1,732 236 1,348 535 1,436
------------------------------------------------------------------------
Income before income taxes and
extraordinary item 2,406 5,134 2,168 3,903 10,406
Income taxes 1,520 2,283 904 1,895 4,837
------------------------------------------------------------------------
Income before extraordinary item 886 2,851 1,264 2,008 5,569
Extraordinary item, net of income
tax (2) - (4,918) - - -
------------------------------------------------------------------------
Net income (loss) $ 886 $ (2,067) $ 1,264 $ 2,008 $ 5,569
========================================================================
OTHER FINANCIAL DATA
Cash provided by (used in)
operating activities $ 4,294 $ 7,578 $ 11,047 $ 13,096 $ 6,142
Cash used in investing activities (6,403) (6,913) (7,808) (5,392) (6,750)
Cash provided by (used in) 2,540 (245) (3,391) (7,429) 201
financing activities
EBITDA (3) 26,036 26,137 25,931 25,811 24,167
Depreciation and amortization 5,444 5,449 5,000 4,489 6,413
Capital expenditures 6,407 6,605 7,881 5,594 3,744
BALANCE SHEET DATA
Working capital $ 41,161 $ 37,724 $ 27,469 $ 28,189 $ 28,109
Total assets 114,553 109,212 98,535 93,987 93,441
Total long-term debt 162,392 160,375 135,696 136,273 138,523
Total shareholders' deficit (73,894) (75,292) (69,930) (70,864) (72,637)
Preferred stock dividend (4) - - - - 1,200
Common stock dividend - 6,000 - - -
</TABLE>
17
<PAGE>
(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) 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 a series of subordinated notes that
was prepaid during the year and $1.2 million (net of income taxes) for
associated prepayment penalties.
(3) "EBITDA" represents the sum of operating income plus depreciation and
amortization (less amortization of deferred financing costs) and Michigan
Single Business Tax. 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 Credit Facility is principally 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(4) Preferred stock was redeemed in 1995.
18
<PAGE>
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 50
distributors who purchase and stock Numatics' products. In non-U.S. markets, a
majority of sales are derived from direct customers.
The Company's cost of products sold 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. 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.
Results of Operations
- ---------------------
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Net Sales. The Company's net sales for 1999 increased 0.5%, or $0.7
million, from $139.4 million in 1998 to $140.1 million in 1999. Net sales in
North America increased 4.4%, or $5.0 million, while international sales
decreased 16.7%, or $4.3 million. This decrease in international sales was a
result of the softness felt in the European pneumatic market, which started
during the fourth quarter of 1998.
Gross Profit. Gross profit for 1999 increased to 37.4% of net sales from
36.9% in 1998. This improvement was a result of cost containment efforts
undertaken to help offset the lower sales volume in the first part of the year
in North America, and throughout the year in the European market.
19
<PAGE>
Marketing, Engineering, General and Administrative. Marketing,
engineering, general and administrative costs increased $1.1 million in 1999,
ending the year at $31.8 million. This increase was primarily the result of the
acquisition of Empire Air Systems in 1999.
Single Business Tax. Single business tax for 1999 was an expense of $0.4
million compared to a credit of $0.6 million in 1998. 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 1999 was $20.2 million, or 14.4% of
sales, compared to $21.3 million, or 15.3% of sales, in 1998. This $1.1 million
decrease was principally due to increased single business tax expense in 1999,
as explained above.
Interest and Other Financing Expenses. Slightly higher debt levels
resulted in a $0.1 million increase in interest expense in 1999 compared to
1998.
Other (Income) Expense. Other expense consists primarily of unrealized
foreign exchange gains and losses. The $1.5 million increase in expense for
1999 compared to 1998 was a result of the strengthening 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, 1999, the Company had net operating loss
carryforwards of approximately $2.6 million, primarily at its German subsidiary.
Those loss carryfowards have no expiration date.
Net Income (Loss). Due to the factors discussed above and the 1998
extraordinary item related to the early retirement of debt, net income increased
$3.0 million, to $0.9 million for 1999.
20
<PAGE>
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 was 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 was 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 was 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 was principally attributed to reduced single business tax expense, as
explained above.
Interest and Other Financing Expenses. Interest rate reductions achieved
through refinancing a previously outstanding series of subordinated notes 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 was 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.
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 previously
unamortized discount on the series of subordinated notes that was prepaid of
$2.1 million, net of taxes, and an associated prepayment penalty of $1.2
million, net of taxes. The amount is reported net of $2.5
22
<PAGE>
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.
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.
Working capital was $41.2 million at December 31, 1999, compared with $37.7
million at December 31, 1998.
The Credit Facility includes: (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 $32.5
million as of December 31, 1999. All borrowings under the revolving credit
facilities mature in March 2004. The term loans are payable in quarterly
installments, which totaled $2.5 million in 1999, and will total $3.0 million
for 2000, $3.5 million for 2001, $4.0 million for 2002, $4.6 million for 2003,
$7.9 million for 2004 and $6.8 million for 2005. The 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 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
- -----------------------------
Prior to December 31, 1999, the Company modified all of its legacy systems to be
able to handle dates beyond December 31, 1999 and verified that the Company's
suppliers and large customers had remediated their own Year 2000 issues. As a
result, the Company has
23
<PAGE>
experienced no major problems with its internal systems or in products purchased
from suppliers used in manufacturing and service of its customers.
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, 1999, the
total redemption value of these optioned shares was $39.2 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 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, 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 Series B Note indenture. Currently, the amounts that would be
payable under these agreements are not material to the Company.
24
<PAGE>
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 notes 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
$162.4 million at December 31, 1999, of which $46.4 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, 1999 and consistent levels of debt and cash, the
estimated reduction in future earnings, net of tax, would be approximately $ 0.9
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, 1999, the Company's net assets (defined as current
assets less current liabilities) subject to foreign currency translation risk
were $16.8 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.
The sensitivity analysis presented assumes a parallel shift in all foreign
currency exchange rates. Exchange rates for different currencies do not
necessarily move in the same direction. Accordingly, this assumption may
overstate the impact of changing exchange rates on the Company's assets and
liabilities denominated in a foreign currency.
25
<PAGE>
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.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table that follows sets forth the name, age at December 31, 1999, 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.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------------------------------------------------
<S> <C> <C>
John H. Welker 59 Chairman, President and Chief
Executive Officer
Robert P. Robeson 53 Vice President, Treasurer, Secretary
and Chief Financial Officer
David K. Dodds 51 Vice President--Sales & Marketing
Henry Fleischer 76 Vice President--Research &
Development
Donald E. McGeachy 63 Vice President--Engineering
David M. Tenniswood 63 Director
Albert A. Koch 57 Director
John P. Musat 54 Director
Tim R. Palmer 42 Director
</TABLE>
John H. Welker has been with Numatics (and its predecessor) for a total of
34 years. He has been Numatics' Chairman of the Board, President, and CEO since
1990. He was President of Numatics' predecessor from 1983 until 1990 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 and in 1990 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.
27
<PAGE>
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 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 and served as Chief Engineer
from 1975 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 the
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.
28
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Information
- --------------------------------
The table that follows provides information, for the Company's last three
fiscal years concerning the compensation of John H. Welker, Numatics' CEO, and
the four other individuals who were the highest paid executive officers of
Numatics during 1999.
Summary Compensation Table
Annual Compensation (1)
- --------------------------------------------------------------------------------
Name and Principal Year Salary Bonus All Other
Position Compensation (2)
John H. Welker, 1999 $326,020 $110,750 5,000
Chairman, President 1998 301,020 110,500 5,000
and CEO 1997 251,020 160,500 5,000
Robert P. Robeson, 1999 143,100 56,180 5,000
Vice President, 1998 137,600 62,470 5,000
Treasurer, and CFO 1997 134,600 62,008 5,000
David K. Dodds, 1999 132,860 49,036 5,000
Vice President-- 1998 127,760 55,022 5,000
Sales and Marketing 1997 125,760 56,444 5,000
Donald E. 1999 114,200 41,608 4,969
McGeachy, Vice 1998 109,800 44,523 4,977
President-- 1997 107,800 48,430 5,000
Engineering
Henry Fleischer, 1999 101,420 39,389 4,623
Vice 1998 97,520 41,575 4,689
President--Research 1997 95,520 42,911 4,681
& Development
(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.
29
<PAGE>
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 ($325,000 for 1999, $350,000 for 2000, 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.
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
- --------------------------
Numatics has a "top-hat" non-qualified deferred compensation plan, under
which a small group of management-level employees could become entitled to
receive cash distributions if certain conditions are satisfied. 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.
30
<PAGE>
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. 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 1999 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 1999; 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 1999.
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.
31
<PAGE>
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.
32
<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.
Name of Beneficial Owner Shares Owned Percentage Owned
-------------------------------------------------------------------------
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 20,000.00 94.00%
as a group (9 persons) (1) (2)
(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.
33
<PAGE>
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.
34
<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, 1999, 1998, and 1997
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 5
(Deficiency)
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
35
<PAGE>
*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
*4.1.2 A/B Exchange Registration Rights Agreement, dated as of March 23,
1998, among Numatics, the Guarantors, and the initial note
purchasers
*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, 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 note
36
<PAGE>
purchasers, 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)**
37
<PAGE>
21.1 List of subsidiaries of Numatics
27.1 Financial Data Schedule
99.1 Consolidated Financial Statements--Numatics, Incorporated--Years
ended December 31, 1999, 1998 and 1997 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)
# Incorporated by reference to exhibit (having the same exhibit number) to
Annual Report on Form 10-K for the year ended December 31, 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, 1999.
38
<PAGE>
SCHEDULE II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
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, 1999
Accounts receivable allowance 58 32 34 (1) 43
Inventory reserve 994 0 418 (2) 576
Deferred tax asset valuation allowance 465 0 347 (3) 118
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
</TABLE>
(1) Uncollectible accounts charged off net of recoveries
(2) Reduction in inventory reserves for inventory disposed of during the year
and allowance for valuation changes
(3) Utilization of foreign net operating loss carry-forwards.
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 28, 2000
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 28, 2000
- ------------------------ Officer and Director
John H. Welker
/s/ Robert P. Robeson Vice President, Treasurer and March 28, 2000
- ------------------------ Chief Financial Officer (also
Robert P. Robeson principal accounting officer)
- ------------------------
David M. Tenniswood Director March 28, 2000
/s/ Albert A. Koch
- ------------------------
Albert A. Koch Director March 28, 2000
/s/ John P. Musat
- ------------------------
John P. Musat Director March 28, 2000
- ------------------------
Tim R. Palmer Director March 28, 2000
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 identified there, and First Trust National
Association, as trustee
*4.1.2 A/B Exchange Registration Rights Agreement, dated as of March
23, 1998, among Numatics, the Guarantors, and the initial note
purchasers
*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, by which
Empire
<PAGE>
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 note
purchasers, 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
<PAGE>
*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, 1999, 1998 and 1997 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)
# Incorporated by reference to exhibit (having the same exhibit number) to
Annual Report on Form 10-K for the year ended December 31, 1998 (File No.
333-51355)
** Indicates contract or compensatory plan or arrangement with one or more
Numatics executive officers and/or directors
<PAGE>
Exhibit 3.1.1
RESTATED ARTICLES OF INCORPORATION
OF
NUMATICS, INCORPORATED
Pursuant to the provisions of Act 284, Public Acts of 1972, as amended, the
undersigned corporation executes the following Articles:
1. The present name of this Corporation is Numatics, Incorporated.
2. This Corporation's identification number (CID) assigned by the Bureau
is 536-171.
3. All former names of this Corporation are: Numatics Acquisition
Corporation.
4. The date of filing the original Articles of Incorporation of this
Corporation was October 15, 1990.
The following Restated Articles of Incorporation supersede the Articles of
Incorporation and shall be the Articles of Incorporation for this Corporation:
ARTICLE I
The name of this Corporation is Numatics, Incorporated.
ARTICLE II
The purpose or purposes for which this Corporation is formed is to engage
in any activity within the purposes for which corporations may be formed under
the Michigan Business Corporation Act.
ARTICLE III
1. The address of the current registered office of this Corporation is
1450 North Milford Road, Highland, MI 48031.
2. The mailing address of the current registered office of this
Corporation is the same as above.
3. The name of the current registered agent of this Corporation is John
H. Welker.
ARTICLE IV
Section 1. Authorized Shares.
(a) Total Number. The total number of shares of all classes of capital
------------
stock which this Corporation shall have authority to issue is 10,000,000,
consisting of the following:
<PAGE>
(1) 50,000 shares of Preferred Stock ("Preferred Stock") of the par
value of $.01 per share; and
(2) 9,950,000 shares of Class A Common Stock ("Common Stock") of the
par value of $.01 per share.
Such shares of Preferred Stock and Common Stock are sometimes hereinafter
collectively referred to as the "capital stock". The designations and the
powers, preferences and relative, participating, optional or other special
rights, and the qualifications, limitations and restrictions of each class of
capital stock shall be as follows:
PART I Preferred Stock
- ------ ---------------
(a) The Board of Directors of this Corporation is authorized to establish
from the shares of authorized Preferred Stock by resolutions adopted and filed
in the manner provided by law, one or more other classes or series of Preferred
Stock, to designate each such class or series of Preferred Stock and the number
of shares comprising such class or series, which number may, if permitted by
law, except where otherwise provided by the Board of Directors in creating such
class or series, be increased or decreased (but not below the number of shares
then outstanding) from time to time by resolutions of the Board of Directors
adopted and filed in the manner provided by law, and to fix the relative rights
and preferences of each such class or series of Preferred Stock, including the
following:
(1) the dividend rate or rates on the shares of such class or series
and the preference or relation which such dividends shall bear to the
dividends payable on any other class or series of capital stock of this
Corporation or on any other series of Preferred Stock, the terms and
conditions upon which and the periods in respect of which dividends shall
be payable, whether and upon what condition such dividends shall be
cumulative and, if cumulative, the date or dates from which dividends shall
accumulate;
(2) whether the shares of such class or series shall be redeemable,
in whole or in part, and if redeemable, whether redeemable for cash, bonds,
securities or other property, at the option of this Corporation or the
holder or upon the happening of a specified event, the limitations and
restrictions with respect to such redemption, and the time or times when,
or periods during which, the price or prices or rate or rates at which, the
adjustments with which and the manner in which such shares shall be
redeemable, including the manner of selecting shares of such class or
series for redemption if less than all shares are to be redeemed;
(3) the rights to which the holders of shares of such class or series
shall be entitled, and the preferences if any, over any other class or
series (or of any other class or series over such class or series), upon
the voluntary or involuntary liquidation, dissolution, distribution, or
winding up of this Corporation, which rights may vary depending on whether
such liquidation, dissolution, distribution or winding up is voluntary or
involuntary, and, if voluntary, may vary at different dates;
(4) whether the shares of such class or series shall be subject to the
operation of a purchase, retirement or sinking fund, the extent to which
and the manner in which
-2-
<PAGE>
such fund shall be applied to the purchase or redemption of the shares of
such class or series for retirement or to other corporate purposes and the
terms and provisions relative to the operation thereof;
(5) whether the shares of such class or series shall be convertible
into, or exchangeable for at the option of this Corporation or the holder
or upon the happening of a specified event, shares of any other class or
any series of any class, or bonds, of this Corporation and, if so
convertible or exchangeable, the times, prices, rates, adjustments and
other terms and conditions of such conversion or exchange;
(6) the voting powers, full and/or limited, if any, of the shares of
such class or series, and whether and under what conditions the shares of
such class or series (alone or together with the shares of one or more
other class or series having similar provisions) shall be entitled to vote
separately as a single class, for the election of one or more directors, or
additional directors, of this Corporation in the case of dividend arrearage
or other specified events, or upon other matters;
(7) whether the issuance of any additional shares of such class or
series, or of any shares of any other class or series, shall be subject to
restrictions as to issuance or as to the powers, preferences or rights of
any such other class or series; and
(8) any other preferences, privileges and powers and relative,
participating, optional, or other special rights and qualifications,
limitations, or restrictions of such class or series, as the Board of
Directors may deem advisable and as shall not be inconsistent with the
provisions of these Restated Articles of Incorporation.
(b) Unless and except to the extent otherwise required by law or provided
in the resolution or resolutions of the Board of Directors creating any series
of Preferred Stock pursuant to this Part I, the holders of the Preferred Stock
shall have no voting power with respect to any matter whatsoever.
(c) Shares of Preferred Stock redeemed, converted, exchanged, purchased,
retired or surrendered to the Corporation, or which have been issued and
reacquired in any manner, may, upon compliance with any applicable provisions of
the Michigan Business Corporation Act, be given the status of authorized and
unissued shares of Preferred stock and may be reissued by the Board of Directors
as part of the series of which they were originally a part or may be
reclassified into and reissued as part of a new series or as a part of any other
series, all subject to the protective conditions or restrictions of any
outstanding series of Preferred Stock.
PART II: Common Stock
- -------- ------------
(a) Except as otherwise required by law or by any amendment to these
Restated Articles of Incorporation, each holder of Common Stock shall have one
vote for each share of stock held by such holder of record on the books of the
Corporation on all matters voted upon by the shareholders.
(b) Subject to the preferential dividend rights, if any, applicable to
shares of Preferred Stock and subject to applicable requirements, if any, with
respect to the setting aside of sums for
-3-
<PAGE>
purchase, retirement or sinking funds for Preferred Stock, the holders of Common
Stock shall be entitled to receive, to the extent permitted by law, such
dividends as may be declared from time to time by the Board of Directors.
(c) In the event of the voluntary or involuntary liquidation, dissolution,
distribution of assets or winding up of the Corporation, after distribution in
full of the preferential amounts, if any, to be distributed to the holders of
shares of Preferred Stock, holders of Common Stock shall be entitled to receive
all of the remaining assets of the Corporation of whatever kind available for
distribution to shareholders ratably in proportion to the number of shares of
Common Stock held by them respectively. The Board of Directors may distribute in
kind to the holders of Common Stock such remaining assets of the Corporation or
may sell, transfer or otherwise dispose of all or any part of such remaining
assets to any other corporation, trust, individual or entity, or any combination
thereof, and may sell all or any part of the consideration so received and
distribute any balance thereof in kind to holders of Common Stock. The merger or
consolidation of the Corporation into or with any other corporation or other
entity, or the merger of any other corporation or other entity into it, or any
purchase or redemption of shares of stock of the Corporation of any class, shall
not be deemed to be a dissolution, liquidation of winding up of the Corporation
for the purposes of this paragraph.
(d) Such numbers of shares of Common Stock as may from time to time be
required for such purpose shall be reserved for issuance (i) upon conversion of
any shares of Preferred stock or any obligation of the Corporation convertible
into shares of Common Stock which is at the time outstanding or issuable upon
exercise of any options, warrants or rights at the time outstanding and (ii)
upon exercise of any options, warrants or rights at the time outstanding to
purchase shares of Common Stock.
ARTICLE V
The duration of this Corporation is perpetual.
ARTICLE VI
Any action required or permitted by the Act, these Restated Articles of
Incorporation or the Bylaws of the Corporation to be taken at an annual or
special meeting of shareholders may be taken without a meeting, without prior
notice and without a vote, if consents in writing, setting forth the action so
taken, are signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take the action
at a meeting at which all shares entitled to vote on the action were present and
voted. The written consents shall bear the date of signature of each shareholder
who signs the consent. No written consents shall be effective to take the
corporate action referred to unless, within 60 days after the record date for
determining shareholders entitled to express consent to or to dissent from a
proposal without a meeting, written consents dated not more than 10 days before
the record date and signed by a sufficient number of shareholders to take the
action are delivered to the Corporation. Delivery shall be to the Corporation's
registered office, its principal place of business, or an officer or agent of
the corporation having custody of the minutes of the proceedings of its
shareholders. Delivery made to a Corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested. Prompt notice
of the taking of the corporate action without a
-4-
<PAGE>
meeting by less than unanimous written consent shall be given to shareholders
who would have been entitled to notice of the shareholder meeting if the action
had been taken at a meeting and who have not consented in writing.
ARTICLE VII
A director of this Corporation shall not be personally liable to this
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director. However, this provision does not eliminate or limit the
liability of a director for any of the following:
(a) any breach of the director's duty of loyalty to this Corporation or
its shareholders;
(b) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(c) a violation of Section 551(1) of the Michigan Business Corporation
Act; or
(d) a transaction from which the director derived an improper personal
benefit.
Any repeal, amendment or other modification of this Article VII shall not
increase the liability or alleged liability of any director of this Corporation
then existing with respect to any state of facts then or thereto fore existing
or any action, suit or proceeding theretofore or thereafter brought or
threatened based in whole or in part upon any such state of facts. If the
Michigan Business Corporation Act is subsequently amended to authorize corporate
action further eliminating or limiting personal liability of directors then the
liability of directors shall be eliminated or limited to the fullest extent
permitted by the Michigan Business Corporation Act as so amended.
ARTICLE VIII
The Corporation shall not issue or sell any of its Equity Securities (as
hereinafter defined), or enter into any Contractual Obligation (as hereinafter
defined) providing for the issuance (contingent or otherwise) of any of its
Equity Securities (each an "Issuance" of "Subject Securities"), except in
compliance with the following provisions of this Article VIII.
1. Right of Participation.
----------------------
1.1 Not fewer than thirty days prior to the consummation of the
Issuance, a notice (the "Notice") shall be furnished by the Corporation to
each holder of Investor Securities. The Notice shall include:
(a) The principal terms of the proposed Issuance, including without
limitation the amount and kind of Subject Securities to be included in
the Issuance, the maximum and minimum (which shall be not less than
90% of such maximum) price per unit of the Subject Securities will be
Issued (collectively, the "Proposed Subscriber"); and
-5-
<PAGE>
(b) An offer by the Corporation to issue, at the option of such holder of
Equity Securities constituting Investor Securities, up to such
holder's Applicable Percentage of the Subject Securities which would
be otherwise issued in the Issuance, on the same terms and conditions
as the Subject Securities are purchased by the Proposed Subscriber;
provided, however, that if the Proposed Subscriber is purchasing the
Subject Securities for noncash consideration, the holders of Equity
Securities constituting Investor Securities may pay in cash the fair
market value (as agreed to by the Corporation and such holder) of such
noncash consideration.
1.2. If a holder of Investor Securities desires to accept the offer
contained in the Notice, it shall send, within twenty days after the
effectiveness of the Notice, a written commitment to the Corporation
specifying the amount of Subject Securities (not in any event to exceed
such holder's Applicable Percentage of the Subject Securities to be
included in the Issuance) which such holder desires to be issued. If any
holder of Investor Securities has not so accepted such offer, such holder
shall be deemed to have waived (for itself and any transferee or assignee
of its Investor Securities) all of its rights with respect to this
Issuance, and the Corporation shall thereafter be free to issue the Subject
Securities to the Proposed Subscriber, at a price no less than 95% of the
minimum price set forth in the Notice and on otherwise no more favorable
terms in any material respect than as set forth in the Notice, without any
further obligation to such holder. If, prior to consummation, the terms of
such proposed Issuance shall change with the result that the price shall be
less than 95% of the minimum price set forth in the Notice, it shall be
necessary for a separate Notice to have been furnished, and the terms and
provisions of this Article VIII separately complied with, in order to
consummate such Issuance pursuant to this Article VIII.
The acceptance of such holder shall be irrevocable except as
hereinafter provided, and such holder shall be bound and obligated to
acquire in the Issuance on the same terms and conditions, with respect to
each unit of Subject Securities issues in the Issuance, such amount of
Subject Securities as such holder shall have specified in its written
commitment.
If at the end of the ninetieth (90th) day following the date of the
effectiveness of the Notice the Corporation has not completed the Issuance,
any holder of Investor Securities who has accepted the offer in a Notice
shall be released from its obligations under the written commitment, the
Notice shall be null and void, and it shall be necessary for a separate
Notice to have been furnished, in order to consummate such Issuance
pursuant to this Article VIII.
1.3. The Corporation may condition the participation of any holder of
Investor Securities in an Issuance upon the purchase by it of any
securities (including without limitation debt securities) other than
Subject Securities ("Other Securities") in the event that the participation
of the Proposed Subscriber in such Issuance is so conditioned. In such
case, each holder of Investor Securities shall acquire in the Issuance,
together with the Subject Securities to be acquired by it, Other Securities
in the same proportion to the Subject Securities to be acquired by it as
Other Securities are acquired by the Proposed
-6-
<PAGE>
Subscriber in proportion to the Subject Securities acquired in the Issuance
by the Proposed Subscriber, on the same terms and conditions, as to each
unit of Subject Securities and Other Securities issued to the Proposed
Subscriber, as the Proposed Subscriber shall be issued units of Subject
Securities and Other Securities.
1.4. Each holder of Investor Securities and its Affiliates shall take
or cause to be taken all such reasonable actions as may be necessary or
reasonably desirable in order expeditiously to consummate each Issuance
pursuant to this Article VIII and any related transactions, including,
without limitation, executing, acknowledging and delivering consents,
assignments, waivers and other documents or instruments with governmental
authorities; and otherwise cooperating with the Corporation; provided,
however, that no holder of Investor Securities or any Affiliate thereof
shall be required to agree to any amendment or modification of, or waiver
under, or other change to, this Agreement, the Investor Securities or any
other agreement relating thereto.
1.5 All costs and expenses incurred by any holder of Investor
Securities or the Corporation in connection with any proposed Issuance of
Subject Securities or the Corporation in connection with any proposed
Issuance of Subject Securities (whether or not consummated), including
without limitation all attorney's fees and charges, all accounting fees and
charges and all finders, brokerage or investment banking fees, charges or
commissions, shall be paid by the Corporation; provided however, that if a
holder of Investor Securities or any of its Affiliates retains separate
legal counsel or other advisors in connection with such proposed Issuance,
the fees and expenses of such separate attorneys or other advisors shall be
borne by such holder.
1.6 The closing of an Issuance pursuant to Article VIII shall take
place at such time and place as the Corporation shall specify by notice to
each participating holder of Investor Securities. At the closing of any
Issuance under this Article VIII, such holders of Investor Securities shall
be delivered the notes, certificates or other instruments evidencing the
Subject Securities (and, if applicable, Other Securities) to be issued to
it, registered in the name of such holder of its designated nominee, free
and clear of any Liens, with any transfer tax stamps affixed, against
delivery by such holders of the applicable consideration.
2 Excluded Transactions. Notwithstanding the preceding provisions of
---------------------
this Article VIII, the preceding provisions of this Article VIII shall not
restrict:
(a) Any Issuance of options to purchase not more than an aggregate of
2,000 shares of Common Stock (subject to appropriate adjustments
for stock spits which occurred or occur after the date of the
filing of the original Articles of Incorporation) and any
Issuance of shares of Common Stock in connection therewith to
employees of the Corporation and its subsidiaries.
(b) Any Issuance of Common Stock upon the exercise or conversion of
any Investor Securities or any Equity Securities outstanding on
the date hereof or issued after the date hereof in compliance
with the provisions of this Article VIII; and
-7-
<PAGE>
(c) Any Issuance of Common Stock pursuant to a public offering
registered under the Securities Act of 1933, as amended, other
than shares issued pursuant to an employee plan registered on
Form S-8 or any similar plan or form.
(d) Any Issuance of Common Stock pursuant to a stock split or pro
rata stock dividend.
3. Termination. The foregoing provisions of this Article VIII shall
-----------
terminate immediately following the closing of a public offering if, immediately
after giving effect thereto, there is outstanding Common Stock not held by
Affiliates of the Corporation which (x) is freely tradeable and the sale of
which is not in any way subject to Rule 144 (including without limitation Rule
144(k) under the Securities Act of 1933, as amended) and (y) has an aggregate
public market value of not less than $50 million.
4. For purposes of this Article VIII, the following terms shall have the
following meanings:
"Affiliate" shall mean any Person directly or indirectly controlling,
controlled by or under direct or indirect common control with the specified
Person and shall include (i) any Person who is an officer, director or
beneficial holder of at least 5% of the outstanding equity interest of the
specified Person and Members of the Immediate Family of any such officer,
director or holder, (ii) any Person of which the specified Person or an
Affiliate (as defined in clause (i) above) of the specified Person shall,
directly or indirectly, either beneficially own at least 5% of the outstanding
equity interest or constitute at least a 5% participant or shall be an officer
or director of such Person, and Members of the Immediately Family, if any, of
such holder, director or officer, and (iii) in the case of a specified Person
who is an individual, Members of the Immediately Family of such Person;
provided, however, that Harvard Private Capital Holdings, Inc shall not be an
Affiliate of the Corporation for purposes of this Article VIII.
"Applicable Percentage" shall mean, with respect to any holder of
Investor Securities, the percentage of all outstanding shares of Common Stock
which would be held by such holder assuming that all outstanding Equity
Securities of the Corporation are converted into, or exchanged or exercised for,
shares of Common Stock in accordance with the terms thereof.
"Contractual Obligation" shall mean, with respect to the Corporation,
any contract, agreement, deed, mortgage, lease, license, indenture, commitment,
undertaking, arrangement or understanding, written or oral, or other document or
instrument, including, without limitation, any document or instrument evidencing
or otherwise relating to any indebtedness but excluding these Restated Articles
and the Bylaws of the Corporation, to which or by which the Corporation is a
party or otherwise subject or bound or to which or by which any property or
right of such Corporation is subject or bound.
"Equity Securities" shall mean, all shares of capital stock or other
equity or beneficial interests issued by or created in or by the Corporation,
all stock appreciation or similar
-8-
<PAGE>
rights or grants of, or other Contractual Obligation for, any right to share in
equity, income, revenues or cash flow of the Corporation, and all securities or
other rights, warrants or other Contractual Obligations to acquire any of the
foregoing, whether by conversion, exchange, exercise, preemptive right or
otherwise.
"Members of the Immediate Family", as applied to any individual, shall
include each parent, spouse, chid, brother, sister and the spouse of a child,
brother, or sister of the individual, and each trust created for the benefit of
one or more of such persons and each custodian of the property of one or more
such persons.
"Person" shall mean an individual, partnership, limited liability
company, corporation, association, trust, joint venture or unincorporated
organization, and any government department or agency or political subdivision
thereof.
"Investor Securities" means the Warrants dated January 3, 1996 issued
by the Corporation to Harvard Private Capital Holdings, Inc., provided that any
such securities sold in a distribution pursuant to a registration statement
under the Securities Act or, if the securities sold are of a class which is
publicly traded or evidenced by listing with a national securities exchange, on
the NASDAQ National Market or otherwise, a sale to the public which is exempt
from the registration requirements of the Securities Act of 1933, as amended,
under Rule 144 thereunder or otherwise, shall cease to be Investor Securities
thereafter.
5. COMPLETE SECTION (a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE
UNANIMOUS CONSENT OF THE INCORPORATORS BEFORE THE FIRST MEETING OF THE
BOARD OF DIRECTORS; OTHERWISE, COMPLETE SECTION (b)
a. ___ These Restated Articles of Incorporation were duly adopted on the
______ day of ___________________, 2000, in accordance with the
provisions of Section 642 of the Act by the unanimous consent of
the incorporators before the first meeting of the Board of
Directors.
Signed this _____ day of ________________________, 2000.
____________________ _______________________
____________________ _______________________
(Signatures of all incorporators; type or print name under each
signature)
b. X These Restated Articles of Incorporation were duly adopted on the
---
15th day of February, 2000, in accordance with the provisions of
Section 642 of the Act and: (check one of the following)
___ were duly adopted by the Board of Directors without a vote
of the shareholders. These Restated Articles of
Incorporation only restate
-9-
<PAGE>
and integrate and do not further amend the provisions of the
Articles of Incorporation as heretofore amended and there is
no material discrepancy between those provisions and the
provisions of these Restated Articles.
___ were duly adopted by the shareholders. The necessary number
of shares as required by statute were voted in favor of
these Restated Articles.
___ were duly adopted by the written consent of the shareholders
having not less than the minimum number of votes required by
statute in accordance with Section 407 (1) of the Act.
Written notice to shareholders who have not consented in
writing has been given. (Note: Written consent by less than
all of the shareholders is permitted only is such provision
appears in the Articles of Incorporation.)
X were duly adopted by the written consent of all the
---
shareholders entitled to vote in accordance with Section 407
(2) of the Act.
Signed this 2nd day of February, 2000
By /s/ John H. Welker
------------------------------------------
(Signature)
John H. Welker, President
------------------------------------
(Type or Print Name)
-10-
<PAGE>
Exhibit 21.1
List of Subsidiaries of Issuer
<TABLE>
<CAPTION>
Percentage of Shares
Owned by Issuer
--------------------
<S> <C>
Micro-Filtration, Inc.; incorporated in Michigan 100%
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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 1,552,063 1,121,142
<SECURITIES> 0 0
<RECEIVABLES> 24,006,715 21,665,615
<ALLOWANCES> 42,520 58,394
<INVENTORY> 35,377,585 33,064,783
<CURRENT-ASSETS> 64,710,191 60,282,938
<PP&E> 63,779,396 59,073,202
<DEPRECIATION> (30,567,303) (27,049,324)
<TOTAL-ASSETS> 114,552,588 109,211,645
<CURRENT-LIABILITIES> 23,548,811 22,558,714
<BONDS> 158,977,572 156,917,908
0 0
0 0
<COMMON> 4,602,151 4,602,151
<OTHER-SE> (78,213,258) (79,098,886)
<TOTAL-LIABILITY-AND-EQUITY> 114,552,588 109,211,645
<SALES> 140,120,460 139,414,542
<TOTAL-REVENUES> 140,120,460 139,414,542
<CGS> 87,685,619 87,955,957
<TOTAL-COSTS> 32,234,483 30,162,018
<OTHER-EXPENSES> 1,732,388 236,455
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 16,061,893 15,926,521
<INCOME-PRETAX> 2,406,077 5,133,591
<INCOME-TAX> 1,520,449 2,282,713
<INCOME-CONTINUING> 885,628 2,850,878
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (4,918,000)
<CHANGES> 0 0
<NET-INCOME> 885,628 (2,067,122)
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
Exhibit 99.1
Numatics, Incorporated
Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors................................ 1
Audited Consolidated Financial Statements
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
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors
Numatics, Incorporated
We have audited the accompanying consolidated balance sheets of Numatics,
Incorporated and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 3, 2000
<PAGE>
Numatics, Incorporated
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,552,063 $ 1,121,142
Trade receivables, less allowances of
$43,000 in 1999 and $58,000 in 1998 23,964,195 21,607,221
Inventories 35,377,585 33,064,783
Other current assets 3,816,348 4,489,792
------------------------------
Total current assets 64,710,191 60,282,938
Other assets:
Goodwill, net of accumulated amortization 6,123,496 6,479,487
Other intangible assets, net of accumulated
amortization 5,217,320 5,781,321
Deferred income taxes 2,609,032 2,000,730
Investment in affiliates 2,294,454 2,157,893
Other 386,002 485,398
------------------------------
16,630,304 16,904,829
------------------------------
Properties:
Land 1,489,357 1,524,383
Buildings and improvements 14,099,546 11,620,518
Machinery and equipment 48,190,493 45,928,301
------------------------------
63,779,396 59,073,202
Less accumulated depreciation (30,567,303) (27,049,324)
------------------------------
33,212,093 32,023,878
------------------------------
$114,552,588 $109,211,645
==============================
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
December 31
1999 1998
------------------------------
<S> <C> <C>
Liabilities and accumulated deficiency
Current liabilities:
Accounts payable trade $ 10,370,630 $ 8,498,737
Accrued expenses 4,568,094 5,379,770
Compensation and employee benefits 4,614,723 4,976,152
Income and single business tax 580,713 246,983
Current portion of long-term debt 3,414,651 3,457,072
------------------------------
Total current liabilities 23,548,811 22,558,714
Long-term debt, less current portion 158,977,572 156,917,908
Deferred retirement benefits 5,173,025 4,202,480
Deferred income taxes 63,594 269,399
Minority interest in subsidiaries (redeemable upon
the happening of certain events outside the control the
Company: $1,015,818 in 1999 and $1,285,640 in 1998) 683,987 554,822
Accumulated deficiency:
Common stock $.01 par value, 250,000 shares
authorized; 21,276 shares outstanding
and related additional paid in capital 4,602,151 4,602,151
Accumulated deficiency (78,213,258) (79,098,886)
Equity adjustment from foreign currency translation (283,294) (794,943)
------------------------------
(73,894,401) (75,291,678)
------------------------------
$114,552,588 $109,211,645
==============================
</TABLE>
See accompanying notes.
2
<PAGE>
Numatics, Incorporated
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Net sales $140,120,460 $139,414,542 $147,097,265
Costs and expenses:
Cost of products sold 87,685,619 87,955,957 93,784,880
Marketing, engineering, general and
administrative 31,842,790 30,771,234 31,830,324
Single business tax 391,693 (609,216) 945,450
----------------------------------------------
Operating income 20,200,358 21,296,567 20,536,611
Other expenses:
Interest and other financing expenses 16,061,893 15,926,521 17,020,961
Other 1,732,388 236,455 1,348,059
----------------------------------------------
Income before income taxes and
extraordinary item 2,406,077 5,133,591 2,167,591
Income taxes 1,520,449 2,282,713 903,768
----------------------------------------------
Income before extraordinary item 885,628 2,850,878 1,263,823
Extraordinary item-early extinguishment
of debt, net of income taxes of $2,534,000 - (4,918,000) -
----------------------------------------------
Net income (loss) $ 885,628 $ (2,067,122) $ 1,263,823
==============================================
</TABLE>
See accompanying notes.
3
<PAGE>
Numatics, Incorporated
Consolidated Statements of Stockholders' Equity (Deficiency)
<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, 1997 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 933,353
----------------------------------------------------------------------
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)
Net income for 1999 885,628 885,628
Equity adjustment from
foreign currency translation 511,649 511,649
------------
Comprehensive income for 1999 1,397,277
----------------------------------------------------------------------
Balance, December 31, 1999 21,276 $4,602,151 $(78,213,258) $(283,294) $(73,894,401)
======================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Numatics, Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 885,628 $ (2,067,122) $ 1,263,823
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 4,358,586 4,130,129 3,547,742
Amortization 1,085,516 1,319,083 1,452,065
Deferred interest expense - 2,059,894 7,313,204
Extraordinary item-early extinguishment of debt - 4,918,000 -
Minority interest in subsidiary earnings 129,164 206,377 103,218
Deferred taxes (823,918) 56,992 (119,748)
Deferred retirement benefits 970,544 1,000,040 738,205
Unrealized foreign currency (gains) losses 1,230,560 (227,776) 1,191,826
Changes in operating assets and liabilities:
Trade receivables (2,409,608) 574,473 (2,200,958)
Inventories (2,899,892) (4,962,350) (3,653,789)
Other current accounts (937,132) (1,162,181) (833,655)
Accounts payable and accrued expenses 1,312,751 1,871,894 1,006,333
Compensation and employee benefits (314,302) 295,247 600,539
Taxes, other than income and single business tax (60,318) (327,270) (33,337)
Income and single business taxes 1,766,856 (107,151) 671,640
------------------------------------------------
Net cash provided by operating activities 4,294,435 7,578,279 11,047,108
Investing activities
Capital expenditures (6,406,979) (6,605,293) (7,880,756)
Other investments 3,685 (308,001) 72,681
------------------------------------------------
Net cash used in investing activities (6,403,294) (6,913,294) (7,808,075)
Financing activities
Proceeds from long-term borrowings 3,036,846 153,721,799 -
Debt repayments (608,522) (138,471,530) (4,915,021)
Debt issuance costs 74,173 (5,195,248) -
Extraordinary item (extinguishment of debt) - (4,194,345) -
Dividends paid - (6,000,001) -
Other - 13 1,600,603
------------------------------------------------
Net cash provided by (used in) financing activities 2,502,497 (139,312) (3,314,418)
Effect of exchange rate changes on cash 37,283 (105,603) (76,941)
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 430,921 420,070 (152,326)
Cash and cash equivalents at beginning of year 1,121,142 701,072 853,398
------------------------------------------------
Cash and cash equivalents at end of year $ 1,552,063 $ 1,121,142 $ 701,072
================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements
December 31, 1999
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.
6
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
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, 1999
and 1998.
Revenue Recognition
The Company recognizes revenue when goods are shipped to the customer.
Fair Value of Financial Instruments
At December 31, 1999, the carrying amounts reported in the consolidated balance
sheets for cash and cash equivalents, accounts receivable, accounts payable,
debt and investments approximate fair value.
Currency Translation
Exchange adjustments related to international currency translation are presented
in the Consolidated Statements of Operations. Translation adjustments of
international subsidiaries are presented in the consolidated financial
statements as a component of accumulated comprehensive income.
7
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
2. Long-Term Debt and Warrant
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
1999 1998
--------------------------------
<S> <C> <C>
Senior subordinated notes due in 2008 bearing interest at 9.625% $115,000,000 $115,000,000
Term loans payable in U.S. dollars in minimum quarterly
installments of $625,000 plus interest at LIBOR plus 3.25%
(9.43375% at December 31, 1999), due in 2004 15,301,499 18,539,957
Term loans payable in U.S. dollars in minimum quarterly
installments of $37,500 plus interest at LIBOR plus 3.5% (9.68375%
at December 31, 1999), due in 2005 14,396,533 15,079,487
Revolving notes payable to banks, due in 2004 14,168,360 8,049,199
Williamston County Tennessee Industrial Revenue Bond 2,500,000 2,500,000
Other 1,025,831 1,206,337
--------------------------------
162,392,223 160,374,980
Less current maturities 3,414,651 3,457,072
--------------------------------
$158,977,572 $156,917,908
================================
</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.
8
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
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, 1999.
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
1999 are as follows: 2000--$3,415,000; 2001--$3,810,000; 2002--$4,324,000; 2003-
- -$4,858,000; thereafter--$145,986,000. 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 $16,062,000 in 1999, $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) and $9,606,000 in 1997.
In connection with the issuance of the Company's previous senior subordinated
note in 1995, the Company issued an exercisable 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 $0.01 per share. The warrant was exercised in 1998.
9
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
3. Goodwill and Other Intangible Assets
Intangible assets at December 31 were comprised of the following:
Amortization
Period
1999 1998 (years)
----------------------------------------
Product drawings $ 1,090,000 $ 1,090,000 15
Numasize software 1,021,000 1,021,000 10
Deferred financing cost 6,025,178 5,962,915 5 to 10
Goodwill 8,714,667 8,426,163 25
-------------------------
16,850,845 16,500,078
Less accumulated amortization 5,510,029 4,239,270
-------------------------
$11,340,816 $12,260,808
=========================
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 value.
4. Income Taxes
The components of income before income taxes and extraordinary item consisted of
the following:
1999 1998 1997
----------------------------------------
Domestic $ 2,811,000 $ 3,266,000 $ 1,747,000
International (405,000) 1,868,000 421,000
----------------------------------------
$ 2,406,000 $ 5,134,000 $ 2,168,000
========================================
10
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
Significant components of the provision for income taxes are as follows:
1999 1998 1997
-----------------------------------------
Current:
Federal $ 1,702,000 $ 1,074,000 $ 1,091,000
Foreign 632,000 739,000 888,000
-----------------------------------------
2,334,000 1,813,000 1,979,000
Deferred (credit):
Federal (608,000) 289,000 (429,000)
Foreign (206,000) 181,000 (646,000)
-----------------------------------------
(814,000) 470,000 (1,075,000)
-----------------------------------------
$ 1,520,000 $ 2,283,000 $ 904,000
=========================================
The reconciliation of income taxes computed at the United States federal
statutory tax rate to income tax expense is:
1999 1998 1997
-----------------------------------------
Income taxes at U.S. statutory
rate $ 818,000 $ 1,745,000 $ 737,000
International rate differences 167,000 94,000 (291,000)
Other 535,000 444,000 458,000
-----------------------------------------
$ 1,520,000 $ 2,283,000 $ 904,000
=========================================
11
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
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 ($5,445,000 at December 31, 1999, $4,474,000 at December
31, 1998, and $3,884,000 at December 31, 1997).
Significant components of the Company's deferred tax assets and liabilities as
of December 31 were as follows:
1999 1998
------------------------
Deferred tax assets:
Intangible amortization $1,264,000 $1,932,000
Deferred compensation 2,066,000 1,956,000
Inventory 21,000 269,000
Other deferred assets 62,000 464,000
Net operating loss carryforward 1,636,000 871,000
------------------------
5,049,000 5,492,000
Valuation allowance (118,000) (465,000)
------------------------
4,931,000 5,027,000
Deferred tax liabilities:
Depreciation 2,159,000 2,289,000
Other deferred liabilities 172,000 390,000
Foreign currency exchange gains 55,000 617,000
------------------------
Total deferred tax liabilities 2,386,000 3,296,000
------------------------
Net deferred tax assets $2,545,000 $1,731,000
========================
The following table summarizes the Company's total provision for income taxes:
1999 1998 1997
-----------------------------------------
Income tax expense before
extraordinary item $ 1,520,449 $ 2,282,713 $ 903,768
Income tax benefit on
extraordinary item - (2,534,000) -
-----------------------------------------
$ 1,520,449 $ (251,287) $ 903,768
=========================================
Income taxes paid approximated $1,640,000 in 1999, $500,000 in 1998, and
$315,000 in 1997.
12
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
4. Income Taxes (continued)
The Company's net operating loss carryforwards primarily exist in its German
subsidiaries and have no expiration date.
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
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost $ 162,478 $ 208,778 $ 234,080 $ 216,741
Interest cost 545,870 517,926 662,295 631,317
Expected return on assets (621,765) (595,512) -- --
Amortization of unrecognized transition obligation -- -- 265,789 265,789
Amortization of unrecognized prior service cost 62,437 62,437 72,456 72,456
Amortization of unrecognized net gain -- (13,946) -- --
-------------------------------------------------------
Net period benefit cost $ 149,020 $ 179,683 $1,234,620 $1,186,303
=======================================================
</TABLE>
13
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
5. Employee Benefit Plans (continued)
Changes in benefit obligation are:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 6,967,589 $ 6,492,321 $ 8,208,262 $ 7,512,805
Service cost 162,478 208,778 234,080 216,741
Interest cost 545,870 517,926 662,295 631,317
Actuarial (gain)/loss 6,042 110,894 131,425 305,889
Benefits paid (258,601) (362,330) (458,740) (458,490)
--------------------------------------------------------
Benefit obligation at end of year $ 7,423,378 $ 6,967,589 $ 8,777,322 $ 8,208,262
========================================================
Changes in plan assets are:
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of assets at beginning of year $ 7,038,601 $ 6,676,144 $ - $ -
Actual return on assets 532,217 473,178 - -
Contributions 119,601 251,609 - -
Benefits paid (258,601) (362,330) - -
--------------------------------------------------------
Fair value of assets at end of year $ 7,431,818 $ 7,038,601 $ - $ -
========================================================
Funded status of the plans are:
<CAPTION>
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status as of end of year $ 8,440 $ 71,012 $(8,777,322) $(8,208,262)
Unrecognized transition - - 3,986,841 4,252,630
Unrecognized prior service cost 454,933 517,370 792,675 865,131
Unrecognized net (gain)/loss (583,053) (678,643) 525,021 393,596
--------------------------------------------------------
Accrued benefit cost $ (119,680) $ (90,261) $(3,472,785) $(2,696,905)
========================================================
</TABLE>
14
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
5. Employee Benefit Plans (continued)
The discount rate used in determining the present value of the accumulated
postretirement and pension benefit obligation was 8% in 1999 and 1998. The
expected long-term rate of return on pension assets was 9% in 1999 and 1998. The
assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.67% 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 $754,850 and the related expense would increase by
$80,674. If the assumed healthcare cost trend rate was decreased 1% in all
future years, the accumulated postretirement benefit obligation would decrease
by $638,111 and the related expense would decrease by $67,049.
The Company 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 $545,000, $680,000 and $620,000 for 1999, 1998 and
1997, respectively.
15
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
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:
1999 1998 1997
------------------------------------------------
Net sales:
North America $ 118,849,473 $ 113,868,485 $ 119,577,505
International 21,270,987 25,546,057 27,519,760
------------------------------------------------
$ 140,120,460 $ 139,414,542 $ 147,097,265
================================================
1999 1998 1997
------------------------------------------------
Depreciation and amortization:
North America $ 4,863,316 $ 4,772,884 $ 3,761,459
International 580,786 676,328 1,238,348
------------------------------------------------
$ 5,444,102 $ 5,449,212 $ 4,999,807
================================================
1999 1998 1997
------------------------------------------------
Operating Income:
North America $ 20,946,152 $ 20,375,126 $ 20,490,870
International (745,794) 921,441 45,741
------------------------------------------------
$ $20,200,358 $ 21,296,567 $ 20,536,611
================================================
1999 1998
---------------------------------
Long-lived Assets
North America $ 30,010,983 $ 28,517,323
International 3,587,112 3,991,953
---------------------------------
$ 33,598,095 $ 32,509,276
=================================
16
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
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, 1999 and 1998,
consolidating condensed statements of operations for the years ended
December 31, 1999, 1998 and 1997 and consolidating condensed statements
of cash flows for the years ended December 31, 1999, 1998 and 1997.
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 (continued)
7. Guarantor and Non-Guarantor Subsidiaries (continued)
Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trade receivables $ 12,880,427 $2,837,294 $ 8,246,474 $ 23,964,195
Inventories 19,558,547 4,752,589 12,404,449 $ (1,338,000) 35,377,585
Other 3,237,081 620,917 1,510,413 - 5,368,411
-------------------------------------------------------------------------
Total current assets 35,676,055 8,210,800 22,161,336 (1,338,000) 64,710,191
Goodwill, net of
accumulated amortization 1,429,281 - 3,123,842 1,570,373 6,123,496
Other 19,611,630 40,172 178,188 (9,323,182) 10,506,808
Intercompany amounts 25,530,618 466,158 4,234,758 (30,231,534) -
Property, plant and
equipment, net of
accumulated depreciation 27,343,326 959,693 4,909,074 - 33,212,093
-------------------------------------------------------------------------
$109,590,910 $9,676,823 $34,607,198 $(39,322,343) $114,552,588
=========================================================================
Accounts payable and accrued
expenses $ 10,313,402 $1,287,689 $ 3,337,633 $ - $ 14,938,724
Compensation and employee
benefits 3,355,734 155,599 1,063,629 - 4,574,962
Current portion of
long-term debt 2,843,227 - 571,424 - 3,414,651
Other 108,793 82,449 429,232 - 620,474
-------------------------------------------------------------------------
Total current liabilities 16,621,156 1,525,737 5,401,918 23,548,811
Long-term debt less current
portion 152,003,109 354,414 6,620,049 - 158,977,572
Other 5,173,025 - 63,595 683,986 5,920,606
Intercompany amounts 9,460,130 4,628,788 16,142,616 (30,231,534) -
Accumulated deficiency (73,666,510) 3,167,884 6,379,020 (9,774,795) (73,894,401)
-------------------------------------------------------------------------
$109,590,910 $9,676,823 $34,607,198 $(39,322,343) $114,552,588
=========================================================================
</TABLE>
18
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
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>
19
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
7. Guarantor and Non-Guarantor Subsidiaries (continued)
<TABLE>
<CAPTION>
Statement of Operations
Year ended December 31, 1999
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 99,872,108 $ 19,195,666 $ 48,159,686 $(27,107,000) $140,120,460
Costs and expenses 82,434,596 17,535,906 46,571,632 (26,622,032) 119,920,102
-----------------------------------------------------------------------
Operating income 17,437,512 1,659,760 1,588,054 (484,968) 20,200,358
Interest and other 16,271,424 761,215 2,152,926 129,165 19,314,730
-----------------------------------------------------------------------
Net income (loss) $ 1,166,088 $ 898,545 $ (564,872) $ (614,133) $ 885,628
=======================================================================
<CAPTION>
Statement of Operations
Year ended December 31, 1998
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)
=======================================================================
<CAPTION>
Statement of Operations
Year ended December 31, 1997
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>
20
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
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 $ 3,762,337 $ 618,628 $ (86,530) - $ 4,294,435
Cash flows from investing activities:
Capital expenditures (5,136,096) (336,334) (934,549) - (6,406,979)
Other investments (24,771) 1,534 26,922 - 3,685
------------------------------------------------------------------------
Net cash used in investing activities (5,160,867) (334,800) (907,627) - (6,403,294)
Cash flows from financing activities:
Debt repayments 2,562,499 (73,602) (60,573) - 2,428,324
Debt issuance costs - - 74,173 - 74,173
Other - - 726,467 (689,184) 37,283
------------------------------------------------------------------------
Net cash used in financing activities 2,562,499 (73,602) 740,067 (689,184) 2,539,780
Intercompany accounts (1,159,217) 190,397 279,636 689,184 -
------------------------------------------------------------------------
Net increase in cash 4,752 400,623 25,546 - 430,921
Cash and cash equivalents, at
beginning of year 111,492 68,647 941,003 - 1,121,142
------------------------------------------------------------------------
Cash and cash equivalents, at
end of year $ 116,244 $ 469,270 $ 966,549 - $ 1,552,063
========================================================================
</TABLE>
21
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
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>
22
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
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>
23
<PAGE>
Numatics, Incorporated
Notes to Consolidated Financial Statements (continued)
8. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1999 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $34,367,875 $34,076,759 $35,249,776 $36,426,050 $140,120,460
Gross profit 12,645,188 13,379,646 13,071,641 13,338,366 52,434,841
Net income (loss) $ (272,441) $ 333,288 $ 977,852 $ (153,071) $ 885,628
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
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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)
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