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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: 000-29358
DENISON INTERNATIONAL PLC
(Exact Name of Registrant as specified in its charter)
England and Wales Not applicable
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14249 Industrial Parkway
Marysville, Ohio 43065
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (937) 644-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
American Depositary Shares (as evidenced by American Depositary
Receipts), each representing one Ordinary Share, $0.01 par value
of the Registrant (title of class)
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
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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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 29, 2000 was $85,540,280.
The number of outstanding shares of each of the registrant's classes of
capital or common stock as of March 29, 2000 was as follows:
11,113,950 Ordinary Shares, $0.01 par value
7,015 'A' Ordinary Shares, (pounds sterling)8.00 par value
Documents Incorporated by Reference
The Registrant's Definitive Proxy Statement on Schedule 14A relating to the
Annual Meeting of Shareholders to be held on May 8, 2000 is incorporated by
reference in Parts I and III of this Form 10-K to the extent stated herein.
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FORM 10-K
TABLE OF CONTENTS
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PART I.............................................................................................1
ITEM 1. BUSINESS..............................................................................1
ITEM 2. PROPERTIES...........................................................................11
ITEM 3. LEGAL PROCEEDINGS....................................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................12
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY...................................................12
PART II...........................................................................................12
ITEM 5. MARKET OF THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................12
ITEM 6. SELECTED FINANCIAL DATA..............................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.........................................................................14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................................22
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.........................................................................45
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT......................................45
ITEM 11. EXECUTIVE COMPENSATION..............................................................46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................46
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS........................................46
PART IV...........................................................................................47
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....................47
EXHIBIT INDEX.................................................................................50
SIGNATURES....................................................................................51
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References to Shares herein refer to (i) the Ordinary Shares of Denison,
$0.01 par value per Ordinary Share (the "Ordinary Shares") and (ii) Denison's
American Depositary Shares ("ADSs"), each of which represents one Ordinary
Share. The ADSs are evidenced by American Depositary Receipts ("ADRs").
Denison publishes its financial statements in U.S. dollars. In this Form
10-K, references to "dollars" or "$" are to U.S. dollars and references to
"pounds sterling," "(pounds sterling)" or "p" are to U.K. currency. Except as
otherwise stated herein, all monetary amounts in this Form 10-K have been
presented in dollars.
The Company publishes annual reports containing annual audited consolidated
financial statements and opinions thereon by independent public auditors. Such
financial statements are prepared on the basis of generally accepted accounting
principles in the United States ("US GAAP") expressed in U.S. dollars. The
Company has published quarterly updates and semi-annual reports containing
unaudited financial information prepared on the same basis as its audited US
GAAP consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K includes and incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included or incorporated in this Form 10-K regarding the
Company's strategy, future operations, financial position, future revenues,
projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "intends," "may," "plans," "projects," "will," "would" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. The Company
cannot guarantee that it actually will achieve the plans, intentions or
expectations disclosed in its forward-looking statements and undue reliance
should not be placed on the Company's forward-looking statements. Actual results
or events could differ materially from the plans, intentions and expectations
disclosed in the forward-looking statements. The Company has included important
factors in the cautionary statements included or incorporated in this Form 10-K
that the Company believes could cause actual results or events to differ
materially from the forward-looking statements made. The Company's
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments the Company
may make. The Company does not assume any obligation to update any
forward-looking statements.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Denison International plc and its subsidiaries ("Denison" or the "Company")
design, manufacture, sell and service highly-engineered components for use in
hydraulic fluid power systems, as well as complete hydraulic fluid power
systems. Hydraulic systems, which are part of larger pieces of machinery and
equipment, provide the force to move and position very heavy materials and
equipment as well as the precision to move and position very light loads with a
high degree of accuracy. The components
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manufactured by the Company for these systems include hydraulic pumps, motors,
manifolds, and valves. Many of Denison's products are designed to be used under
demanding conditions, such as elevated pressure, high temperature, variable
speed and low decibel levels. The Company sells its products globally to a
diverse group of end-users for use in a broad array of industrial applications,
such as machine tools and material handling equipment, various mobile
applications, such as construction, agricultural and utility equipment, and in
marine applications, such as military equipment.
The Company focuses on the specialty segment of the hydraulic power market
and works closely with its customers to meet their specified performance
objectives. Denison's product offerings include a wide variety of piston pumps
and motors; vane pumps and motors; manifold systems; pressure, directional and
proportional valve products; and electronic control products. Denison's products
enjoy excellent brand recognition and significant market share in certain
sectors of the industrial hydraulics market targeted by the Company. The Company
markets and sells its products primarily through a global network of regional
sales and service subsidiaries, independent fluid power equipment distributors
and, to a lesser extent, directly to end-users. In the United States, the
Company relies primarily on independent fluid power distributors which also
distribute other products that do not generally compete with Denison's. In
Europe and Asia, Denison primarily sells its products directly to Original
Equipment Manufacturers ("OEMs") through its regional sales and service
subsidiaries. For certain information concerning the Company's revenue,
operating profit and identifiable assets attributable to each of the Company's
geographical market segments, see Note 15 of "Notes to Consolidated Financial
Statements."
Denison, whose operations date back to the early 1930s, is a pioneer in the
hydraulic products market. The Company's long history of innovation can be
traced back to its first product, the hydraulic-powered car pusher, a
revolutionary development which led to widespread application of hydraulic power
as a solution for numerous industrial and mobile requirements. Denison's
research and development efforts have resulted in its being granted
approximately 600 patents since its inception. The business of the Company was
acquired by its present owners in 1993 from Hagglund & Soner AB. The Company has
conducted business under the "Denison" name since 1932.
The Company was incorporated in England and Wales as a private company
limited by shares in March 1993 and was re-registered as a public limited
company on July 28, 1997. On August 8, 1997, the Company completed an initial
public offering in which it issued and sold 450,000 Ordinary Shares at $16.00
per share. The net proceeds from the offering were $4,480,000. In December 1998,
the Company acquired all of the outstanding shares of Lokomec Oy, a manufacturer
and distributor of highly engineered manifold systems located in Tampere,
Finland.
The Company's principal U.S. executive offices are located at 14249
Industrial Parkway, Marysville, Ohio 43040 and its telephone number is (937)
644-4500. The Company's U.K. executive offices are located at Masters House, 107
Hammersmith Road, London W14 0Qh, England and its telephone number is
44-171-603-1515.
INDUSTRY OVERVIEW
Hydraulics, or fluid power, is a motion control technology that is used to
transfer and control force and power through fluids under pressure. Hydraulic
systems are typically comprised of a pump, valves, manifolds and actuators.
Pumps are used to move fluid from one location to another. Pressure is generated
when the fluid encounters resistance. Valves and manifolds control the flow of
fluids, and actuators, such as cylinders and rotary motors, convert pressure
into mechanical energy.
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Hydraulic systems offer greater flexibility of layout, compact design and
higher performance-to-weight ratio than other forms of motion control, such as
mechanical and electrical systems. Hydraulic systems provide the force to move
and position materials and equipment weighing several tons as well as the
precision to move and position very light loads with a high degree of accuracy.
For example, hydraulics is a tool powerful enough for heavy-duty steel
production in blast furnaces and precise enough for handling of steel ingots in
a stamping mill. As a result, hydraulic systems are integral to a wide variety
of industrial, mobile and marine applications. Although generally not noticed by
most end-product users, virtually every production process uses hydraulic power
as does almost every machine, vehicle and aircraft.
The hydraulic pump and valve market is a highly-fragmented, multi-billion
dollar worldwide industry. The hydraulics market is divided broadly into two
product segments: specialty and commodity. The specialty segment is comprised of
highly-engineered, high-performance, specialized hydraulic products, which are
generally more complex and used in demanding applications. Specialty products
tend to be less price sensitive, generally have higher margins and are more
likely to utilize servicing and maintenance. The commodity segment is comprised
of lower performance products, which are sold for use in price-sensitive
applications.
Demand and growth in different application sectors of the hydraulics
industry have typically been driven by various external economic factors. The
industrial sector of the hydraulics industry has typically been affected by the
cyclical nature of the overall economy. Sales of mobile hydraulic systems and
components have been driven by infrastructure development factors such as
construction and new housing starts. Sales of marine systems have been largely
influenced by military expenditures and, thus, are less affected by cyclical
economic factors. Demand and growth in each of the industrial, mobile and marine
sectors of the hydraulics market are also affected by the replacement cycle of
the hydraulic products.
PRODUCTS
The Company designs, manufactures, sells and services a broad range of
components for use in hydraulic fluid power systems, as well as complete
hydraulic fluid power systems, for applications with high reliability,
performance, precision and durability requirements. The Company's primary
products are piston pumps and motors, vane pumps and motors, manifolds, and
valves. In 1999, piston pumps and motors accounted for 26.8% of the Company's
net sales, vane pumps and motors accounted for 33.2% of the Company's net sales,
valves accounted for 23.7% of the Company's net sales and manifolds accounted
for 6.7% of the Company's net sales. In addition, the Company manufactures
electronic control products and certain other components and accessories used in
hydraulic systems. Other products sales accounted for 9.6% of the Company's net
sales.
The markets served by the Company are substantial and diversified, with no
single customer accounting for 4% or more of its net sales in 1999. The
Company's products are used in many different industrial, mobile and marine
applications, including mining machinery, drilling equipment, excavators,
cranes, machine tools, die casting and plastics processing machinery.
PUMPS AND MOTORS
Hydraulic pumps include piston pumps and motors, which provide adjustable
flow and variable displacement, and vane pumps and motors, which provide
continuous flow and fixed displacement. Each type of pump or motor is suitable
for particular uses, depending upon variables such as speed, pressure, operating
temperature, noise level, life expectancy and cost. Piston pumps and motors are
used in tractors, tanks, machine tools, sophisticated winches (such as anchors
on a ship or deck cranes on an aircraft carrier) as well as in other products
with complex performance requirements, such as varying or multiple speeds or
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pressures. Vane pumps and motors are used in less complex applications generally
requiring low noise levels but little or no variation in flow, such as refuse
trucks, cranes and large presses.
All hydraulic pumps operate on the displacement principle in which a fluid
(typically petroleum-based oil) is transferred from an inlet (suction port) into
a mechanically-sealed, low-pressure chamber and subsequently, to a high-pressure
chamber having the outlet (pressure port). The transfer of the fluid inside the
pump can be accomplished by the movement of screws, gears, vanes or pistons
which compact the fluid and create pressure.
Hydraulic motors operate on a principle, which is the reverse of the
hydraulic pump process, absorbing hydraulic flow and pressure and converting
them into mechanical energy and rotary motion. This rotary motion can then be
used for various industrial applications, including the rotation of the wheels
of a mobile loader, driving winches on mobile crane systems or turning the
rollers on a conveyor belt.
Pumps and motors operate in either an open or closed-loop system. In an
open-loop system, the hydraulic fluid is drawn into one or more pumps to produce
flow and then travels to a number of different actuators performing independent
functions. For example, an industrial conveyor belt system, involving many
unrelated functions, may use an open-loop system. In a closed-loop system, the
pump is dedicated to a single motor or set of motors performing a single
function. Unlike in an open-loop system, in which the hydraulic fluid goes to a
storage "reservoir" after passing through the motor, in a closed-loop system,
the oil returns to the pump before being transferred back to the motor. The
closed-loop system enables the flow direction of the hydraulic fluid to be
reversed while the system is operating. This, in turn, allows for rapid changes
in direction and speed of the motor, which is useful in applications such as
rotating the wheels of a front-loader. In general, piston pumps are specifically
manufactured for use in either an open-loop or closed-loop system, while vane
pumps are typically used only in open-loop systems. A motor can generally be
used in either an open or closed-loop system.
Piston Pumps and Motors. Piston pumps are distinguished from vane pumps by
their ability to produce variable displacement; the amount of hydraulic fluid
passing through the pump, and thus the pressure generated by the hydraulic
system, can be varied to meet the changing requirements of the application.
Variable displacement generally reduces the cost of operating the hydraulic
system because the pump can operate at lowered displacement when the system
requirements are lowered, thus saving energy. Piston pumps are also typically
used with high horsepower applications because their design enables them to
operate at greater pressures than vane pumps.
Denison manufactures a full range of piston pumps which operate at
pressures as high as 7,250 pounds per square inch ("psi") and which vary in size
from 0.9 cubic inches to 38.9 cubic inches, and in displacement from 11 to 303
gallons per minute ("gpm"). Denison is particularly well-known in the hydraulics
industry for its large-size piston pumps, such as the larger piston pumps in the
Company's Gold Cup Series and in the Premier Series. Denison is one of very few
manufacturers that offer very large piston pumps as a standard, rather than a
custom-made, product. Denison's large-size piston pumps are distinguished from
those of its competitors by its proprietary "barrel-bearing" design, which
enables the pump to run in a stable condition at high speed and pressure.
Management believes the "barrel-bearing" design gives the larger Denison piston
pumps a sturdier construction than other piston pump designs, resulting in a
longer life cycle in severe duty applications such as heavy mining equipment and
aircraft carrier steering systems.
All Denison piston pumps are manufactured at the Company's Marysville, Ohio
facility. During 1999, the Marysville plant produced and shipped in excess of
12,000 units.
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Vane Pumps and Motors. Vane pumps and motors are ideal for applications
which require a fixed displacement in which the pressure produced does not need
to be adjusted during operation. Vane pumps and motors typically produce a low
noise level and are ideal for applications which require low noise output, such
as garbage trucks, injection-molding machines and other devices found in
workplaces where OSHA regulations mandate reduced noise levels. In addition, due
to their simpler design, vane pumps and motors are less susceptible than piston
products to contamination from impurities in the hydraulic system, a feature
that makes vane pumps and motors ideal for use in steel production and mining,
which produce many contaminants.
Denison is the second-largest manufacturer of vane pumps in the world in
terms of net sales. The Company produces a full range of vane pumps and motors
which operate at pressures in excess of 4,500 psi and which vary in size from
0.35 cubic inches to 16 cubic inches, and in displacement from 1 to 250 gpm.
Denison's newest vane pump product is the M5BF series fan-drive motor. The M5BF
is designed for use in industrial applications, and offers less noise and
leakage and higher operating pressure than earlier vane pump models.
Denison's vane pumps are recognized as among the strongest products in the
hydraulics industry and are distinguished from competitors' vane pumps by
Denison's double-lip design, in which the vane is in contact with the cam ring
at two points rather than at one as with the single-lip design. This double-lip
design makes Denison's vane pumps less susceptible to contamination than
single-lip pumps. The Company believes that no other manufacturer currently
offers the double-lip design, a feature of all vane pumps manufactured by
Denison since the 1940s.
All Denison vane pumps are manufactured at the Company's Vierzon, France
facility. During 1999, the Vierzon plant produced and dispatched in excess of
50,000 units.
MANIFOLDS
Manifolds are machined steel or aluminum blocks, which act as housing for
surface mounted, or cartridge valves, which control the operation of a wide
variety of hydraulic equipment such as presses, bailers, lifting devices, and
mobile machinery and equipment. Manifolds are utilized in conjunction with
pumps, motors, cylinders, and valves to form a complete hydraulic system.
Systems are a growing trend in the hydraulics industry as customers are
essentially outsourcing the hydraulics engineering expertise and component
integration to a single supplier offering a complete "package". The manufacture
and sale of manifolds offers the Company an avenue to utilize its engineering
expertise to sell additional valves, which are often not competitive if sold as
individual items. Substantially all of Denison's manifolds are manufactured at
the Company's Tampere, Finland facility. During 1999, the Tampere factory
produced and sold in excess of 10,000 manifolds.
VALVES
Valves function by changing the size or direction of the orifice through
which the pressurized fluid passes as it travels from the pump to the piston or
motor. This function provides control over the direction, pressure and flow of
the pressurized fluid depending upon the requirements of the system in which the
valve is operating. Often, electronic controllers are used to control the size
and direction of the valve orifice.
Denison manufactures four basic types of valves: directional control valves
which alter the path of pressurized fluid through the hydraulic systems;
pressure control valves which regulate the pressure of the hydraulic fluid; flow
control valves which match the hydraulic fluid's flow with the requirements of
the
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system; and check valves which allow fluid to pass in one direction and not the
other. Denison's valves are used in a variety of commercial settings, including
injection molding, metal and material forming, mobile equipment such as cranes,
and marine systems such as ship-mounted winches.
Denison is one of the few manufacturers of flange mounted pressure control
valves, a design which enables the valve to be attached directly to another
hydraulic component, such as a pump or a motor. Most competitors' valves must be
connected to the associated component with hydraulic lines, which tend to be
more expensive and are less effective at controlling leaks than flange mounting.
Denison's high performance directional valves, when combined with the Company's
pressure controls, offers the best range of valves available in the market.
All Denison valves are manufactured at the Company's Hilden, Germany plant,
with the exception of the proprietary design smaller directional control valves,
which are manufactured for the Company pursuant to an agreement with a Czech
company, a line of pressure control valves, manufactured for Denison by a Swiss
company, and a line of cartridge valves, manufactured for Denison by an English
company. In each case, the manufacturing company produces the valves using
Denison's specification. During 1999, the Hilden factory supplied approximately
190,000 units, of which approximately 120,000 were manufactured at the Hilden
factory.
ELECTRONICS
Denison manufactures electronic controllers to be used with its piston
pumps and motors. Electronic controllers act as an interface between a hydraulic
component and the master controls of the hydraulic system operator and as a
protective device against unusual and potentially damaging signals from the
hydraulic system.
The Venus Controller is Denison's newest and most sophisticated
microprocessor-based controller. It is programmed and adjusted with a personal
computer or other small-computerized device, providing faster response and
greater accuracy than older analog devices. The Venus Controller is
distinguished from many competitors' controllers by its ability to
simultaneously control several different hydraulic functions or components. For
example, it can control both open-loop and closed-loop functions, whereas many
competitors' products require different controllers for each of these functions.
This simplifies the control and adjustment of hydraulic systems.
The Venus Controller is manufactured at the Marysville, Ohio facility. The
other Denison controllers are manufactured at the Marysville, Ohio facility and
the Hilden, Germany facility.
SERVICE
The Company provides a full array of aftermarket services, consisting
primarily of upgrades and replacement of its own and other manufacturers'
hydraulic related products and systems, and to a lesser extent field service,
repairs and maintenance. The Company provides these aftermarket services through
its own regional sales and service subsidiaries and through its network of
independent fluid power equipment distributors.
Denison's large installed customer base provides it with significant
aftermarket sales of spare parts and services. In the past, the highest level of
aftermarket service has been piston pumps, which tend to be more complex and
require more maintenance than vane pumps. Approximately 120,000 piston pumps and
370,000 vane pumps have been manufactured by Denison and are currently in use
and therefore may be
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subject to service. In 1999, 11.7% of the Company's net sales were derived from
aftermarket services, primarily the sales of spare and replacement parts.
PRODUCT DEVELOPMENT
Denison has a long history of emphasizing research and development, dating
back to the formation of the Company in 1932. Denison was an early technological
leader within the hydraulics industry and has been granted approximately 600
patents since the Company's inception. Denison has remained strongly committed
to being on the forefront of technological innovation, as evidenced by the
Company's continuing focus on development of new products and enhancements to
existing products.
As of December 31, 1999, Denison's research and development staff consisted
of a total of 54 employees. Twenty-nine of these employees conduct research and
development on piston pumps and motors at Denison's Ohio facility; ten focus on
research and development related to vane pumps and motors at Denison's France
facility; and twelve perform research and development on industrial valves at
Denison's Germany plant. The main activities of the research and development
staff involve modifying and improving existing products and designing variations
of existing products to suit specific customer needs. A smaller portion of their
time is spent on developing new concepts and new product designs. Denison
currently has no plans to significantly change the number of its R&D employees.
Denison incurred research and development costs of $3.7 million, $3.1 million
and $3.2 million in the years ended December 31, 1999, 1998 and 1997,
respectively.
MANUFACTURING AND SUPPLIERS
The Company's production facilities are located in Marysville, Ohio,
Vierzon, France, Tampere, Finland and Hilden, Germany. The Marysville plant
manufactures piston pumps and motors, the Vierzon plant manufactures vane pumps
and motors, the Tampere plant manufactures manifolds, and the Hilden plant
manufactures valves. The manufacturing plants have undergone significant
upgrading and rationalization in recent years and are now in superior
manufacturing condition. Currently, the facilities are operated in two to three
shifts with the possibility of increasing capacity with existing machinery by
increasing working hours. Approximately 30% of the manufacturing workforce is
dedicated to the production of piston pumps and motors, 39% to the production of
vane pumps and motors, 7% to the production of manifolds and 24% to the
production of valves. Each facility is equipped with testing equipment to
maintain the Company's high quality control standards. The Vierzon, Tampere and
Hilden facilities are ISO9001 certified and the Marysville facility is working
toward ISO certification.
The Company manufactures in-house virtually all of the high value-added or
quality critical components such as the rotating groups, body components and
controls used to build its products. The Company has computerized numerically
controlled type flexible machinery and equipment that is organized in a series
of work cells, utilizing just-in-time production scheduling techniques. The
Company has spent in excess of $27.0 million on new production equipment in the
last four years. As a result of these investments, significant gains in
productivity efficiency have been realized since 1993. Management believes that
the improvement programs in progress will further add to efficiency and promote
cost reductions, particularly in piston pump and valve production.
The Company's ability to produce components to high-level standards of
complex design makes it difficult for competitors to offer products of equal
performance for certain demanding applications. Modern and innovative machining
practices are employed to produce a wide array of products, while assuring
process control. The Company also utilizes specialized and precision grinding
methods that allow superior speed, precision and efficiency, and innovative
fabrication and manufacturing processes. All manufacturing
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processes employed are well proven and support the Company's efforts to produce
products that are both highly durable and reliable.
The primary products purchased from suppliers are castings (all products),
solenoids (valves), turned parts (valves), steel bars (vane and piston), steel
and aluminum stock (manifolds), bearings (vane and piston), brass (piston) and
shafts. The Company has implemented an aggressive program of consolidating
suppliers of component parts and raw materials. This program has resulted in an
increased supply of component parts, improved quality, and reduced costs of
production materials. Currently, there are few common suppliers between the
different manufacturing facilities. Management anticipates that the continuation
of this program will yield additional savings in the future.
The Company's operations involve the handling and use of substances that
are subject to foreign, Federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
soil, air, and water and establish standards for their storage and disposal. The
Company is not involved in any pending or threatened proceedings that would
require curtailment of its operations because of such regulations. The Company
believes that it is in material compliance with all of such laws in the United
States, and it continually expends funds to assure that it remains in material
compliance. Investigations of the Company's European facilities have identified
areas of contamination and practices, which may be in violation of applicable
regulations. Compliance with foreign and domestic environmental laws has not
had, and is not expected to have, any material effect on the Company's earnings
or competitive position.
SALES AND MARKETING
Denison has an extensive and well-trained international sales network
comprised of 16 regional sales and service subsidiaries and 193 independent
fluid power equipment distributors in 52 countries. Distributors buy products
from the Company and resell them to end-users. To a small extent, other
manufacturers' products are distributed through the Company's channels; however,
the Company's distributors do not typically carry products, which compete with
the Company's products. Denison's sales and service subsidiaries are full
service offices engaged in the customized modification, design, manufacture,
packaging, sale and servicing of the Company's hydraulic components and systems.
Typically, the sales and service subsidiaries as well as the distributors are
staffed with professional engineers who are capable of designing hydraulic
systems to meet the requirements of customers' applications. The network is
divided into three main geographical regions: Europe, North America and the
Asia-Pacific region.
The Company has a particularly strong sales and marketing network in the
United States, which is comprised of 38 sales and marketing employees in 10
states, as well as 27 independent distributors. Direct sales to OEMs and the
government account for approximately 46% of total U.S. net sales, with the
balance of U.S. net sales effected through distributors.
Denison's regional sales and service subsidiaries are located in 16
countries around the world, including Germany, the United Kingdom, France,
Italy, Scandinavia, Spain, Singapore, Hong Kong, Japan and Australia. Denison's
plants supply pumps, manifolds and valves to its regional subsidiaries, which
maintain small inventories of the components and parts with the highest customer
demand. Each of the regional subsidiaries has the capacity to modify or convert
pumps, motors and valves on-site to meet specific needs of customers, thus
allowing the subsidiaries to offer a flexible product line without maintaining
an extensive inventory. The regional subsidiaries also have sophisticated test
rigs to permit on-site diagnosis and repair of Denison products. Together with
the additional 193 distributors throughout the world, the regional subsidiaries
constitute an international sales network providing extensive support in
application engineering, service and repair parts for Denison products
worldwide.
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OEMs and distributors are normally updated with technical developments
through meetings, training sessions and product brochures, while promotion
efforts to other customers are handled by the distributors themselves. The OEMs
prefer to purchase all their required equipment from a single source supplier.
In order to capitalize on this trend, the Company intends to become a full range
supplier within chosen niches in various market sectors. These chosen niches
include metal forming, material forming, capital plant and machine tools in the
industrial sector; earthmoving and construction, special purpose machinery
(including mining) and agriculture in the mobile sector; and a number of
applications in the commercial and military marine sector. These have been
selected not only on the basis of fit with existing products, but also on the
basis of product overlap and management's expectation of above-average growth in
demand for these products in the foreseeable future. Management estimates that
it is possible for Denison to increase its presence as a full range supplier
within these niches through relatively few additions to its existing product
range.
CUSTOMERS
Denison's broad base of well-known customers in the hydraulics industry in
the United States, Europe and the Asia-Pacific region attests to the high
reliability and quality of the Company's products. In 1999, Denison's top ten
OEM and direct end-user customers accounted for approximately 12% of net sales,
and the top ten customers overall accounted for approximately 12% of net sales.
The markets served by the Company are substantial and diversified, with no
single customer accounting for more than 4% of the Company's net sales in 1999.
The Company's products are primarily utilized in industrial, mobile and
marine applications. Industrial applications involve equipment that generally is
stationary in factories or processing plants, such as presses, injection molding
equipment, power units, drilling equipment, test stands, mining machinery,
metal-forming and metal-cutting machinery and machine tools. The requirements of
the industrial marketplace are more demanding than most mobile applications
since industrial equipment typically operates at significantly higher cycles.
The Company's products are designed to meet these operating imperatives.
Denison's industrial customers include Cincinnati Milacron (machine tools and
injection molding equipment); Ingersoll-Rand and Driltech (rotary drills);
General Electric and Solar Turbines (power generation); Harris Waste Management
and Kershaw Manufacturing (presses and boilers); and Husky (injection molding
equipment).
Mobile applications involve equipment that generally is not fixed in place,
such as construction, demolition, agricultural, mining, lumber and pulp harvest,
and utility equipment. These industries tend to place a premium on
considerations of space, weight and cost. Mobile customers include Komatsu
(construction equipment); Case, Caterpillar and Volvo (wheel loaders); Plasser &
Theurer (railroad repair machinery); and PPM Crane (mobile cranes and
excavators).
Marine applications involve equipment used on sea vessels by both
commercial and military end-users, such as anchors, ship-mounted winches and
deck cranes on aircraft carriers. Marine customers include the U.S. Navy and
Hepburn Engineering.
End users who purchase the Company's products through distributors include
Bethlehem Steel and Kaiser Aluminum (primary metals); Boeing and Textron
(aerospace); Boise Cascade and Roseberg Forest Products (pulp and paper
industry); and Westinghouse and Stewart & Stevenson (power generation). Other
major customers include large OEMs such as Grove Manufacturing and Tamrock in
the United States; Grange (France), Hagglund & Soner AB (Sweden), Krupp
(Germany) and MIR (Italy), in Europe; and IHI, Kawasaki and Mitsubishi in Japan.
-9-
<PAGE>
BACKLOG
The Company's backlog of unfilled firm orders was $23.7 million at December
31, 1999, compared with $22.2 million at December 31, 1998. The Company
estimates that approximately 98% of the December 31, 1999 backlog will be filled
by December 31, 2000.
COMPETITION
The hydraulics industry is highly fragmented and intensely competitive. The
Company competes primarily on the basis of the performance, quality and
durability of its products, as well as the availability of aftermarket support
through its regional sales and service subsidiaries and through its network of
independent fluid power equipment distributors.
The Company competes with divisions of large corporations, such as Rexroth
and divisions of Eaton, Parker Hannifin and Bosch, as well as companies with
more limited product lines. Some of the Company's competitors are larger and
have greater financial and other resources than the Company and thus can better
withstand adverse economic or market conditions as compared to the Company. In
addition, companies not currently in direct competition with the Company may
introduce competing products in the future.
The Company has a large number of competitors, some of which are full-line
producers and others that are niche suppliers like the Company. The most
significant competitors market globally. In addition, the Company faces
competition from a number of local companies in regional markets. Full-line
producers have the ability to provide integrated hydraulic systems to customers,
including components functionally similar to those manufactured by the Company.
There has been some consolidation activity in recent years, with large,
full-line producers filling out their product lines with the acquisition of
smaller, privately held producers. The Company's main competitors by product
include Rexroth, Oilgear, Hydrakraft and Parker Hannifin (piston products);
Eaton, Atos and Parker Hannifin (vane products); and Rexroth, Bosch, Eaton, Atos
and Parker Hannifin (valve products). In addition, various small regional
companies compete with the Company's manifold product lines.
EMPLOYEES
As of December 31, 1999, the Company had 954 full-time employees, including
480 employees in manufacturing and operations, 52 employees in product
development, 284 employees in sales and marketing and 138 employees in
management and administration. In addition, the Company utilizes the services of
approximately 70 temporary employees. Of the Company's full-time employees, 229
are working in the United States, 178 in Germany, 264 in France, 52 in Finland
and the remainder in the Company's sales and service facilities. The Company
considers its relations with its employees to be satisfactory.
A collective bargaining agreement with the International Association of
Machinists and Aerospace Workers AFL-CIO/CLC, Denison Lodge 427, District Lodge
28, which covers all hourly-paid production and maintenance employees (125
employees overall) at the U.S. facility expired in June 1999. As a result of
differences between management and the collective bargaining unit on wage and
benefit issues, the bargaining unit conducted a work stoppage. After ten weeks
of negotiations, a three-year agreement was executed by both parties, and the
bargaining unit returned to work in August 1999. The Company does not believe
that the work stoppage is likely to have a material adverse impact on future
operations at the facility.
The French facility has a collective bargaining agreement, the "Convention
Collective de la Matallurgie," which covers all employees and is mandatory in
French companies which engage in activities
-10-
<PAGE>
such as Denison's. The non-management personnel are represented by several
unions. While the German facility is not directly subject to collective
bargaining agreements, it does adopt certain provisions of collective bargaining
agreements applicable to the metalworking industry in its employment contracts.
Such provisions relate to matters such as working conditions, wages and year-end
bonuses. Management at each of the facilities believes labor relations to be
satisfactory.
ENVIRONMENTAL MATTERS
The Company's operations involve the handling and use of substances that
are subject to foreign, federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
soil, air and water and establish standards for their storage and disposal. A
risk of environmental liability is inherent in manufacturing activities.
Investigations of the Company's European facilities have identified areas
of contamination and some practices which may be in violation of applicable
regulations. The Company is in the process of determining whether any
remediation and/or any changes in current practices are necessary. There can be
no assurance that remediation of these facilities will not be required or that
fines or sanctions will not be imposed on the Company for violations of
environmental law, if any are determined to exist. While management does not
believe that compliance with environmental requirements is likely to have a
material adverse effect on the Company, there can be no assurance that future
additional environmental compliance or remediation obligations will not arise at
one or more of the Company's facilities or that such obligations could not have
a material adverse effect on the Company's financial condition or results of
operations. The Company has an accrual of $1.3 million at December 31, 1999 for
anticipated future costs related to environmental liabilities. See Note 14 of
"Notes to Consolidated Financial Statements."
PATENTS AND TRADEMARKS
The Company believes that the growth of its business is dependent upon the
quality of its products, its ability to produce products that meet the
requirements of its customers and its relationships in the marketplace, rather
than the extent of its patents and trademarks. The Company currently has over
100 patents and has been granted approximately 600 patents since its inception.
The loss of any single patent is not likely to have a material adverse effect on
the Company's business, financial condition and results of operations.
ITEM 2. PROPERTIES.
Denison has administrative, sales and manufacturing facilities located in
Marysville, Ohio; Vierzon, France; Tampere, Finland; and Hilden, Germany. All
four facilities are owned by the Company and occupy 170,000, 174,100, 120,000
and 146,600 square feet, respectively. The Marysville plant manufactures piston
pumps and motors, the Vierzon plant manufactures vane pumps, and motors, the
Tampere plant manufactures manifolds, and the Hilden plant manufactures valves.
The manufacturing plants have undergone significant upgrading and
rationalization in recent years and are now in superior manufacturing condition.
Currently, the facilities are operated in two to three shifts with the
possibility of increasing capacity with existing machinery by increasing working
hours. Approximately 30% of the manufacturing workforce is dedicated to the
production of piston pumps and motors, 39% to the production of vane pumps and
motors, 7% to the production of manifolds and 24% to the production of valves.
Each facility is equipped with testing equipment to maintain the Company's high
quality control standards. The Vierzon, Tampere and Hilden facilities are
ISO9001 certified and the Marysville facility is working toward ISO
certification.
-11-
<PAGE>
The Company also owns a sales and service facility in Wakefield, England.
In addition, the Company leases or subleases facilities for its regional sales
and service subsidiaries in the following countries: Australia, Belgium, Canada,
Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Luxembourg, the
Netherlands, Singapore, Spain, Sweden, the United Kingdom and the United States.
The Company believes that its existing facilities are sufficient for its current
needs, and that suitable additional or alternative space will be available in
the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in certain legal proceedings incidental to the
normal conduct of its business. The Company does not believe that any
liabilities relating to any of the legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth the name and position of each of the
executive officers of the Registrant.
Present Office
Name Age Position Held Since
- ---- --- -------- --------------
J. Colin Keith 55 Chairman of the Board of 1993
Directors
David L. Weir 46 Chief Executive Officer, 1997
President and Director
Anders C.H. Brag 47 Managing Director and Director 1993
Bruce A. Smith 44 Chief Financial Officer and 1998
Director
Paul G. Dumond 45 Company Secretary 1993
PART II
ITEM 5. MARKET OF THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal trading market for the Company's securities is ADSs listed on
the Nasdaq National Market. The Company's ADSs have traded in the U.S. since
August 8, 1997 under the symbol "DENHY". Prior to that time, there was no public
market for the Companay's securities. Each ADS represents one Ordinary Share,
par value $0.01 per Ordinary Share. Each ADS is evidenced by an ADR. Bankers
Trust Company is the Depositary for the ADRs. As of December 31, 1999,
11,120,965 ADSs were held by 16 registered ADR holders. The largest holder, The
Depository Trust Company, holds 5,848,179 ADSs representing 64 participants.
The following table shows the high and low sales prices of the ADSs on the
Nasdaq National Market for each quarterly period for the two years ended
December 31, 1999.
-12-
<PAGE>
Price per ADS (in U.S. Dollars)
----------------------------------
Quarterly Period Ended High Low
- ------------------------------ --------- ---------
March 31, 1998 $ 18.50 $ 15.25
June 30, 1998 20.75 17.25
September 30, 1998 20.25 12.50
December 31, 1998 14.25 11.75
March 31, 1999 14.75 11.00
June 30, 1999 19.25 12.63
December 31, 1999 11.63 8.50
At March 29, 2000, the last reported price for an ADS on the Nasdaq
National Market was $ 12.25.
The Company has never declared or paid dividends on its Ordinary
Shares. The Company currently intends to retain its earnings to finance the
growth and development of its business and, consequently, does not anticipate
paying any dividends on the Ordinary Shares in the foreseeable future. Under the
Companies Act 1985, as amended, of Great Britain (the "Companies Act"),
dividends are payable on the Ordinary Shares only out of profits available for
distribution determined in accordance with accounting principles generally
accepted in the United Kingdom, which differ in certain respects from US GAAP.
In addition, certain of the Company's financing agreements restrict the
Company's ability to pay dividends to its shareholders and it is anticipated
that future financing agreements will have similar restrictions. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data for each of the five years in the
period ended December 31, 1999 are derived from the Consolidated Financial
Statements of the Company. The selected consolidated financial data of the
Company set forth below are qualified by reference to, and should be read in
conjunction with the Consolidated Financial Statements, Related Notes and other
financial information included in this Form 10-K.
-13-
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales $ 135,543 $ 145,253 $ 148,388 $ 148,149 $ 139,255
Cost of sales 90,430 90,917 94,008 95,312 91,185
--------- --------- --------- --------- ---------
Gross profit 45,114 54,336 54,380 52,837 48,070
Selling, general
and administrative
expenses 31,966 33,028 33,618 35,336 35,066
--------- --------- --------- --------- ---------
Operating income 13,147 21,308 20,762 17,501 13,004
Other income/(expense) 693 0 2,175 1,829 369
Interest income
(expense), net 354 938 218 48 (372)
--------- --------- --------- --------- ---------
Income before taxes 12,808 22,246 23,155 13,001 13,001
Provision for income
Taxes 4,522 5,956 3,367 2,437 1,657
--------- --------- --------- --------- ---------
Net income $ 8,286 $ 16,290 $ 19,788 $ 16,941 $ 11,344
========= ========= ========= ========= =========
Basic earnings per share $ .75 $ 1.47 $ 1.84 $ 1.61 $ 1.08
========= ========= ========= ========= =========
Diluted earnings per share
$ .74 $ 1.46 $ 1.82 $ 1.59 $ 1.06
========= ========= ========= ========= =========
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 31,173 $ 35,799 $ 30,337 $ 19,144 $ 16,001
Working capital 66,533 66,432 63,834 51,074 39,782
Total assets 128,820 143,457 107,493 93,726 86,023
Total debt(1) 5,697 12,881 2,478 4,177 8,889
Redeemable preferred stock -- -- -- 1,141 1,036
Total shareholders' equity 81,060 78,527 59,552 39,120 24,355
</TABLE>
(1) Total debt comprises bank lines of credit with a maturity of less than one
year, long-term debt (including current portion) and capital lease
obligations (including current portion).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following should be read in conjunction with "Item 6. Selected
Financial Data" and the Company's Consolidated Financial Statements and the
Notes related thereto appearing elsewhere in this Form 10-K.
Although the Company reports its financial results in U.S. dollars,
approximately 70% of the Company's revenues and expenses are incurred in foreign
currencies. The fluctuation of the functional currencies earned by the Company
against the U.S. dollar has had the effect of increasing or decreasing (as
applicable) U.S. dollar reported net sales, as well as the cost of goods sold,
gross profit, selling, general and
-14-
<PAGE>
administrative expenses denominated in such foreign currencies when translated
into U.S. dollars as compared to prior periods.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
The Company's net sales decreased 6.7% to $135.5 million in fiscal 1999
from $145.3 million in fiscal 1998. During the same period, net sales in North
America decreased 23.1% to $40.9 million from $53.2 million; net sales in Europe
increased 1.7% to $77.1 million from $75.8 million; and net sales in
Asia-Pacific region increased 8.0% to $17.5 million from $16.2 million. The
strengthening US dollar against most of the functional currencies earned by the
Company, combined with a slow-down in the Company's North American markets
supporting the mining and gas and oil exploration markets, and a ten-week work
stoppage at the Company's Marysville, Ohio manufacturing facility were the
primary reasons for the reduced revenues realized. Partially offsetting these
factors were strong first year sales of the Company's manifold operations in
Tampere, Finland, a company acquired late in 1998, and a recovering demand for
the Company's products in the Asia-Pacific markets.
Restated (at average exchange rates for fiscal 1998), net sales for fiscal
1999 were $137.6 million, a 5.3% decrease from fiscal year 1998. The increased
sales revenue for the period attributable to the changes in exchange rate was
$2.1 million. Restated (at average exchange rates for fiscal 1998), net sales
for fiscal 1999 for the Company's European operations increased 6.1% to $80.4
million from $75.8 million; while net sales for the Asia-Pacific region remained
constant with 1998 net sales of $16.2 million.
The Company's gross profit decreased to $45.1 million in fiscal 1999 from
$54.3 million in fiscal 1998. Gross profit as a percentage of net sales
decreased to 33.3% in fiscal 1999 from 37.4% in fiscal 1998. The decreased gross
profit was primarily attributable to the decreased volume demand realized,
combined with planned production curtailments throughout 1999 to reduce
inventory levels and the impact of the work stoppage at the Company's
Marysville, Ohio manufacturing facility. Worldwide inventories were reduced in
1999 from 1998 levels by $5.2 million (before the impact on inventory balances
from currency fluctuations). Partially offsetting these factors were strong
first year earnings from the Company's manifold operations in Tampere, Finland,
combined with the impact of cost reductions made throughout 1999 and prior
fiscal years.
Gross profit in North America decreased 43.7% to $9.0 million in fiscal
1999 from $15.8 million in fiscal 1998. Gross profit in Europe decreased 7.0% to
$30.6 million in fiscal 1999 from $32.9 million in fiscal 1998, and Asia-Pacific
gross profit increased 6.0% to $5.3 million in fiscal 1999 from $5.0 million in
fiscal 1998. Restated (at average exchange rates for fiscal 1998), gross profit
in Europe was $31.7 million, or a 3.7% decrease over fiscal 1998, and gross
profit in the Asia-Pacific region was $4.9 million, or a 2.0% decrease over
fiscal 1998. The total gross profit decrease for the period attributable to the
exchange rate differences was $0.7 million. Restated (at average exchange rates
for fiscal 1998), consolidated gross profit as a percentage of net sales
decreased to 33.4% for fiscal 1999 compared to 37.4% for fiscal 1998.
Selling, general and administrative ("SG&A") expenses decreased 3.2% to
$32.0 million for fiscal 1999 from $33.0 million for fiscal 1998. These expenses
as a percentage of net sales were 23.6% for fiscal 1999 as compared to 22.7% for
fiscal 1998. Restated (at average exchange rates for fiscal 1998), SG&A
decreased 2.1% to $32.3 million (23.5% of net sales) in fiscal 1999 from $33.0
million (22.7% of net sales) in fiscal 1998. The restated decrease in these
expenses for fiscal 1999 as compared to fiscal 1998 is due primarily to the
impact of cost reductions implemented by the Company in fiscal 1999 and prior
fiscal years.
-15-
<PAGE>
The increase in these expenses as a percentage of net sales is reflected by a
currency adjusted decrease in net sales revenue leveraged from a 2.1% marginal
decrease in SG&A expenses.
Operating income decreased 38.5% to $13.1 million in fiscal 1999 from $21.3
million in fiscal 1998. Operating income as a percentage of net sales decreased
to 9.7% in fiscal 1999 from 14.7% in fiscal 1998. Restated (at average exchange
rates for fiscal 1998), operating income decreased 36.2% to $13.6 million (9.9%
of net sales) in fiscal 1999 from $21.3 million (14.7% of net sales) in fiscal
1998. The changes in exchange rates had the effect of decreasing operating
income for the period by $0.5 million.
Other expense increased to $0.7 million (.5% of net sales) in fiscal 1999
from $0.0 million in fiscal 1998. The increase in other expense was the result
of recognition of non cash currency losses on inter-company loans throughout
fiscal 1999, with no such transactions completed in fiscal 1998.
Net interest income was $354,000 in fiscal 1999 compared to $938,000 of net
interest income in fiscal 1998. The decrease in interest income was primarily
due to decreased interest bearing cash balances held at the subsidiary level,
with funds utilized to reduce the borrowings utilized in the acquisition of
Lokomec Oy, the Company's facility in Tampere, Finland in December 1998,
combined with lower worldwide investment rates on the Company's cash balances.
The effective tax rate for fiscal 1999 was 35.3% compared to 26.9% for
fiscal 1998. This change is the result of year-to-year variations in the country
sources of the Company's profits, in each case at tax rates that vary among
jurisdictions. The provision for taxes decreased 24.1% to $4.5 million in fiscal
1999 compared to $6.0 million in fiscal 1998. This provision as a percentage of
net sales decreased to 3.3% in fiscal 1999 from 4.1% in fiscal 1998, reflecting
the lower operating margins discussed earlier.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
The Company's net sales decreased 2.1% to $145.3 million in fiscal 1998
from $148.4 million in fiscal 1997. During the same period, net sales in North
America decreased 7.3% to $53.2 million from $57.4 million; net sales in Europe
increased 11.1% to $75.8 million from $68.2 million; and net sales in
Asia-Pacific region decreased 28.5% to $16.2 million from $22.7 million. The
strengthening US dollar against most of the functional currencies earned by the
Company, combined with a slow-down in the Company's markets supporting the
mining and gas and oil exploration markets were the primary reasons for the
reduced revenues realized. Partially offsetting these factors was the strong
demand for the Company's vane and piston product lines in Europe.
Restated (at average exchange rates for fiscal 1997), net sales for fiscal
1998, were $148.2 million, virtually equal to fiscal 1997. The increased sales
revenue for the period attributable to the changes in exchange rate was $2.9
million. Restated (at average exchange rates for fiscal 1997), net sales for
fiscal 1998 for the Company's European operations increased 12.5% to $76.8
million from $68.2 million; while net sales for the Asia-Pacific region
decreased 22.2% to $17.7 million from $22.7 million.
The Company's gross profit decreased slightly to $54.3 million in fiscal
1998 from $54.4 million from fiscal 1997. Gross profit as a percentage of net
sales increased to 37.4% in fiscal 1998 from 36.7% in fiscal 1997. The increased
gross profit was primarily attributable to a favorable mix of the Company's more
profitable product lines, combined with margin enhancements attained from cost
reduction initiatives implemented at the Company's manufacturing facilities.
Gross profit in North America decreased 13.5% to $15.8 million in fiscal
1998 from $18.3 million in fiscal 1997. Gross profit in Europe increased 18.0%
to $32.9 million in fiscal 1998 from $27.9 million in
-16-
<PAGE>
fiscal 1997, and Asia-Pacific gross profit decreased 39.6% to $5.0 million in
fiscal 1998 from $8.3 million in fiscal 1997. Restated (at average exchange
rates for fiscal 1997), gross profit in Europe was $33.4 million, or a 19.7%
increase over fiscal 1997, and gross profit in the Asia-Pacific region was $5.5
million, or a 33.9% decrease over fiscal 1997. The total gross profit decrease
for the period attributable to the exchange rate differences was $0.8 million.
Restated (at average exchange rates for fiscal 1997), consolidated gross profit
as a percentage of net sales increased to 37.2% for fiscal 1998 compared to
36.7% for fiscal 1997.
SG&A expenses decreased 1.8% to $33.0 million for fiscal 1998 from $33.6
million for fiscal 1997. These expenses as a percentage of net sales were equal
to fiscal 1997 performance of 22.7%. Restated (at average exchange rates for
fiscal 1997), SG&A increased 0.8% to $33.9 million (22.9% of net sales) in
fiscal 1998 from $33.6 million (22.7% of net sales) in fiscal 1997. THE RESTATED
INCREASE IN THESE EXPENSES FOR FISCAL 1998 AS COMPARED TO FISCAL 1997 IS DUE
PRIMARILY TO COSTS ASSOCIATED WITH RESTRUCTURING IN THE COMPANY'S ASIAN-PACIFIC
AND NORTH AMERICAN OPERATIONS. The increase in these expenses as a percentage of
net sales is reflected by currency adjusted flat net sales revenue leveraged
from a 0.8% marginal increase in SG&A expenses.
Operating income increased 2.6% to $21.3 million in fiscal 1998 from $20.8
million in fiscal 1997. Operating income as a percentage of net sales increased
to 14.7% in fiscal 1998 from 14.0% in fiscal 1997. Restated (at average exchange
rates for fiscal 1997), operating income increased 2.2% to $21.2 million (14.3%
of net sales) in fiscal 1998 from $20.8 million (14.0% of net sales) in fiscal
1997. The changes in exchange rate had the effect of decreasing operating income
for the period by $0.1 million.
Other income decreased to $0 in fiscal 1998 from $2.2 million (1.5% of net
sales) in fiscal 1997. The decrease of other income was the result of
recognition of a gain on disposal of surplus real estate assets in Germany for
fiscal 1997, with no such transactions completed in fiscal 1998.
Net interest income was $938,000 in fiscal 1998 compared to $218,000 of net
interest income in fiscal 1997. The increase in interest income was primarily
due to increased interest bearing cash balances held at the subsidiary level,
combined with funds from the Company's initial public offering. These funds were
utilized late in fiscal 1998 to partially fund the acquisition of Lokomec Oy.
The effective tax rate for fiscal 1998 was 26.8% compared to 14.5% for
fiscal 1997. This change is the result of year-to-year variations in the country
sources of the Company's profits, in each case at tax rates that vary among
jurisdictions. The provision for taxes increased 77.0% to $6.0 million in fiscal
1998 compared to $3.4 million in fiscal 1997. This provision as a percentage of
net sales increased to 4.1% in fiscal 1998 from 2.3% in fiscal 1997. During
fiscal 1997, the Company recognized a tax credit of $1.9 million to record
deferred tax assets related to its U.S. operations. There were no such tax
credits recognized in fiscal 1998. Excluding the impact of the tax credit, the
effective tax rate for fiscal 1997 was 22.7% compared to 26.8% for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
YEAR ENDED AND AT DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash & cash equivalents $ 31,174 $ 35,799 $ 30,337
Net cash provided by operating activities 13,246 14,859 16,985
Net cash used in investing activities (7,051) (20,692) (5,225)
Net cash provided by (used in) financing activities (7,416) 10,333 1,899
-17-
<PAGE>
Effect of exchange rate changes on cash (3,404) 962 (2,466)
</TABLE>
Historically the Company has funded its cash requirements through cash flow
from operations, although short-term fluctuations in working capital
requirements for some of the Company's subsidiaries have been met through
borrowings under revolving lines of credit obtained locally. The Company's
primary uses of cash have been to fund capital expenditures, acquisitions and to
service and repay debt.
Net cash provided by operating activities for fiscal 1999 decreased to
$13.2 million from $14.9 million in fiscal 1998. The $1.7 million decrease in
net cash provided by operating activities for fiscal 1999 compared to fiscal
1998 was attributable to a $8.0 million decrease in net income, partially offset
by a $5.2 million increase in sources of cash from operating assets and
liabilities, and a $ 1.1 million increase in depreciation / amortization. The
Company anticipates that operating cash and capital expenditure requirements
will continue to be funded by cash flow from operations, cash on hand and bank
borrowings.
Net cash used in investing activities was $7.1 million for 1999, compared
to $20.7 million for fiscal 1998. Investing activities in 1999 consisted largely
of investment in manufacturing equipment for the Company's four production
facilities, an additional expenditure under an earn out arrangement with the
former owners of Lokomec Oy, a company acquired late in 1998, and the
investments in hardware and software as part of the Company's year 2000
compliance projects. During 1998, investing activities also reflect the
acquisition of 100% of the outstanding shares of Lokomec Oy for $10.9 million,
net of cash acquired. The Company anticipates that it will incur approximately
$6.0 million for capital expenditures for fiscal 2000, excluding any
acquisitions of new businesses.
Net cash used by financing activities was $ 7.4 million for fiscal 1999
compared to net cash provided of $10.3 million for 1998. The decrease of $17.7
million in net cash provided by financing activities for fiscal 1999 compared to
fiscal 1998 was primarily attributable to the partial repayment of short term
bank borrowings of $12.0 million borrowed in 1998 to facilitate the Lokomec
acquisition.
The effect of exchange rate changes on cash and cash equivalents was ($ 3.4
million) and $.9 million for fiscal 1999 and fiscal 1998, respectively. As
approximately greater than two thirds of the Company's business is transacted in
currencies other than the U.S. dollar, foreign currency fluctuations had a
significant impact on dollar reported balances for fiscal 1999 compared to
fiscal 1998. The $4.3 million increase in the exchange rate impact on cash and
cash equivalents was attributable to a continuing 1999 strengthening U.S. dollar
against most of the functional currencies earned by the Company in its European
operations. The average dollar-weighted foreign currency decrease for fiscal
1999 for the Company's European operations was 8.5%.
In April 1999, the Company's Japan subsidiary entered into a bank loan with
a bank that provided $3.0 million for working capital and acquisitions.
Borrowings under the agreement are secured by a guarantee by the Company. At
December 31, 1999, $1.5 million was outstanding under the bank loan. Interest on
the loan accrues at a rate of 2.25%. Interest on the loan is payable quarterly.
In May 1999, the Company's U.S. subsidiary entered into an revolving credit
note with a bank that provides up to $15.0 million for working capital and
acquisitions. Borrowings under the agreement are secured by a guarantee by the
Company. At December 31, 1999 $3.5 million was outstanding under the note.
Interest on the line, which is based on LIBOR plus 0.875% (6.995% at December
31, 1999), is payable monthly.
Short-term borrowings outside the United States under available informal
credit facilities are typically a result of overdrafts. At December 31, 1999,
the Company had an additional $.6 million of other
-18-
<PAGE>
foreign debt outstanding. The Company also has an additional $2.6 million of
unused foreign credit facilities. The banks may withdraw these facilities at any
time. The weighted average interest rates on short-term borrowings as of
December 31, 1999 and 1998 were 5.1% and 6.0% respectively.
IMPACT OF INFLATION
The impact of inflation on the operating results of the Company has been
moderate in recent years reflecting generally lower rates of inflation in the
economy and relative stability in the Company's cost structure. Although
inflation has not had, and the Company does not expect that it will have, a
material impact on operating results, there is no assurance that the Company's
business will not be effected by inflation in the future.
EXPOSURE TO CURRENCY FLUCTUATIONS
A significant portion of the Company's business is conducted in currencies
other than the dollar, including pounds sterling, equivalent European Euro
currencies and Japanese yen. The Company's financial statements are prepared in
dollars, and therefore fluctuations in exchange rates in the pound sterling and
other currencies in which the Company does business relative to the dollar may
cause fluctuations in reported financial information, which are not necessarily
related to the Company's operations. In 1999, for example, the Company
experienced a 1.7% increase in net sales in the European region (denominated in
local currencies); however, the dollar-translated net sales figures showed a net
increase due to the fluctuation of the dollar against the local currencies of
6.1%. Due to the volatility of currency exchange rates, the Company cannot
predict the effect of exchange rate fluctuations upon future operating results.
Although the Company currently engages in transactions to hedge a portion of the
risks associated with fluctuations in currency exchange rates, it may not do so
in the future. There can be no assurance that the Company's business, financial
condition and results of operations will not be materially adversely affected by
exchange rate fluctuations or that any hedging techniques implemented by the
Company will be effective.
The following table illustrates the effect of the currency exchange rates
on certain of the Company's income items in fiscal 1999 and fiscal 1998 which
have been recalculated to show what such amounts would have been applying 1997
average exchange rates to 1998 amounts and 1998 average exchange rates to 1999
amounts.
-19-
<PAGE>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 AT 1998
---- ---- -------
ACTUAL ACTUAL EXCHANGE RATES
-------- -------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $145,253 $135,543 $137,629
Gross profit 54,336 45,113 45,630
Operating income 21,308 13,147 13,587
Net income 16,290 8,286 8,530
Basic earnings per share 1.47 .75 .77
Diluted earnings per share 1.46 .74 .77
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 AT 1997
---- ---- -------
ACTUAL ACTUAL EXCHANGE RATES
-------- -------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $148,388 $145,253 $148,201
Gross profit 54,380 54,336 55,145
Operating income 20,762 21,308 21,226
Net income 19,788 16,290 16,168
Basic earnings per share 1.84 1.47 1.46
Diluted earnings per share 1.82 1.46 1.45
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the year 2000 date change. The Company
expensed approximately $750,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products or
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its customers, suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed properly.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K includes and incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included or incorporated in this Form 10-K regarding the
Company's strategy, future operations, financial position, future revenues,
projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "intends," "may," "plans," "projects," "will," "would" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. The Company
cannot guarantee that it actually will achieve the plans, intentions or
expectations disclosed in its forward-looking statements and undue reliance
should not be placed on the Company's forward-looking statements. Actual results
or events could differ materially from the plans, intentions and expectations
disclosed in the forward-looking statements. The Company has included important
factors in the cautionary statements included or incorporated in this Form 10-K
that the Company believes could cause actual results or events to differ
materially from the forward-looking statements made. The Company's
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint
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<PAGE>
ventures or investments the Company may make. The Company does not assume any
obligation to update any forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in exchange rates or interest rates or weak economic conditions in the
markets in which the Company sells its products. The Company does not use
financial instruments for trading purposes and is not a party to any leveraged
derivatives.
Foreign Currency Risk
The Company enters into foreign exchange contracts to hedge some of its
foreign currency exposure. The Company uses such contracts to hedge exposure to
foreign currency exchange rates associated with anticipated costs to be incurred
in a foreign currency. The Company seeks to minimize the risk that the expenses
incurred by a subsidiary in a currency other than its functional currency will
be affected by changes in the exchange rates. THE COMPANY BELIEVES THAT THE
POSSIBLE FINANCIAL STATEMENT IMPACT OF ITS FOREIGN CURRENCY FORWARD CONTRACTS IS
IMMATERIAL.
Interest Rate Risk
The Company's interest bearing liabilities are most sensitive to changes in
the London InterBank Offered Rate (LIBOR) as substantially all of its short term
investments bear minimal interest rate risk.
As of December 31, 1999, the Company had approximately $5.6 million
outstanding on its revolving line of credit and short term credit agreements.
The potential loss to the Company over one year that would result from a
hypothetical, instantaneous, and unfavorable change of 100 basis points in the
interest rates of all applicable assets and liabilities would be approximately
be $0.1 million.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DENISON INTERNATIONAL PLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors 23
Consolidated Balance Sheets as of December 31, 1999 and 1998 24
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997 26
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 30
-22-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Denison International plc
We have audited the consolidated balance sheets of Denison International
plc and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. Our
audit also included the financial statement schedule listed in the index at Item
14. 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 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
Denison International plc 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 respect the information set forth therein.
/S/ ERNST & YOUNG LLP
Columbus, Ohio
February 11, 2000
-23-
<PAGE>
DENISON INTERNATIONAL PLC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,174 $ 35,799
Accounts receivable, less allowances of $ 2,175 and
$2,395 in 1999 and 1998, respectively 28,267 29,716
Inventories 31,453 38,236
Other current assets 3,566 4,513
-------- --------
Total current assets 94,460 108,264
Property, plant and equipment, net 24,519 24,726
Other assets 2,727 2,013
Goodwill, net of accumulated amortization of $345 and $145
in 1999 and 1998, respectively 7,114 8,454
-------- --------
Total assets $128,820 $143,457
======== ========
</TABLE>
-24-
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Current liabilities:
Notes payable to bank $ 5,586 $ 12,532
Accounts payable 9,027 10,973
Accrued payroll and related expenses 3,996 4,349
Other accrued liabilities 7,527 12,408
Income tax payable 1,680 1,259
Current portion of capital lease obligations 111 311
--------- ---------
Total current liabilities 27,927 41,832
Noncurrent liabilities:
Capital lease obligations, less current portion -- 38
Pension accrual 10,506 10,785
Other noncurrent liabilities 4,516 5,921
Negative goodwill, net of accumulated amortization of
$6,195 and $4,823 in 1999 and 1998, respectively 4,811 6,354
--------- ---------
19,833 23,098
========= =========
Shareholders' equity:
'A' ordinary shares (pounds sterling)8.00 par value; 7,125 shares
authorized, and 7,015 issued and outstanding in 1999
and 1998 86 86
Ordinary shares $0.01 par value; 15,000,000 shares
authorized, and 11,113,950 and 11,097,450 shares
issued and outstanding in 1999 and 1998, respectively 111 111
Additional paid-in capital 5,479 5,453
Capital redemption reserve 1,090 1,090
Retained earnings 82,691 74,405
Accumulated other comprehensive loss (8,397) (2,618)
--------- ---------
Total shareholders' equity 81,060 78,527
--------- ---------
Total liabilities and shareholders' equity $ 128,820 $ 143,457
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
-25-
<PAGE>
DENISON INTERNATIONAL PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 135,543 $ 145,253 $ 148,388
Cost of sales 90,430 90,917 94,008
--------- --------- ---------
Gross profit 45,113 54,336 54,380
Selling, general and administrative expenses 31,966 33,028 33,618
--------- --------- ---------
Operating income 13,147 21,308 20,762
Other income (expense) (693) -- 2,175
Interest (expense) income, net 354 938 218
--------- --------- ---------
Income before taxes 12,808 22,246 23,155
Provision for income taxes 4,522 5,956 3,367
--------- --------- ---------
Net income $ 8,286 $ 16,290 $ 19,788
========= ========= =========
Basic earnings per share $ .75 $ 1.47 $ 1.84
========= ========= =========
Diluted earnings per share $ .74 $ 1.46 $ 1.82
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
-26-
<PAGE>
<TABLE>
<CAPTION>
DENISON INTERNATIONAL PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
A A
ORDINARY ORDINARY ORDINARY ORDINARY ADDITIONAL
SHARES OF SHARES OF SHARES OF SHARES OF PAID
(POUNDS STERLING) (POUNDS STERLING) CAPITAL (II)
8.00 EACH $0.01 EACH 8.00 EACH $0.01 EACH
--------- --------- --------- --------- -------------
(NUMBER OF SHARES)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 7,015 10,528,950 86 105 862
Issuance of ordinary shares in
connection with initial public
offering -- 450,000 -- 5 4,475
Exercise of stock options -- 450,000 -- 1 74
Ordinary shares canceled -- (15,000) -- -- --
Net Income -- -- -- -- --
Pension liability adjustment -- -- -- -- --
Translation adjustment -- -- -- -- --
Comprehensive Income
Transfer on redemption of
redeemable preferred stock -- -- -- -- --
----- ---------- ---- ---- -----
Balance at December 31, 1997 7,015 11,057,700 86 111 5,411
Exercise of stock options -- 39,750 -- -- 42
Net income -- -- -- -- --
Translation adjustment -- -- -- -- --
Comprehensive Income -- -- -- -- --
----- ---------- ---- ---- -----
Balance at December 31, 1998 7,015 11,097,450 $86 $111 $5,453
Exercise of stock options -- 16,500 -- -- 26
Net income -- -- -- -- --
Translation adjustment -- -- -- -- --
Comprehensive Income -- -- -- -- --
----- ---------- ---- ---- -----
Balance at December 31, 1999 7,015 11,113,950 $86 $111 $5,479
===== ========== ==== ==== ======
<CAPTION>
ACCUMU-
LATED OTHER
COMPRE-
CAPITAL HENSIVE COMPRE-
REDEMPTION RETAINED INCOME HENSIVE
RESERVE EARNINGS (III) (LOSS) INCOME (LOSS) TOTAL
------- ------------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 -- 39,417 (1,350) 39120
Issuance of ordinary shares in
connection with initial public
offering -- -- -- -- 4,480
Exercise of stock options -- -- -- -- 75
Ordinary shares canceled -- -- -- -- --
Net Income -- 19,788 -- 19,788 19,788
Pension liability adjustment -- -- 497 497 497
Translation adjustment -- -- (4,408) (4,408) (4,408
-------
Comprehensive Income $15,877
=======
Transfer on redemption of
redeemable preferred stock 1,090 (1,090) -- --
----- ------ ----- ------
Balance at December 31, 1997 1,090 58,115 (5,261) 59,552
Exercise of stock options -- -- -- -- 42
Net income -- 16,290 -- 16,290 16,290
Translation adjustment -- -- 2,643 2,643 2,643
-------
Comprehensive Income -- -- -- $18,933 --
----- ------ ----- ======= ------
Balance at December 31, 1998 $1,090 $74,405 $(2,618) $78,527
Exercise of stock options -- -- -- -- 26
Net income -- 8,286 -- 8,286 8,286
Translation adjustment -- -- (5,779) (5,779) (5,779
Comprehensive Income -- -- -- $ 2,507 --
----- ------ ----- ======= ------
Balance at December 31, 1999 $1,090 $82,691 $(8,397) $81,060
====== ======= ======= =======
</TABLE>
(i) The share capital has been retroactively restated to reflect the
restructuring of the Company's share capital in July 1997, as described
in Note 1(c) of Notes to the Consolidated Financial Statements.
(ii) Additional paid in capital is not distributable.
(iii) Retained earnings available for distribution as dividends by the parent
company at December 31, 1999 were $50,624,000.
The accompanying notes are an integral part of these statements.
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<PAGE>
DENISON INTERNATIONAL PLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,286 $ 16,290 $ 19,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of goodwill (1,172) (1,417) (754)
Depreciation 4,676 3,703 3,382
Deferred income taxes 306 210 (1,668)
Gain on sale of assets 32 (65) (2,175)
Changes in operating assets and liabilities:
Accounts receivable (146) 2,245 (2,431)
Inventories 4,510 (7,526) (568)
Other current assets 1,438 (768) (255)
Other assets 58 27 26
Accounts payable (873) (86) 252
Accrued payroll and related expenses 3 (1,017) (538)
Income tax payable 476 (670) 928
Other accrued liabilities (4,370) 1,359 (379)
Pension accrual 220 527 356
Other noncurrent liabilities (198) 2,047 1,021
-------- -------- --------
Net cash provided by operating activities 13,246 14,859 16,985
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary, net of cash acquired (788) (10,923) --
Purchase of property, plant and equipment (6,345) (9,923) (7,400)
Proceeds from disposal of property, plant and equipment 82 154 2,175
-------- -------- --------
Net cash used in investing activities (7,051) (20,692) (5,225)
-------- -------- --------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving line of credit 993 12,000 --
Net repayment on lines of credit (8,204) (1,041) (528)
Redemption of stock -- -- (1,090)
Repayment of capital lease obligations (231) (668) (1,038)
Net proceeds from sale of ordinary shares -- -- 4,480
Proceeds from exercise of stock options 26 42 75
-------- -------- --------
Net cash (used in) provided by financing activities (7,416) 10,333 1,899
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(4,625) 5,462 11,193
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 35,799 30,337 19,144
-------- -------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
$ 31,174 $ 35,799 $ 30,337
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 807 $ 221 $ 330
Income taxes paid $ 4,109 $ 6,418 $ 4,107
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Acquisition of property and equipment through capital leases
$ -- $ -- $ 218
</TABLE>
The accompanying notes are an integral part of these statements.
-29-
<PAGE>
DENISON INTERNATIONAL PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
(a) Business of the Company
Denison International plc (the "Company"), a Company incorporated in
England and Wales, and its subsidiaries manufacture and distribute hydraulic
pumps and valves. The manufacturing plants are located in the United States,
Germany, France, and Finland and there are sales and distribution operations in
the United Kingdom, Canada, Sweden, Denmark, The Netherlands, Spain, Italy,
Japan, Australia, Hong Kong and Singapore.
(b) Incorporation
The Company was incorporated on March 10, 1993 as Alnery No. 1278 Limited
and on May 14, 1993 changed its name to Denison International Limited ("DIL")
and re-registered as a public limited company on July 28, 1997.
(c) Share Restructuring and Initial Public Offering
Throughout the period from January 1, 1994 to December 31, 1996, the
Company's authorized share capital was (pounds sterling)682,500, divided into
500,000 A Ordinary Shares, (pounds sterling)0.01 par value per share, ("A
Ordinary Share") and 1,000,000 B Ordinary Shares, (pounds sterling)0.01 par
value per share ("B Ordinary Share") and 667,500 cumulative redeemable
preference shares, (pounds sterling)1.00 par value per share. Each A Ordinary
Share entitled the holder to one vote and each B Ordinary Share entitled the
holder to 1.85 votes.
On January 23, 1997 the Company redeemed the 667,500 preference shares.
On July 24, 1997 (i) 667,500 unallocated preference shares, (pounds
sterling)1.00 par value per share, were canceled; (ii) the Company's then
outstanding A Ordinary Shares and B Ordinary Shares were redesignated as
Ordinary Shares, (pounds sterling)0.01 par value per share, ranking pari passu;
(iii) the Company made a bonus issue (stock dividend) of seven Ordinary Shares
for every one Ordinary Share then held; (iv) the then outstanding Ordinary
Shares, (pounds sterling)0.01 par value per share, were consolidated into
700,930 Ordinary Shares, (pounds sterling)0.08 par value per share; (v) all of
the authorized and outstanding Ordinary Shares, (pounds sterling)0.08 par value
per share, were redesignated as A Ordinary Shares; (vi) the Company made a bonus
issue (stock dividend) of fifteen Ordinary Shares, $0.01 par value per share,
for each A Ordinary Share; (vii) 570 A Ordinary Shares, (pounds sterling)0.08
par value per share, were subscribed; and (viii) the then outstanding A Ordinary
Shares were consolidated into 7,015 A Ordinary Shares, (pounds sterling)8 par
value per share.
As a result, the Company's authorized share capital was 15,000,000 Ordinary
Shares, $0.01 par value per share, and 7,125 A Ordinary Shares, (pounds
sterling)8 par value per share. After the reorganization, there were 10,513,950
Ordinary Shares and 7,015 A Ordinary Shares issued and outstanding.
On August 8, 1997 the Company completed an initial public offering in which
it issued and sold 450,000 Ordinary shares at $16.00 per share (the "Offering").
Net proceeds from the Offering were $4,480,000.
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<PAGE>
2. BASIS OF FINANCIAL STATEMENTS
Companies Act 1985
These consolidated financial statements do not comprise the Company's
statutory accounts within the meaning of section 240 of the Companies Act 1985,
as amended, of Great Britain (the "Companies Act"). The Company's statutory
accounts, which are its primary consolidated financial statements, are prepared
in accordance with accounting principles generally accepted in the United
Kingdom ("U.K. GAAP") in compliance with the Companies Act and are presented in
pounds sterling. Statutory accounts for the years ended December 31, 1997 and
1998 have been, and for the year ended December 31, 1999 will be filed with the
Registrar of Companies for England and Wales. The auditors' reports on those
accounts previously filed were unqualified.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated on consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
United States generally accepted accounting principles ("U.S. GAAP") requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from these estimates.
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The significant accounting
policies applied in their preparation are as follows:
Cash and Cash Equivalents
The Company considers all highly liquid investments having an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Work-in-progress and finished goods
include the cost of direct materials and labor plus a reasonable proportion of
manufacturing overheads based on normal levels of activity.
-31-
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are depreciated using the straight-line
method over their estimated useful lives as follows:
Buildings owned by the Company 33 to 38 years
Leaseholds Life of lease
Plant and equipment 4 to 10 years
Goodwill
Goodwill (including negative goodwill) is amortized using the straight-line
method over periods of ten to thirty years. Goodwill represents the excess of
the purchase price over the estimated fair value of net assets acquired.
Negative goodwill represents the excess of the estimated fair value of net
assets acquired (after the elimination of the carrying value of all noncurrent
assets) over the purchase price.
The Company's policy is to periodically review its goodwill and other
long-lived assets based upon the evaluation of such factors as the occurrence of
a significant adverse event or change in the environment in which the business
operates or if the expected future net cash flows (undiscounted and without
interest) would become less than the carrying amount of the asset. An impairment
loss would be recorded in the period such determination is made based on the
fair value of the related businesses.
Environmental Remediation
Environmental liabilities are recorded based on the most probable cost if
known or on the estimated minimum cost, determined on a site by site basis. The
Company's environmental liabilities are not discounted and do not take into
consideration any possible future insurance proceeds or any significant amounts
of claims against other third parties.
Revenue Recognition
The Company recognizes revenues from the sale of its products at the time
of shipment to the customer. Provision is made currently for estimated product
returns which may occur.
Warranty
The Company generally warrants its products for one year. An estimate of
the amount required to cover warranty expense on products sold is charged
against income at the time of sale. Other liabilities include accrued warranty
costs of $1.6 million and $2.2 million at December 31, 1999 and 1998,
respectively, of which $1.5 million and $2.2 million are classified as
short-term.
Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising
expenses include the promotion of specific products and kinds of advertising
include Company and product catalogues, business and industrial publications.
Advertising expense was $0.9 million, $0.9 million and $1.3 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
-32-
<PAGE>
Research and Development
Expenditures for research and development are expensed as incurred.
Research and development expense was $3.7 million, $3.1 million and $3.2 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
Income Taxes
Full provision is made for income taxes using the liability method on all
temporary differences between financial reporting and tax bases of assets and
liabilities, using enacted tax rates and laws.
Foreign Currency
The functional currencies of the Company and its subsidiaries are their
local currencies.
For U.S. reporting purposes, these consolidated financial statements are
translated from local currency into U.S. dollars using year-end rates for the
balance sheets and average rates for statements of operations and cash flows in
accordance with Financial Accounting Standards Board Statement No. 52, "Foreign
Currency Translation." Translation gains and losses are accumulated in the
accumulated other comprehensive income or loss component of shareholders'
equity.
Foreign currency transactions are converted into functional currencies at
the rates of exchange at the transaction date or average rate for the period of
the transaction. Exchange gains and losses arising from transactions in foreign
currencies are recorded in the consolidated statements of operation and are
insignificant for all years presented.
Stock Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
"Accounting and Disclosure of Stock-Based Compensation" ("FAS 123"), the Company
accounts for employee share option grants using the intrinsic value method in
accordance with Accounting Principle Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Under APB 25, because the exercise price equals
the estimated market price on the date of grant, no compensation expense has
been recognized for stock option awards. The effect of applying the fair value
method of FAS 123 to the Company's option grants is presented in Note 9.
Earnings per Common Share
Basic net income per share is computed using the weighted average number of
shares outstanding during the period. Diluted net income per share is computed
using the weighted average number of shares and diluted equivalent shares
outstanding during the period. Dilutive equivalent shares consist of stock
options (see Note 10).
Concentrations of Business and Credit Risk
Financial instruments which potentially subject the Company to credit risk
consist principally of trade receivables. The Company performs on-going credit
evaluations of its customers and generally does not require collateral. The
Company maintains adequate reserves for potential losses and such losses, which
have historically been minimal, have been within management's estimates.
-33-
<PAGE>
The Company sells the majority of its products to distributors and original
equipment manufactures throughout North America, Europe and Asia-Pacific.
Comprehensive Income (Loss)
In 1998, the Company adopted Financial Accounting Standards Board Statement
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 established rules
for reporting and display of comprehensive income and its components; however,
the adoption of FAS 130 had no impact on the Company's net income or
shareholders' equity. FAS 130 requires pension liability adjustments and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
Accumulated other comprehensive loss on the balance sheet consists of:
DECEMBER 31,
-----------------------
1999 1998
------- -------
(U.S. DOLLARS IN THOUSANDS)
Pension liability adjustment (43) (43)
Cumulative translation adjustment (8,354) (2,575)
------- -------
Accumulated other comprehensive loss $(8,397) $(2,618)
======= =======
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("FAS 133") effective for years beginning after June 15, 1999, (the
Company's year ending December 31, 2000). The effective date has been delayed to
June 15, 2000, (the Company's year ending December 31, 2001), as the result of
the FASB's issuance in August, 1999 of FAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective date of FASB
Statement No. 133". FAS 133 requires that all derivatives be recorded on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives are either offset against
the change in the fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company has not yet determined what the effect of
FAS 133 will be on the earnings and financial position of the Company.
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
----------------------------
1999 1998
------- -------
(U.S. DOLLARS IN THOUSANDS)
Finished goods 18,482 22,486
Work-in-progress 2,565 3,343
Raw materials and supplies 10,406 12,407
------- -------
$31,453 $38,236
======= =======
-34-
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
DECEMBER 31,
--------------------
1999 1998
------- -------
(U.S. DOLLARS IN THOUSANDS)
Land and buildings $ 3,952 $ 2,538
Machinery and equipment 33,859 32,238
Motor vehicles 911 975
------- -------
38,722 35,841
Less accumulated depreciation (14,203) (11,115)
------- -------
Property, plant and equipment, net $24,519 $24,726
======= =======
6. BANK NOTES PAYABLE
In May 1999, the Company's U.S. subsidiary entered into a revolving credit
agreement with a bank that provides up to $15.0 million for working capital and
acquisitions. Borrowings under the agreement are guaranteed by the Company. At
December 31, 1999, $3.5 million was outstanding under the time note. Interest on
the note accrues at a rate of LIBOR + 0.875% (6.995% at December 31, 1999).
Interest on the note is payable monthly. The revolving credit note is due on
April 30, 2002. This note is classfied as current based on the Company's
intention to repay the note in fiscal 2000.
In April 1999, the Company's Japan subsidiary entered into a bank loan that
provided $3.0 million for working capital and acquisitions. Borrowings under the
agreement are guaranteed by the Company. At December 31, 1999, $1.5 million was
outstanding under the bank loan. Interest on the loan accrues at a rate of 2.25%
and is payable quarterly. The bank loan is due on April 20, 2000.
Other short-term borrowings outside the United States under available
informal credit facilities are typically a result of overdrafts. At December 31,
1999, the Company had an additional $.6 million of other foreign debt
outstanding. The Company also has an additional $2.6 million of unused foreign
credit facilities. These facilities may be withdrawn at any time by the banks.
The weighted average interest rates on short-term borrowings as of December
31, 1999 and 1998 were 5.1% and 6.0%, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair values of financial instruments at the
balance sheet dates using available market information and appropriate valuation
methodologies. These estimates are highly subjective in nature and involve
uncertainties and significant judgment in interpretation of current market data.
The estimated fair values of the Company's financial instruments approximate
their carrying values at December 31, 1999 and 1998.
The Company conducts its business in various foreign currencies. As a
result, it is subject to the transaction exposures that arise from foreign
exchange rate movements between the dates that foreign currency transactions are
recorded and the date they are consummated. The Company hedges some anticipated
transactions, primarily intercompany purchases, through the use of forward
contracts. Gains and losses on contracts that are designated and effective as
hedges of anticipatory intercompany purchase
-35-
<PAGE>
transactions are market-to-market and recognized currently in cost of sales.
Forward contracts and the related value at risk were not material at December
31, 1999 and 1998. There can be no assurance that these strategies will be
effective.
8. ACQUISITIONS
On December 23, 1998 the Company closed its acquisition of Lokomec Oy
effective as of October 1, 1998, for a cash purchase price of $16,038,000
($10,923,000 net of cash acquired). Lokomec is a manufacturer of hydraulic
manifolds located in Tampere, Finland. The acquisition was accounted for using
the purchase method of accounting, and the operating results of Lokomec have
been included in the consolidated results of the Company from October 1, 1998.
An imputed interest charge covering the period from October 1, 1998 to December
23, 1998 has been reflected in the results of Lokomec included in the 1998
consolidated results of the Company. Goodwill of $8,599,000 is being amortized
by the straight-line method over 30 years. Three months of amortization expense
is included in the Company's 1998 consolidated statement of operations.
The purchase price may be increased dependent upon the achievement of
certain operating objectives, principally based upon earnings before interest
and taxes over a 3 year period. In 1999, the Company paid $788,000 related to
this earnout provision.
The following unaudited pro forma summary presents the Company's combined
1998 results as if the acquisition occurred at January 1, 1998, after giving
effect to certain adjustments including goodwill amortization. These pro forma
results are not necessarily indicative of those that would have occurred had the
acquisition occurred at January 1, 1998:
December 31, 1998
(U.S. dollars in thousands)
Revenue $ 153,901
=========
Net income $ 17,891
=========
Basic earnings per share $ 1.61
=========
Diluted earnings per share $ 1.61
=========
9. STOCK OPTIONS
The Company's Executive Stock Option Plan authorizes awards to employees in
the form of options to purchase the Company's Ordinary Shares. The aggregate
number of Ordinary Shares for which options may be granted under the plan is
850,000. Options granted under the plan are for periods not to exceed 10 years,
and must be issued at the higher of par value or the fair market value of the
shares on the date of grant. Options vest over four years from the date of grant
subject to any additional restrictions which may be imposed by the board of
directors. Pro forma information regarding net income and earnings per share is
required under FAS 123, and has been determined as if the Company has accounted
for its employee stock options under the fair value method of that Statement.
Prior to the Offering, the Company used the minimum value method to estimate the
fair value of options at the grant date, assuming a risk free rate of 6%, no
dividend yield and an expected life of 5 years. After the Offering, the Company
adopted the Black-Scholes method to estimate the fair value of options at the
date of grant with the following assumptions for 1999, 1998 and 1997: risk-free
interest rates of 6%, volatility of 37%, 42% and 42% respectively, no dividend
yield and an expected life of 5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
-36-
<PAGE>
1999 1998 1997
(U.S. dollars in thousands, except per share data)
Pro forma net income $7,183 $15,587 $19,603
Pro forma earnings per share: $ .65 $ 1.41 $ 1.83
Basic $ .65 $ 1.40 $ 1.80
Diluted
The following table summarizes share option activity for Ordinary Shares:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING BEGINNING OF YEAR 626,000 $ 16.66 370,250 $ 13.98 150,000 $ 0.93
GRANTED 46,000 12.75 327,500 17.75 314,000 16.28
EXERCISED (16,500) 1.53 (39,750) 0.98 (93,750) .80
FORFEITED (5,000) 12.88 (32,000) 16.22 -- --
----------------------- ----------------------- ---------------------
OUTSTANDING END OF YEAR 650,500 $ 13.98 626,000 $ 16.66 370,250 $ 13.98
======================= ======================= =====================
EXERCISABLE AT END OF YEAR 222,875 83,520 15,000
WEIGHTED-AVERAGE FAIR VALUE
OF OPTIONS GRANTED DURING
THE YEAR $5.40 $8.05 $5.47
</TABLE>
-37-
<PAGE>
Share options outstanding at December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------------------- ------------------------------------
WEIGHTED-
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
NUMBER PRICE LIFE NUMBER PRICE
-------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
Exercise prices between
$12.75 and $19.53 650,500 16.81 7.8 222,875 $16.82
</TABLE>
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(U.S. dollars in thousands, except share and
per share data)
<S> <C> <C> <C>
Numerator:
Net income $ 8,286 $ 16,290 $ 19,788
=========== =========== ===========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares 11,120,965 11,089,607 10,738,578
Effect of dilutive stock options 8,127 43,649 125,467
----------- ----------- -----------
Denominator for diluted earnings
per share -- adjusted weighted-
average shares 11,129,092 11,133,256 10,864,045
=========== =========== ===========
Basic earnings per share $ .75 $ 1.47 $ 1.84
=========== =========== ===========
Diluted earnings per share $ .74 $ 1.46 $ 1.82
=========== =========== ===========
</TABLE>
-38-
<PAGE>
11. COMMITMENTS
The Company has purchase commitments with various vendors for approximately
$1.4 million as of December 31, 1999. These purchase commitments are payable
during 2000.
Future minimum lease payments under capital leases and non-cancelable
operating leases with initial terms of one year or more consisted of the
following at December 31, 1999
CAPITAL OPERATING
LEASES LEASES
------ ------
(U.S. dollars in thousands)
2000 $ 182 $ 1,560
2001 -- 879
2002 -- 739
2003 -- 454
2004 -- --
Thereafter -- 5
------- --------
Total minimun lease payments 182 $ 3,657
========
Less amount representing interest (71)
Less current portion (111) 111
--------
Long-term obligation $ --
========
Property, plant and equipment include the following amounts for leases that
have been capitalized at December 31, 1999 and 1998:
DECEMBER 31,
-----------
1999 1998
---- ----
(U.S. DOLLARS IN THOUSANDS)
Machinery and equipment $ 1,598 $ 1,794
Less accumulated depreciation (900) (880)
------- -------
$ 698 $ 914
======= =======
Amortization of leased assets is included in depreciation expense. The
interest element of the rental obligations is charged to income over the period
of the lease at the estimated effective interest rate implicit in the lease.
Rent expense charged to operations for the years ended December 31, 1999,
1998 and 1997 was $1.5 million, $1.6 million and $1.8 million, respectively.
12. INCOME TAXES
The Company's income before income taxes relates to operations in the
United Kingdom and operations other than the United Kingdom (foreign). The
relationship between income before income taxes and the provision for income
taxes varies from period to period because each jurisdiction in which the
Company operates has its own system of taxation (not only with respect to the
statutory rate, but also with respect to the availability of deductions,
credits, and other benefits) and because the amounts earned in and subject to
tax by, each jurisdiction changes from period to period.
-39-
<PAGE>
For financial reporting purposes, income before income taxes includes the
following components:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- -------
(U.S. DOLLARS IN THOUSANDS)
Pretax income:
United Kingdom $ 2,821 $ 2,866 $ 1,775
Foreign 9,987 19,380 21,380
------- ------- -------
$12,808 $22,246 $23,155
======= ======= =======
Significant components of the provision for income tax expense were as
follows:
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
---- ---- ----
Current:
United Kingdom $ 491 $ 335 $ --
Foreign 3,725 5,411 5,035
------ ------ ------
Total Current $4,216 $5,746 $5,035
====== ====== ======
Deferred:
United Kingdom -- -- --
Foreign 306 210 (1,668)
------ ------ ------
Total provision for income taxes $4,522 $5,956 $3,367
====== ====== ======
The effective tax rate on earnings before income taxes varies from the
current U.K. statutory income tax rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Provision at statutory rate 31% 31% 31%
Foreign operations taxed at rates different from United
Kingdom Statutory rate 2 7 9
Reduction in valuation allowance relating to utilization (7)
of NOL carry forwards and other deferred tax assets (1) (6) (7)
Release of valuation allowance -- -- (1)
Amortization of negative goodwill (2) (2)
Other--net (primarily cost basis differences on property,
plant and equipment) (5) (3) (10)
--- --- ----
Effective tax rate 35% 27% 15%
== == ==
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes recorded at the applicable
statutory rates where the Company's operations are located.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31,
--------------------
1999 1998
------- -------
Deferred tax assets:
Employee benefits $ 1,038 $ 1,091
Net operating loss carryforwards 7,487 8,667
Other 3,014 3,811
Valuation allowance (9,134) (10,739)
------- -------
-40-
<PAGE>
Deferred tax assets 2,405 2,830
------- -------
Deferred tax liabilities (Fixed Assets) 1,145 1,264
Net deferred tax assets $ 1,260 $ 1,566
======= =======
A valuation allowance has been provided against the net deferred tax
assets for financial reporting purposes in respect of temporary differences and
net operating loss carryforwards. These deferred tax assets primarily relate to
existing net operating losses and basis differences that arose as part of the
June 15, 1993 acquisition. Certain of these net operating losses and future tax
deductions are subject to limitations under foreign tax law which are described
further below. The valuation allowance has been reduced by $1.6 in both fiscal
1999 and fiscal 1998.
At December 31, 1999, the Company had net operating loss carryforwards
("NOLS") of approximately $17.4 million for foreign tax purposes, of which $12.5
million will be allowable against national taxes and $4.9 million will be
allowable against local trade taxes. Approximately $4.5 million of NOL
deductions in the U.S. are limited under Section 382 of the Internal Revenue
Code to $0.6 million per year expiring in 2007. The Company and its subsidiaries
file for group relief or consolidated tax returns in the jurisdictions where
available.
The Company has not provided for taxes on undistributed foreign
earnings since the Company intends to reinvest these earnings in the future
growth of the business.
13. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company operates four defined benefit plans in the United States,
Germany and Japan. The plans are generally funded in advance by contributions
from the Company at rates assessed by each plan's professionally qualified
actuaries. Plan assets consist principally of corporate and government bonds and
common stocks.
In addition to the Company's defined benefit pension plans, the
Company's U.S. subsidiary provides health care and life insurance benefits for
certain retired employees, and life insurance benefits for certain active
employees. The health care and life insurance plans are non-contributory and the
health care plan contains other cost-sharing features such as deductibles and
coinsurance.
The following table sets forth the reconciliation of the beginning and
ending balances of the benefit obligation and plan assets, the funded status and
the amounts recognized in the consolidated balance sheets for the defined
benefit and other postretirement plans as of December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
1999 1998 1999 1998
----------- ----------- -------- ----------
(U.S. DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation beginning of year $ 16,057 $ 14,082 $ 929 $ 911
Service cost 342 493 4 5
Interest cost 871 884 56 59
Actuarial (gain)/loss (732) 506 58 (209)
Benefits paid (669) (752) (177) (120)
Special termination benefits -- -- -- 283
Exchange rate changes (922) 844 -- --
-------- ----------- -------- ----------
Benefit obligation at end of year $ 14,947 $ 16,057 $ 870 $929
-------- ----------- -------- ----------
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
1999 1998 1999 1998
----------- ----------- -------- ----------
(U.S. DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 5,312 $ 5,189 -- --
Actual return on plan assets 337 343 -- --
Employer contributions 231 275 177 120
Benefits paid (370) (501) (177) (120)
Exchange rate changes 57 13 -- --
-------- ----------- -------- ----------
Fair value of plan assets at end of year $ 5,567 $ 5,319 $ 0 $ 0
-------- ----------- -------- ----------
RECONCILIATION OF FUNDED STATUS
Funded status (9,381) (10,738) (870) (929)
Unrecognized actuarial (gain)/loss (813) (190) 19 (40)178
Unrecognized net asset 180 186 -- --
Accumulated other comprehensive income (43) (43) -- --
-------- ----------- -------- ----------
Accrued benefit cost ($10,057) ($ 10,785) (851) (969)
-------- ----------- -------- ----------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSISTS OF:
Prepaid benefit cost $ 449 $ -- $ -- $ --
Accrued benefit liability (10,506) (10,785) (870) (929)
-------- ----------- -------- ----------
Net amount recognized ($10,057) ($ 10,785) ($ 870) ($ 929)
======== =========== ======== ==========
ADDITIONAL YEAR-END INFORMATION FOR PLANS WITH
BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS
Projected benefit obligation 14,180 15,139
Accumulated benefit obligation 13,258 14,027
Fair value of plan assets 4,631 4,390
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost 342 493 4 5
Interest cost 871 884 56 59
Expected return on plan assets (352) (345) -- --
Amortization of transitional (asset) or obligation 38 31 -- --
Recognized actuarial (gain) or loss 17 (2) -- 9
-------- ----------- -------- ----------
Net periodic benefit cost 916 1,061 60 73
-------- ----------- -------- ----------
ADDITIONAL (GAIN) OR LOSS RECOGNIZED DUE TO:
Special termination benefits -- -- -- 283
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 6.05% 5.93% 7.50% 6.75%
Rate of increase in compensation levels 2.40% 2.40% -- --
Expected long-term rate of return on assets 6.75% 6.87% -- --
The annual assumed health care cost trend rate is 6% for the years subsequent to December 31, 1999 and is assumed to remain
at 6% thereafter.
</TABLE>
-42-
<PAGE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care trend rate would have the following effects:
(U.S. dollars in thousands) 1% Increase 1% Decrease
- --------------------------- ----------- -----------
Effect on total service and interest cost $ 28 $ 23
Effect on postretirement benefit obligation $ 186 $ 154
14. CONTINGENCIES
The Company remains involved in environmental cleanup efforts at Company
owned sites. The Company's estimate of the total anticipated cost of the cleanup
efforts is $3.0 million of which $1.7 million has been spent as of December 31,
1999. Remaining accrued cleanup costs total $1.3 million of which $1.3 million
is classified in the consolidated financial statements as long-term accrued
liabilities. The liability was reduced by $.5 million and $.4 million,
respectively, in 1999 and 1998.
Because of the uncertainties relating to remediation activities, the future
expenditures to remediate the currently identified sites could be higher than
the accrued liability. Although it is difficult to assess the final outcome
related to environmental exposures, management believes that these liabilities
are fully accrued for in the accompanying consolidated financial statements.
15. SEGMENT INFORMATION
The Company operates exclusively in the hydraulics industry. Substantially
all revenues result from the sale of hydraulics products. The Company's
reportable segments are based on geographic area. The accounting policies of the
operating segments are the same as described in Note 3. Sales are determined
based on the country of origin. The Company evaluates the performance of its
operating segments based on operating profit after elimination of profits on
transfers between geographic area.
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----
<S> <C> <C> <C>
SALES TO UNAFFILIATED COMPANIES:
United Kingdom $ 8,903 $10,172 $11,248
France 16,562 17,215 15,762
Germany 10,697 12,450 11,717
Rest of Europe 40,954 35,964 29,496
-------- -------- --------
Total Europe 77,116 75,801 68,223
United States 34,540 45,170 50,097
Canada 6,384 8,055 7,342
-------- -------- --------
Total N. America 40,924 53,225 57,439
Asia-Pacific 17,503 16,227 22,726
-------- -------- --------
Total consolidated $135,543 $145,253 $148,388
======== ======== ========
TRANSFERS BETWEEN GEOGRAPHIC AREA:
United Kingdom $ 107 $ 143 $ 164
France 21,698 27,357 23,193
Germany 14,151 17,118 15,329
Rest of Europe 210 214 250
-------- -------- --------
Total Europe 36,166 44,832 38,936
United States 8,840 11,557 13,647
-43-
<PAGE>
Canada 0 0 0
-------- -------- --------
Total N. America 8,840 11,557 13,647
Asia-Pacific 36 69 108
-------- -------- --------
Total transfers 45,042 56,458 52,691
Eliminations (45,042) (56,458) (52,691)
-------- -------- --------
Total consolidated $ 0 $ 0 $ 0
======= ======= =======
DEPRECIATION EXPENSE:
United Kingdom $ 166 $ 122 $ 154
France 1,626 1,480 1,468
Germany 524 394 326
Rest of Europe 648 342 217
--- --- ---
Total Europe 2,964 2,338 2,165
United States 1,287 1,046 912
Canada 15 18 14
-------- -------- --------
Total N. America 1,302 1,064 926
Asia-Pacific 410 301 291
-------- -------- --------
Total consolidated $ 4,676 $ 3,703 $ 3,382
======== ======== ========
OPERATING INCOME:
United Kingdom $ 3,391 $ 2,428 $ 2,309
France 5,981 7,442 5,475
Germany (628) 2,724 1,049
Rest of Europe 4,628 3,071 1,403
-------- -------- --------
Total Europe 13,372 15,665 10,236
United States (468) 5,183 7,873
Canada 506 961 713
-------- -------- --------
Total N. America 38 6,144 8,586
Asia-Pacific (263) (501) 1,940
-------- -------- --------
Total consolidated $13,147 $21,308 $20,762
======= ======= =======
IDENTIFIABLE ASSETS:
United Kingdom $15,461 $ 9,211 $10,098
France 21,274 33,035 23,766
Germany 14,214 17,615 13,311
Rest of Europe 32,140 36,308 14,791
-------- -------- --------
Total Europe 83,089 96,169 61,966
United States 26,182 29,007 27,059
Canada 4,183 3,950 3,788
-------- -------- --------
Total N. America 30,365 32,957 30,847
Asia-Pacific 15,366 14,331 14,680
-------- -------- --------
Total consolidated $128,820 $143,457 $107,493
======== ======== ========
</TABLE>
-44-
<PAGE>
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1999
<S> <C> <C> <C> <C>
Net Sales $36,469 $34,593 $30,192 $34,289
GROSS PROFIT 12,561 12,411 9,171 10,970
Operating Income 3,936 4,190 1,725 3,296
Net Income 2,886 2,873 885 1,642
Basic Earnings per Share 0.26 0.26 0.08 0.15
Diluted Earnings per Share 0.26 0.26 0.08 0.14
1998
Net Sales $37,371 $35,343 $34,016 $38,523
GROSS PROFIT 13,862 14,080 12,920 13,474
Operating Income 5,322 6,292 5,287 4,407
Net Income 3,877 4,830 4,212 3,371
Basic Earnings per Share 0.35 0.44 0.38 0.30
Diluted Earnings per Share 0.35 0.43 0.38 0.31
</TABLE>
17. SUBSEQUENT EVENTS (UNAUDITED)
On February 16, 2000 the Company entered into an agreement to acquire 100%
of the outstanding shares of Valmet Hydraulics OY ("Valmet"), a wholly owned
subsidiary of Metso Corporation and incorporated and located in Finland. Valmet
designs, manufactures and distributes hydraulic rotating house LSHT motors for
wheel and roll drives and hydraulic radial piston rotors for harvesting
machines. In 1999 Valmet had net sales of approximately USD $16.5 million. The
Company expects to close on the acquisition in the second quarter of 2000.
In March 2000 the Company entered into an agreement to acquire 100% of the
outstanding shares of Riva Calzoni Oleodinamica S.p.A. ("Calzoni"), a wholly
owned subsidiary of Intek S.p.A and incorporated and located in Italy. Calzoni
designs, manufactures and distributes radial piston oil-pressure motors for
industrial hydraulics applications. In 1999 Calzoni had net sales of
approximately USD $11.0 million. The Company expects to close on the acquisition
in the second quarter of 2000.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information regarding Directors appearing under the caption "Election
of Directors" in the Company's Definitive Proxy Statement to be used in
connection with the Annual General Meeting of Stockholders to be held on May 8,
2000 (the "2000 Proxy Statement") is incorporated herein by reference, since
such Proxy Statement will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the Company's fiscal year pursuant to
Regulation 14A. Information required by this item as to executive officers of
the Company is included in Part I (See "Executive Officers of the Company") of
this Annual Report on Form 10-K. Information required by Item 405 of Regulation
S-K is set forth in the 2000 Proxy Statement under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance" which information is incorporated
herein by reference.
-45-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by reference
to "Executive Compensation" in the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by reference
to "Ownership of Common Stock by Certain Beneficial Owners" in the 2000 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS & RELATED TRANSACTIONS.
None.
-46-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
The 1999 Consolidated Financial Statements of Denison
International plc and Subsidiaries are included in Part II,
Item 8.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts is enclosed at page
F-1 of this Form 10-K.
All other financial statement schedules for the Company and its
subsidiaries have been included in the consolidated financial
statements or the related footnotes, or they are either
inapplicable or not required.
3. Exhibits
See the Index to Exhibits at page 48 of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
-47-
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description
2.1 Agreement, dated December 23, 1998, by and among Denison
International plc, Merifire OY and other persons named
therein.*
3.1 Memorandum and Articles of Association of the Company.**
4.1 Form of Deposit Agreement, among the Company, Bankers Trust
Company, as Depository, and holders from time to time of
American Depository Shares issued thereunder (including as
an exhibit the form of American Depository Receipt and the
form of said Agreement).**
4.2 Form of Ordinary Share Certificate.**
10.1 The Denison International Stock Option Plan.**
10.2 Employment Agreement, dated as of June 1, 1998, by and
between David L. Wein, Denison Hydraulics, Inc. and Denison
International plc.**
10.3 Unsecured Credit Note Dated May, 1999 between Denison
Hydraulics, Inc. and Bank One, NA
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
------------
* Filed as an exhibit to the Company's Annual Report on Form 20-F for
the year ended December 31, 1998 and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on
Form F-1 (Registration No. 333-7248) and incorporated herein by
reference.
48
<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 Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
Denison International plc
(registrant)
By: /s/ Bruce A. Smith
-------------------------------------
Bruce A. Smith
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ J. Colin Keith March 29, 2000
-------------------------------------------------------
J. Colin Keith, Chairman of the Board
/s/ Anders C. H. Brag March 29, 2000
-------------------------------------------------------
Anders C. H. Brag, Managing Director and Director
/s/ David L. Weir March 29, 2000
-------------------------------------------------------
David L. Weir, President, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ Bruce A. Smith March 29, 2000
-------------------------------------------------------
Bruce A. Smith, CFO and Director (Principal Financial
Officer and Principal Accounting Officer)
49
<PAGE>
SCHEDULE II
-----------
DENISON INTERNATIONAL PLC
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER DEDUCTIONS END OF
PERIOD EXPENSES ACCOUNTS (WRITE-OFFS) PERIOD
------ -------- -------- ------------ ------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
Allowance for bad and doubtful debts
Year ended December 31, 1997 2,538 1,291 (210) (a) (532) 3,087
Year ended December 31, 1998 3,087 261 62 (a) (1,015) 2,395
Year ended December 31, 1999 2,395 1,060 (225) (a) (1,055) 2,175
Exchange adjustment
</TABLE>
F-1
-50-
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description
2.1 Agreement, dated December 23, 1998, by and among Denison
International plc, Merifire OY and other persons named
therein.*
3.1 Memorandum and Articles of Association of the Company.**
4.1 Form of Deposit Agreement, among the Company, Bankers Trust
Company, as Depository, and holders from time to time of
American Depository Shares issued thereunder (including as
an exhibit the form of American Depository Receipt and the
form of said Agreement).**
4.2 Form of Ordinary Share Certificate.**
10.1 The Denison International Stock Option Plan.**
10.2 Employment Agreement, dated as of June 1, 1998, by and
between David L. Wein, Denison Hydraulics, Inc. and Denison
International plc.**
10.3 Unsecured Credit Note Dated May, 1999 between Denison
Hydraulics, Inc. and Bank One, NA
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
------------
* Filed as an exhibit to the Company's Annual Report on Form 20-F for
the year ended December 31, 1998 and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on
Form F-1 (Registration No. 333-7248) and incorporated herein by
reference.
<PAGE>
Exhibit 10.3
DENISON HYDRAULICS, INC.
REVOLVING CREDIT LOAN AGREEMENT
May 18,1999
<PAGE>
Table of Contents
Page
ARTICLE 1. REVOLVING CREDIT LOANS ....................................... 1
1.1 Revolving Credit Commitment ...................................... 1
1.2 Conversion Options ............................................... 2
1.3 Revolving Credit Note ............................................ 2
1.4 Use of Revolving Credit Loan Funds ............................... 4
1.5 Default Rate ..................................................... 4
1.6 Additional Provisions and Limitations Relating to LIBOR Rate Loans 5
ARTICLE 2. PAYMENTS, SETOFFS, SECURITY .................................. 7
2.1 Payments ......................................................... 7
2.2 Application of Payments .......................................... 7
2.3 Setoffs .......................................................... 7
2.4 Collateral ....................................................... 7
2.5 Late Fee ......................................................... 7
2.6 Availability Fee ................................................. 8
ARTICLE 3. EXECUTION AND CONDITIONS OF BORROWING ........................ 8
3.1 Opinion of Counsel ............................................... 8
3.2 Resolution Authorizing Execution of Loan Documents ............... 9
3.3 Compliance with this Agreement ................................... 9
3.4 Incumbency Certificate ........................................... 9
3.5 Execution and Delivery of the Promissory Notes ................... 9
ARTICLE 4. REPRESENTATIONS AND WARRANTIES ............................... 10
4.1 Organization and Authority to Execute Documents .................. 10
4.2 Financial Statements ............................................. 10
4.3 No Guaranties of Others' Obligations ............................. 10
4.4 Compliance with Occupational Safety & Health Act ................. 10
4.5 No Undisclosed Liabilities ....................................... 10
4.6 No Undisclosed Subsidiaries ...................................... 10
4.7 Good Title to Assets and No Undisclosed Liens .................... 11
4.8 Possess Necessary Patents, Trademarks, and Licenses .............. 11
4.9 No Undisclosed Interest in the Title to Assets ................... 11
4.10 No Undisclosed Financing Statements .............................. 11
4.11 No Lawsuits or Judgments ......................................... 11
4.12 Filing and Payment of Taxes ...................................... 11
4.13 No Default of this Agreement ..................................... 12
4.14 Insurance ........................................................ 12
4.15 No Untrue or Misleading Statements or Omissions .................. 12
4.16 Pollutants ....................................................... 12
4.17 No Margin Activity ............................................... 12
-i-
<PAGE>
4.18 ERISA .................................................... 13
4.19 Year 2000 ................................................ 13
ARTICLE 5. AFFIRMATIVE COVENANTS ......................... 14
5.1 Annual Financial Statements .............................. 14
5.2 Periodic Financial Statements ............................ 14
5.3 No Default Certificate ................................... 14
5.4 Insurance ................................................ 14
5.5 Bank One to be Primary Depository ........................ 15
5.6 Payment of Taxes ......................................... 15
5.7 Compliance with Laws ..................................... 15
5.8 Preserve and Maintain Corporate Rights ................... 15
5.9 Payment of Legal, Filing, and Closing Costs .............. 15
5.10 Maintain and Preserve Assets ............................. 15
5.11 ERISA .................................................... 16
5.12 Notification of Certain Adverse Events ................... 16
5.13 Notice of the Existence of Pollutants .................... 17
5.14 Inspection of Books and Records .......................... 17
ARTICLE 6. NEGATIVE COVENANTS ..................................... 18
6.1 Encumbering Assets ....................................... 18
6.2 Incurring Other Debt ..................................... 18
6.3 Guaranty of Others' Debts ................................ 18
6.4 Merger or Consolidation .................................. 18
6.5 Transfer of Substantial Portion of Assets ................ 18
6.6 Disposing of Notes/Accounts Receivable ................... 18
6.7 Amount of Tangible Net Worth ............................. 19
6.8 Funded Debt to EBITDA .................................... 19
6.9 Interest Coverage Ratio .................................. 19
6.10 Year 2000 Covenants ...................................... 19
6.11 Transactions with Affiliated Persons ..................... 20
ARTICLE 7. EVENTS OF DEFAULT AND REMEDIES ......................... 20
7.1 Events of Default ........................................ 20
ARTICLE 8. DEFINITIONS ............................................ 22
8.1 Definitions .............................................. 22
8.2 Generally Accepted Accounting Principles ................. 27
ARTICLE 9. MISCELLANEOUS .......................................... 28
9.1 Successors and Assigns ................................... 28
9.2 Notices .................................................. 28
9.3 Waiver ................................................... 28
9.4 Duration ................................................. 28
9.5 Governing Law and Jurisdiction ........................... 29
-ii-
<PAGE>
9.6 Amendments ..................................... 29
9.7 Severability ................................... 29
9.8 Captions ....................................... 29
9.9 Arbitration .................................... 29
9.10 Entire Agreement ............................... 30
9.11 Waiver Of Jury Trial ........................... 30
EXHIBIT "A" - REVOLVING CREDIT NOTE
-iii-
<PAGE>
REVOLVING CREDIT LOAN AGREEMENT
THIS REVOLVING CREDIT LOAN AGREEMENT ("Agreement") dated as of May 18,
1999, is entered into by and between DENISON HYDRAULICS, INC., a New York
corporation (hereinafter called "Borrower"), and BANK ONE, N.A., a national
banking association (hereinafter called "Bank One").
WHEREAS, Borrower and Bank One are entering into this Agreement to set
forth the terms and conditions pursuant to which Bank One will provide a
revolving line of credit of $15,000,000 to Borrower; and
WHEREAS, Borrower and Bank One desire to establish the conditions under
which the loan contemplated above will be established;
NOW THEREFORE, Borrower and Bank One hereby agree as hereinafter set
forth.
ARTICLE 1. REVOLVING CREDIT LOANS
1.1 Revolving Credit Commitment. Bank One hereby agrees on the terms
and conditions of this Agreement to lend to Borrower the maximum sum of Fifteen
Million Dollars ($15,000,000) (the "Revolving Credit Commitment"). The Revolving
Credit Commitment shall be available to Borrower, subject to the limitations
herein, in whole or part and from time to time until April 30, 2002 (the
"Termination Date"), and any amounts borrowed may be repaid in whole or in part
and reborrowed until such date. Annually, Bank One shall consider extending the
Termination Date for additional periods of one year in duration with such
decision regarding extending the Termination Date to be in Bank One's sole
discretion. Each borrowing under the Revolving Credit Commitment shall be made
in accordance with the provisions of this Section 1.1 and shall be subject to
the conditions of Article 4 (a "Revolving Credit Loan").
Each Revolving Credit Loan shall, at the election of Borrower, be made
either in the form of (i) a Variable Rate Loan (individually a "Variable Rate
Loan" and collectively the "Variable Rate Loans") or (ii) a LIBOR Rate Loan
(individually a "LIBOR Rate Loan" and collectively the "LIBOR Rate Loans"). The
aggregate unpaid principal amount of the Variable Rate Loans and the LIBOR Rate
Loans at any one time outstanding shall not exceed the Revolving Credit
Commitment.
Each Revolving Credit Loan shall be made pursuant to the request of
Borrower to Bank One which request for a Revolving Credit Loan shall specify (i)
the total amount of the Revolving Credit Loan (which for the initial borrowing
under a LIBOR
<PAGE>
Rate Loan shall be in an amount of not less than Five Hundred Thousand Dollars
($500,000) and each borrowing as a LIBOR Rate Loan thereafter shall be in an
amount of not less than Two Hundred Fifty Thousand Dollars ($250,000)); (ii) the
borrowing date (the "Borrowing Date"), which shall be a Business Day in the case
of a Variable Rate Loan and a London Banking Day in the case of a LIBOR Rate
Loan; and (iii) whether the Revolving Credit Loan is to be a Variable Rate Loan
or a LIBOR Rate Loan (and in the case of a LIBOR Rate Loan, the length of the
Interest Period). Requests for Variable Rate Loans may be made on the applicable
Borrowing Date. Requests for LIBOR Rate Loans shall be made at least three LIBOR
Banking Days prior to the applicable Borrowing Date.
In the case of a request for a LIBOR Rate Loan, Bank One shall not later
than 11:00 a.m., Columbus, Ohio time two London Banking Days prior to the
Borrowing Date, give notice to Borrower, of the LIBOR Rate applicable for the
Interest Period requested by Borrower. Borrower shall, not later than 11:30
a.m., Columbus, Ohio time two LIBOR Banking Days prior to the Borrowing Date,
give notice by telephone confirmed in writing to Bank One whether it wishes (i)
to complete such borrowing in the form of a LIBOR Rate Loan; (ii) to complete
such borrowing as a Variable Rate Loan; or (iii) to cancel its request for a
Revolving Credit Loan. Failure by Borrower to timely deliver such notice shall
constitute cancellation of such request.
1.2 Conversion Options. Borrower may elect from time to time to convert
not less than Two Hundred Fifty Thousand Dollars ($250,000) of the Variable Rate
Loans then outstanding to LIBOR Rate Loans by giving Bank One irrevocable
telephone notice of such election as provided in this Section 1.2. Each LIBOR
Rate Loan shall automatically convert to a Variable Rate Loan upon its maturity
unless Borrower elects to continue such LIBOR Rate Loan as a LIBOR Rate Loan by
giving Bank One irrevocable telephone notice of such election as provided in
this Section 1.2. Any such notice pursuant to this Section 1.2 shall be received
by Bank One at least two LIBOR Banking Days prior to the proposed conversion
date, which shall be a LIBOR Banking Day, and shall specify (i) the conversion
date and (ii) the length of the new Interest Period. If no Event of Default then
exists, such conversion shall be made on the requested conversion date.
1.3 Revolving Credit Note. The Revolving Credit Commitment shall be
evidenced by a master promissory note (the "Revolving Credit Note") of Borrower
executed by a duly authorized officer of Borrower, which shall be in the form of
Exhibit "A" attached hereto. Each Revolving Credit Loan made by Bank One and
each payment made on account of principal on the Revolving Credit Note shall be
recorded by Bank One; provided, however, that the failure of Bank One to make
such notation shall not limit or otherwise affect the obligations of Borrower
under the Revolving Credit Note or this Agreement. The Revolving Credit Note
shall include the following terms:
-2-
<PAGE>
(a) Term. The Revolving Credit Note shall be dated as of the date
of this Agreement and shall be due and payable in full on or before the
Termination Date.
(b) Interest Rate on Variable Rate Loans. From its date, each
Variable Rate Loan shall bear interest (computed on the basis of the
actual number of days elapsed over a Business Year) on the unpaid
principal balance at a fluctuating rate per annum equal to the Prime
Rate. Any change in the interest rate due to a change in the Prime Rate
shall be effective immediately upon and after the date of each such
change in the Prime Rate.
Interest on the Variable Rate Loans shall be payable monthly on the
first day of each calendar month (the "Interest Payment Date"),
commencing on the first day of the month following the initial
disbursement of the initial Revolving Credit Loan.
(c) Interest Rate on LIBOR Rate Loans. From its date, each LIBOR
Rate Loan shall bear interest during the period from the date thereof
until and including the maturity date thereof at a rate per annum
equal to the LIBOR Rate plus the Margin shown below applicable to
LIBOR Rate Loans. The initial Margin for a LIBOR Rate Loan shall be
87.5 basis points. Borrower shall be obligated to pay with respect to
each LIBOR Rate Loan such additional amounts as shall be determined
pursuant to Section 1.6. Any change in the interest rate due to a
change in the Margin, as described below, shall be effective
immediately upon and after the date of each such change in the Margin.
Interest on LIBOR Rate Loans shall be payable on each Interest
Payment Date and at the end of the Interest Period selected by Borrower
for each such LIBOR Rate Loan. Interest on all LIBOR Rate Loans shall be
calculated on the basis of the actual number of days elapsed over a
Business Year.
For purposes of Section 1.3(c), the Margin applicable to the LIBOR
Rate Loans shall be determined as provided in the following table:
If Borrower's Funded LIBOR
Debt to EBITDA Ratio is: Rate Margin
------------------------ -----------
Equal to or greater than 3:25 to 1:00 1.25%
Less than 3:25 to 1:00 and 1.00%
Equal to or greater than 2:50 to 1:00
Less than 2:50 to 1:00 .875%
-3-
<PAGE>
Bank One shall calculate Borrower's Funded Debt to EBITA (as defined in
Section 6.8 hereof) on a rolling four quarter basis and adjusted at each
fiscal quarter and promptly upon receipt of Borrower's quarterly ending
Financial Statement beginning as of the quarter ending March 31, 1999,
and on each quarter ending thereafter. The Margin shall be adjusted
appropriately effective as of the date of Bank One's calculation of the
Funded Debt to EBITDA.
(d) Optional Repayments. Outstanding Variable Rate Loans may be
repaid in whole or in part at any time, without premium or penalty, in
principal amounts not less than the minimum Revolving Credit Loan for any
borrowing (after the initial borrowing) under Section 1.1 by tender of
payment and delivery of written, facsimile or oral notice of payment to
Bank One not later than 1:30 p.m., Columbus, Ohio time, on the Business
Day on which such repayment is to be made. Payments received after 1:30
p.m. shall be deemed tendered on the following Business Day. Outstanding
LIBOR Rate Loans may be prepaid in whole or in part at any time, so long
as such prepayment is accompanied by a prepayment premium contemplated
below, with such prepayments in principal amounts not less than the
minimum Revolving Credit Loan for any borrowing (after the initial
borrowing) under Section 1.1 by tender of payment after delivery of
written, facsimile or oral notice of payment to Bank One not later than
1:30 p.m., Columbus, Ohio time, five Business Days before the date such
repayment is to be made. Interest accrued to the date of payment shall be
due and payable on the next following Interest Payment Date unless the
Revolving Credit Note is paid in full, in which event, accrued interest
shall become due and payable on the payment date. The prepayment premium
for a prepayment of a LIBOR Rate Loan shall be an amount or amounts as in
the reasonable judgment of Bank One will compensate Bank One for any
loss, premium or penalty incurred by it because of such prepayment of a
LIBOR Rate Loan.
1.4 Use of Revolving Credit Loan Funds. The funds from the Revolving
Credit Commitment shall be used by Borrower for working capital and acquisition
activities.
1.5 Default Rate. Upon any of the Events of Default, including failure to
pay the Revolving Credit Note upon final maturity, Bank One, at its option, may,
in addition to any other remedies available to Bank One as contemplated in this
Agreement, if permitted under applicable law, do one or both of the following:
(a) increase the applicable interest rate on the outstanding principal sum under
the Revolving Credit Commitment and accrued interest to 2.00 percentage points
in excess of the Prime Rate, and (b) add any unpaid accrued interest to
principal and such sum will bear interest therefrom until paid at the rate
provided in subsection (a).
-4-
<PAGE>
1.6 Additional Provisions and Limitations Relating to LIBOR Rate Loans.
The additional provisions and limitations set forth below shall apply with
respect to LIBOR Rate Loans:
(a) If Bank One shall, in good faith, determine that it is unable
to reasonably ascertain the LIBOR Rate or to acquire London Interbank
Market deposits on reasonable terms in an amount sufficient to meet a
request for a LIBOR Rate Loan, Bank One shall promptly notify Borrower.
In such event, Borrower may request a Variable Rate Loan of like amount
without regard to the notice requirement of Section 1.1 or may cancel
such request.
(b) The obligation of Bank One to make LIBOR Rate Loans hereunder
shall be suspended in the event that any change in any law or regulation
or in any interpretation thereof by any governmental authority charged
with its administration shall, in the sole opinion of Bank One, make it
unlawful for Bank One to comply with its obligation to make or maintain
any LIBOR Rate Loan hereunder for the duration of such illegality. Bank
One shall promptly notify Borrower of such suspension, and, if and when,
in the sole opinion of Bank One, such illegality ceases to exist, such
suspension shall cease and Bank One shall promptly notify Borrower of the
termination of such suspension.
(c) If Bank One has LIBOR Rate Loans outstanding and there shall
occur any change in applicable law, regulation or interpretation
(including any request, guideline or policy not having the force of law by
any authority charged with the administration or interpretation thereof)
(i) which change directly affects transactions in the London Interbank
Market, (ii) which involves new or additional taxes, reserves or deposit
requirements in regard to the LIBOR Rate Loans or changes in the basis of
taxation of payments on LIBOR Rate Loans, or (iii) which, if the LIBOR
Rate Loans made hereunder by Bank One were to have been matched with
London Interbank Market deposits corresponding in amounts to such LIBOR
Rate Loans and having maturity dates which are the same as such LIBOR Rate
Loans regardless of whether or not such LIBOR Rate Loans are in fact so
matched, increases the cost to Bank One of making or maintaining the LIBOR
Rate Loans hereunder or reduces the amount of any payments (whether of
principal, interest or otherwise) receivable by Bank One as to any LIBOR
Rate Loans or requires Bank One to make any payment on or calculated by
reference to the gross amount of any sum received by it as to such LIBOR
Rate Loans, then where the amount of any such additional cost, reduction
or payment is deemed material by Bank One:
(i) Bank One shall promptly notify Borrower of the
occurrence of such event;
-5-
<PAGE>
(ii) Bank One shall promptly deliver to Borrower a
certificate stating the change which has occurred, together with the
date thereof and the amount of and the manner of calculating the
increased cost on any outstanding LIBOR Rate Loan; and
(iii) upon receipt of such certificate from Bank One,
Borrower shall pay to Bank One on demand the amount or amounts of such
additional cost with respect to such outstanding LIBOR Rate Loan as
additional compensation hereunder.
(d) The certificate of Bank One delivered to Borrower as to the
additional amount payable pursuant to Section 1.6(c) shall (in the absence of
manifest error in the transmission or calculation) be conclusive evidence of the
amount thereof. The protection of this Section 1.6(d) shall be available to Bank
One regardless of any possible contention of invalidity or inapplicability of
the law, regulation or condition which has been imposed. However, if Borrower
has made a payment of any additional amounts pursuant to Section 1.6(c) and any
subsequent event occurs which reduces the amount of the increased cost incurred
by Bank One, then Bank One shall promptly refund to Borrower an amount equal to
such reduction in the amount of increased cost.
(e) If Borrower is required to pay to Bank One any additional amount
pursuant to Sections 1.6(c) or (f), Borrower shall be entitled upon giving Bank
One not less than five days' written notice, in addition to its other rights, to
prepay any outstanding LIBOR Rate Loan with respect to which such additional
amounts of payment are required (all such prepayments shall be in full and not
in part with interest accrued to the date of such prepayments) by substituting a
Variable Rate Loan of equal principal amount therefor. As a condition of such
prepayments, Borrower shall promptly pay to Bank One, for the account of Bank
One, upon Bank One's written request such amount or amounts as in the reasonable
judgment of Bank One will compensate Bank One for any loss, premium or penalty
incurred by it because of such prepayment.
(f) In addition to the other amounts payable hereunder, Borrower shall
pay to Bank One such additional amounts as shall compensate Bank One for
increased costs which Bank One, in its sole discretion, reasonably determines in
good faith to be allocable to LIBOR Rate Loans. Additional amounts payable under
this Section 1.6(f) shall be paid by Borrower to Bank One on the maturity of the
respective LIBOR Rate Loans, subject to receipt by Borrower from Bank One of a
certificate showing the amount and certifying as to the correctness thereof.
-6-
<PAGE>
ARTICLE 2. PAYMENTS, SETOFFS, SECURITY
2.1 Payments. All payments and prepayments by Borrower to be made in
respect of principal or interest on the Revolving Credit Note shall become due
at 3:00 p.m., Columbus, Ohio time on the day when due, and shall be made to Bank
One in federal funds or other immediately available lawful money of the United
States of America. Borrower acknowledges that all payments due hereunder, except
for any balloon payments, shall electronically be debited by Bank One from
Borrower's designated account when such payments are due. Whenever any payment
to be made hereunder shall be due other than on a Business Day, such payment
shall be made on the next succeeding Business Day and such extension of time
shall in such case be included in the computation of interest or fees hereunder.
2.2 Application of Payments. Unless otherwise agreed to, in writing, or
otherwise required by applicable law, payments will be applied first to accrued,
unpaid interest, then to principal, and any remaining amount to any unpaid
collection costs, late charges and other charges, provided, however, upon any of
the Events of Default, Bank One reserves the right to apply payments among
principal, interest, late charges, collection costs and other charges at its
discretion. All prepayments shall be applied to the indebtedness owing hereunder
in such order and manner as Bank One may from time to time determine in its
sole discretion.
2.3 Setoffs. Upon the occurrence of any Event of Default, Bank One shall
have the right to set off against all obligations of Borrower to Bank One under
this Agreement and the Revolving Credit Note, whether matured or unmatured, all
amounts owing to Borrower by Bank One, whether or not then due and payable, and
all funds or property of Borrower on deposit in operating accounts of Borrower
with or otherwise held or in the custody of Bank One.
2.4 Collateral. Borrower shall not be required to provide any collateral
as security for its obligations hereunder. However, on or before the date of
borrowing, Guarantor shall execute and deliver to Bank One in a form
satisfactory to Bank One, the Guaranty, whereby Guarantor shall agree to
guaranty the performance of all of Borrower's obligations hereunder.
2.5 Late Fee. Bank One shall have the right to assess to Borrower a late
payment fee in the amount of the greater of $25.00 or 5% of the late payment of
the Revolving Credit Loan, up to the maximum amount of $1,500.00 per late
charge in the event of a default in payment that remains uncured for a period of
10 days or more. Notwithstanding the foregoing, no late payment fee shall be
assessed in the event that the late payment results from Bank One's failure to
timely withdraw funds from Borrower's account to make such payment in accordance
with the agreement between Bank One and Borrower.
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<PAGE>
2.6 Availability Fee. Borrower shall pay to Bank One an availability fee
equal in amount to .10% of the average daily unused portion of the Revolving
Credit Commitment payable by Borrower to Bank One quarterly in arrears on the
last day of each March, June, September and December of each year, commencing
June 30, 1999, through the Termination Date.
ARTICLE 3. EXECUTION AND CONDITIONS OF BORROWING
The obligation of Bank One to make disbursements under the Revolving
Credit Note to Borrower provided for hereunder shall be subject to the following
conditions:
3.1 Opinion of Counsel. Borrower's counsel in Ohio shall supply to Bank
One on or prior to the date of initial borrowing, an opinion satisfactory to
Bank One, which shall include. but not be limited to, opinion to the effect that
Borrower is a duly organized and existing corporation under the laws of the
State of New York; that Borrower is qualified to do business in Ohio and all
other states as shall be designated in the opinion letter where such
qualification is necessary where such failure would have a material effect on
Borrower; the the execution hereof by Borrower has been duly authorized by
appropriate corporate action; that there is no prohibition in law, in Borrower's
certificate or articles of incorporation, regulations, bylaws or in any
agreement to which Borrower is a party, which in any way restricts or prevents
the execution or carrying out of this Agreement in any respect; that this
Agreement and the Revolving Credit Note issued and delivered to Bank One
pursuant to the provisions hereof have been duly executed and are the legal,
valid and binding obligation of Borrower, enforceable against Borrower in
accordance with their respective terms, and are in full force end effect and in
compliance with all requirements of the State of Ohio and federal law.
Guarantor's counsel in Ohio shall supply to Bank One on or prior to the
date of initial borrowing, an opinion satisfactory to Bank One, which shall
include, but not be limited to, opinions to the effect that Guarantor is
qualified to do business in an all states as shall be designated in the opinion
letter where such qualification is necessary where such failure would have a
material effect on Guarantor; that the Guaranty has been duly executed and is
the legal, valid and binding obligation of Guarantor, enforceable against
Guarantor in accordance with its terms, and is in full force and effect and in
compliance with all requirements of the State of Ohio and federal law.
Guarantor's counsel in England shall supply to Bank One on or prior to
the date of initial borrowing, an opinion satisfactory to Bank One, which shall
include but not be limited to, opinions to the effect that Guarantor is a duly
organized and existing corporation under English law; that the execution of the
Guaranty by Guarantor has been duly authorized by appropriate corporate action
and that all authorizations, approvals, licenses, consents, registrations, and
filings (if any) required by English law
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for the Guarantor to guarantee the indebtedness referred to in this Agreement
have been duly obtained or effected and are in full force and effect; that there
is no prohibition in English law, in Guarantor's organizational documents,
articles of incorporation, regulations, bylaws of any agreement to which
Guarantor is a party, which in any way restricts or prevents the execution and
carrying out of the Guaranty in any respect; that the Guaranty is the legal,
valid and binding obligation of Guarantor, enforceable against Guarantor in
accordance with its terms, and is in full force and effect under English law;
and that a judgment that is final, granting or denying a recovery of a sum of
money obtained in a court in Ohio against Guarantor in respect of the Guaranty
would be recognized and enforced by the courts having jurisdiction over the
Guarantor in England.
3.2 Resolution Authorizing Execution of Documents. On or prior to the
date of initial borrowing, Borrower shall furnish -to Bank One certified copies
of the resolutions of the Board of Directors of Borrower authorizing the
execution of this Agreement and the Revolving Credit Note. In addition, Borrower
shall cause Guarantor to furnish to Bank One certified copies of resolutions of
the Board of Directors of Guarantor authorizing the execution of the Guaranty
3.3 Compliance with this Agreement. At the time of the initial borrowing,
Borrower shall be in compliance with all of the provisions, warranties, and
conditions contained in this Agreement with which it is to comply, and there
shall exist no Default as hereinafter specified, and no event shall exist or
shall have occurred which with the lapse of time or notice or both would
constitute an Event of Default
3.4 Incumbency, Certificate. Borrower and Guarantor shall provide at the
time of the initial borrowing a Certificate of the Secretary or an Assistant
Secretary of Borrower and Guarantor, respectively, which shall certify the names
of the officers of Borrower and Guarantor authorized to sign this Agreement, the
Revolving Credit Note, the Guaranty and the other documents or certificates to
be delivered pursuant to this Agreement by Borrower or Guarantor, as applicable,
or any of its officers, together with the true signatures of such officers. Bank
One may conclusively rely an such certificates until it shall receive a further
certificate of the Secretary or an Assistant Secretary of Borrower canceling or
amending the prior certificate and submitting the signatures of the officers
named in such further certificate.
3.5 Execution and Delivery of the Promissory Note and Guaranty. Borrower
shall have duly and validly executed, issued and delivered the Revolving Credit
Note to Bank One, and Guarantor shall have duly and validly executed, issued
and delivered the Guaranty.
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ARTICLE 4. REPRESENTATIONS AND WARRANTIES
In borrowing hereunder, Borrower represents and warrants to Bank One,
which representations and warranties shall survive the execution and delivery of
this Agreement and the Revolving Credit Note, that:
4.1 Organization and Authority to Execute Documents. Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the State of New York and is duly qualified or licensed to conduct its
activities in Ohio and in each other jurisdiction in which the nature of such
activities make such qualification necessary, and the failure so to qualify
might materially and adversely affect the business or assets of Borrower as a
whole; that the execution hereof has been duly authorized by appropriate
corporate action; there is no prohibition, either in law, in its certificate or
articles of incorporation or bylaws or in any agreement to which it is a party,
which in any way prohibits or would be violated by the execution and carrying
out of this Agreement in any respect; this Agreement has been duly executed and
is the valid and binding obligation of Borrower; and the Revolving Credit Note
issued and delivered to Bank One as payee will also be valid and binding
obligations of Borrower.
4.2 Financial Statement Borrower has furnished to Bank One its most
recent Financial Statement dated as of December 31, 1998, which is complete,
true and correct in all material respects and which fairly reflect Borrower's
financial condition.
4.3 No Guaranties of Others' Obligations. Borrower has made no
investments in, advances to or guaranties of the obligations of any Person,
corporation or other entity except as disclosed in the Financial Statement
referred to above or as otherwise disclosed to Bank One in writing.
4.4 Compliance with Occupational Safety & Health Act. Borrower is not in
violation of any requirement of any applicable occupational safety and health
act or any standard, rule or order promulgated pursuant thereto or any
regulation prescribed pursuant thereto, the violation of which involves (i) the
possibility of a material adverse effect on the business, operation or condition
of Borrower or (ii) the ability of Borrower to perform this Agreement.
4.5 No Undisclosed Liabilities. Borrower has no material liabilities,
direct or to the best of Borrower's knowledge, contingent, except as disclosed
in the above mentioned Financial Statements and except as set forth in Schedule
4.5, attached hereto.
4.6 No Undisclosed Subsidiaries. That there exist as of the date hereof
no Subsidiaries of Borrower.
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4.7 Good Title to Assets and No Undisclosed Liens. Borrower has good and,
with respect to real estate, marketable title to all their respective property
and assets reflected as being owned by them in the Financial Statement referred
to in Section 4.2 above, subject to no liens, other than liens reflected on such
Financial Statement or Permitted Liens, except property and assets disposed of
since the date of such Financial Statement in the ordinary course of business.
4.8 Possess Necessary Patents, Trademarks, and Licenses. Borrower owns or
possesses all patents trademarks service marks, trade names, copyrights,
permits and licenses, or rights with respect to the foregoing, necessary for the
present and planned future conduct of the business of Borrower, without any
known conflict with the rights of others, except as disclosed to Bank One in
writing.
4.9 No Undisclosed Interest in the Title to Assets. None of the assets
or property, the value of which is reflected in the Financial Statement
referred to above, is held by Borrower as lessee or conditional vendee, or
pursuant to a title retention agreement of any kind, except as set forth in said
Financial Statement or the notes relating thereto or as disclosed to Bank One in
writing.
4.10 No Undisclosed Financing Statements. No financing or continuation
which names Borrower as debtor has been filed under the Uniform Commercial Code
in any state or other jurisdiction except as disclosed to Bank One in writing
from the Chairman or the President of Borrower, and Borrower has not agreed to
or consented to cause or to permit in the future (upon the happening of a
contingency or otherwise) any of its property, whether now owned or hereafter
acquired, to be subject to a lien, except Permitted Liens.
4.11 No Lawsuits or Judgements. There is no action, suit or proceeding at
law or in equity or any arbitration proceeding or investigation, inquiry or
other proceeding by or before any court or governmental instrumentality or other
agency now pending or, to the knowledge of Borrower threatened or affecting
Borrower or any property or rights of Borrower nor is there any basis therefore,
except such of the foregoing which, if adversely determined, would not in the
aggregate have a material adverse effect on Borrower or which does not seek to
enjoin the consummation of any transaction contemplated by this Agreement. No
judgment, decree or order of any federal, state or municipal court, board or
other governmental or administrative agency has been issued against or binds
Borrower which has, or is likely to have, any material adverse effect on the
business or assets or the financial condition of Borrower.
4.12 Filing and Payment of Taxes. Borrower has duly filed or caused to be
filed all federal, state and local tax returns which are required to be filed,
and has duly paid or caused to be duly paid, to the extent required, all taxes
as shown on said
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returns or on any assessment received by them, to the extent that such taxes
have become due.
4.13 No Default of this Agreement. There does not exist any Event of
Default or any condition or circumstance which constitutes or with lapse of time
or the giving of notice or both would constitute an Event of Default.
4.14 Insurance. All of the properties and operations of Borrower of a
character usually insured against by Persons of established reputation engaged
in the same or a similar business similarly situated are adequately insured, by
financially sound and reputable insurers against loss or damage of the kinds and
in the amounts customarily insured against by such Persons; and Borrower
carries, with such insurers in customary amounts, such other insurance,
including public liability insurance, as is usually carried by persons of
established reputation engaged in the same or a similar business similarly
situated.
4.15 No Untrue or Misleading Statements or Omissions. To the best of
Borrower's knowledge, neither this Agreement nor any other agreement, instrument
or certificate contemplated by or made or delivered pursuant to or in connection
with this Agreement, contains any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
4.16 Pollutants. Borrower covenants and agrees to hold harmless and
indemnify Bank One from any and all liabilities, losses, damages, penalties,
fines, claims, suits, costs, fees (including attorneys' fees), and expenses,
including, but not limited to, liability for cleanup costs, the relocation of
tenants occupying the Premises or any portion thereof, contaminant costs, bodily
injury and property damage and all costs, fees (including attorneys' fees) and
expenses incurred by Bank One for the defense of any claim or cause of action
arising from the location of Pollutants on the Premises. As the term is used
herein, "Pollutants" shall mean any solid, liquid, gaseous or thermal
containment, including smoke, vapor, soot, fumes, acids, alkalis. chemicals,
waste, petroleum products or by-products, asbestos, PCB's phosphates, lead or
other heavy metals, chlorine, radon gas "hazardous substances" as defined under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as is now of hereafter amended or supplemented, and regulations adopted
pursuant thereto, or other toxic or hazardous wastes or materials.
4.17 No Margin Activity. Borrower is not engaged in the business of
extending or obtaining credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation U of the Board of Governors of the
Federal Reserve System, as is now and may from time to time hereafter be in
effect) and no part of the proceeds of any Revolving Credit Loan shall be used
to purchase or carry any such margin stock or to extend credit to others for the
purpose Of purchasing or
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carrying any such margin stock or to reduce or retire any indebtedness incurred
for any such purpose. No part of the proceeds of any Revolving Credit Loan
hereunder will be used for any purpose which violates, or which is inconsistent
with, the provisions of Regulations G, T, U or X of the Board of Governors of
the Federal Reserve System.
4.18 ERISA. Each Plan maintained by Borrower and by each ERISA Affiliate
complies with all material applicable requirements of ERISA and of the Code and
with all material applicable rulings and regulations issued under the provisions
of ERISA and the Code setting forth those requirements. Borrower nor any ERISA
Affiliate has engaged in any prohibited transaction (as defined in Section 406
of ERISA or Section 4975 of the Code) (i) which has not been corrected within
the correction period applicable to it under Section 502(i) of ERISA or Section
4963(e) of the Code or (ii) for which an exemption has not been obtained under
Section 408 of ERISA or Section 4975 of the Code. Borrower nor any ERISA
Affiliate is a participant in (i) any Multiemployer Plan, (ii) any other Plan
which is subject to Title IV of ERISA, or (iii) any money purchase pension plan.
4.19 Year 2000.
(i) All devices, systems, machinery, information technology,
computer software and hardware, and other date sensitive technology
(jointly and severally the "Systems") necessary for Borrower to carry on
its business as presently conducted and as contemplated to be conducted
in the future are Year 2000 Compliant or will be Year 2000 Compliant
within a period of time calculated to result in no material disruption of
any of Borrower's business operations. For purposes of these
representations and warranties, "Year 2000 Compliant" means that such
Systems are designed to be used prior to, during and after the Gregorian
calendar year 2000 A.D. and will operate during each such time period
without error relating to date data, specifically including any error
relating to, or the product of, date data which represents or references
different centuries or more than one century.
(ii) Borrower has: (1) undertaken a detailed inventory, review, and
assessment of all areas within its business and operations that could be
adversely affected by the failure of Borrower to be Year 2000 Compliant
on a timely basis, (2) developed a detailed plan and time line for
becoming Year 2000 Compliant on a timely basis; and (3) to date,
implemented that plan in accordance with that timetable in all material
respects.
(iii) Borrower has made inquiry of each of its key suppliers,
vendors, and customers, and has obtained confirmations from all such
persons, as to whether such persons have initiated programs to become
Year 2000 Compliant and on the basis of such confirmations, Borrower
reasonably believes that all such persons will be or try to become so
compliant or make other suitable
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arrangements so as not to likely cause a material disruption of
business. For purposes of this paragraph, "key suppliers, vendors, and
customers" refers to those suppliers, vendors, and customers of Borrower
whose business failure would, with reasonable probability result in a
material adverse financial change in the business properties, or
condition of Borrower. For purposes of this paragraph, Bank One, as a
lender of funds under the terms of this Agreement, confirms to Borrower
that Bank One has initiated its own corporate-wide Year 2000 program
with respect to its lending activities.
ARTICLE 5. AFFIRMATIVE COVENANTS
Until payment in full of the Revolving Credit Note and performance of all
other obligations of Borrower hereunder:
5.1 Annual Financial Statements. Borrower shall furnish to Bank One
within one hundred twenty (120) days after the close of each fiscal year an
audited Financial Statement: which fairly reflects its financial condition.
5.2 Periodic Financial Statements. Borrower shall furnish to Bank One
within forty-five (45) days after the close of each month of each fiscal
quarter, an internally prepared Financial Statement which fairly reflects its
financial condition and which are certified as true and correct in all material
respects subject to year-end adjustments by the Treasurer or Borrower.
5.3 No Default Certificate. Borrower's Financial Statement called for by
the above paragraphs must be accompanied by a certificate signed by the
Treasurer, or other responsible officer of Borrower stating that, except as
disclosed in the certificate, Treasurer has no knowledge of any Event of Default
or event which, with the lapse of time or notice or both, would become an Event
of Default hereunder.
5.4 Insurance. Borrower shall at all times.
(a) Maintain adequate insurance upon all of its properties and
operations of a character usually insured against by Persons of
established reputation engaged in the same or a similar business
similarly situated by financially sound and reputable insurers against
loss or damage of the kinds and in the amounts customarily insured
against by such Persons.
(b) Maintain with such insurers in customary amounts such other
insurance, including public liability insurance as is usually carried by
Persons of established reputation engaged in the same or a similar
business similarly situated.
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(c) At the request of Bank One, furnish a statement of its
insurance coverage.
(d) Bank One shall be named as loss payee on any insurance covering
damage or losses to Borrower's equipment.
5.5 Bank One to be Primary Depository. Bank One shall be the primary
depository and principal bank of account of Borrower.
5.6 Payment of Taxes. Borrower shall promptly pay and discharge all taxes
and assessments levied and assessed or imposed upon its property or income taxes
as well as all claims which, if unpaid, might by law become a lien or charge
upon such property; provided, however, that nothing herein contained shall
require Borrower to pay any such taxes, assessments or claims so long as
Borrower shall in good faith contest the validity and stay the execution and
enforcement thereof.
5.7 Compliance with laws. Borrower will promptly comply in all
substantial respects, with all applicable statutes, laws, ordinances and
governmental rules, regulations and orders to which it is subject or which are
applicable to its business, property and assets if noncompliance therewith would
materially and adversely affect its business.
5.8 Preserve and Maintain Corporate Rights. Borrower shall preserve and
maintain its corporate existence, rights, franchises and privileges in the
jurisdiction which it shall select, and qualify and remain qualified as a
foreign corporation in each jurisdiction where such qualification is necessary,
except such jurisdictions, if any, where the failure to preserve and maintain
its corporate existence, rights, franchises and privileges, or qualify or remain
qualified will not have a material adverse effect on the business or property of
Borrower.
5.9 Payment of Fees and Expenses. Borrower will pay or reimburse all
reasonable fees and expenses incurred by Bank One in connection with the
collection and enforcement of this Agreement and the Revolving Credit Note.
Borrower shall, upon request, promptly reimburse Bank One for all amounts
expended, advanced or incurred by Bank One to satisfy any obligation of Borrower
under this Agreement, or in the collection and enforcement of the Revolving
Credit Note and Bank One's rights under this Agreement including all court
costs, attorneys' fees, fees of auditors and accountants and investigation
expenses reasonably incurred by Bank One in connection with such collection and
enforcement, together with interest at the post-maturity rate set forth herein
on such amount from the date of written demand by Bank One for reimbursement
until the date Bank One is actually reimbursed.
5.10 Maintain and Preserve Assets. Borrower shall use reasonable efforts
in good faith to maintain and preserve in good working order and condition,
ordinary
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wear and tear excepted, all of its properties necessary for the conduct of its
business, if failure to maintain and preserve such properties would over a
substantial period Of time materially and adversely affect Borrower.
5.11 ERISA. Borrower shall furnish to Bank One. (a) promptly and in any
event within 10 days after Borrower knows or has reason to know of the
occurrence of a Reportable Event with respect to a Plan with regard to which
notice must be provided to the PBGC, a copy of such materials required to be
filed with the PBGC with respect to such Reportable Event and in each such case
a statement of the chief financial officer of Borrower setting forth details as
to such Reportable Event and the action which Borrower proposes to take with
respect thereto, (b) promptly and in any event within 10 days after Borrower
knows or has reason to know of any condition existing with respect to a Plan
which presents a material risk of termination of the Plan, imposition of an
excise tax, requirement to provide security to the Plan or incurrence of other
liability by Borrower or any ERISA Affiliate a statement of the chief financial
officer of Borrower or such ERISA Affiliate describing such condition; (c) at
least 10 days prior to the filing by any plan administrator of a Plan of a
notice of intent to terminate such Plan, a copy of such notice; (d) promptly and
in no event more than 10 days after the filing thereof with the Secretary of the
Treasury, a copy of any application by Borrower or an ERISA Affiliate for a
waiver of the minimum funding standard under section 412 of the Code; (e)
promptly and in no event more than 10 days after the filing thereof with the
Internal Revenue Service, copies of each annual report which is filed on Form
5500 together with certified financial statements for the Plan (if any) as of
the end of such year and actuarial statements on Schedule B to such form 5500;
(f) promptly and in any event within 10 days after it knows or has reason to
know of any event or condition which might constitute grounds under section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Plan, a statement of the chief financial officer of Borrower describing such
event or condition; (g) promptly and in no event more then 10 days after receipt
thereof by Borrower or any ERISA Affiliate, a copy of each notice received by
Borrower or an ERISA Affiliate concerning the imposition of any withdrawal
liability under section 4202 of ERISA; and (h) promptly after receipt thereof a
copy of any notice Borrower or any ERISA Affiliate may receive from the PBGC or
the Internal Revenue Service with respect to any Plan or Multiemployer Plan;
provided, however, that this subsection (h) shall not apply to notices of
general application promulgated by the PBGC or the Internal Revenue Service.
5.12 Notification of Certain Adverse Events. Borrower shall promptly
notify Bank One if Borrower learns of the occurrence of (i) any event which
constitutes a Default, together with a detailed statement by a responsible
officer of Borrower of the steps being taken to cure the effect of such Default;
or (ii) the receipt of any notice or the taking of any other action by the
holder of any promissory note, debenture or other evidence of indebtedness of
Borrower or of any security (as defined in the Securities Act of 1933, as
amended) of Borrower with respect to a claim of default,
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together with a detailed statement by a responsible officer of Borrower
specifying the notice given or other action taken by such holder and the nature
of the claimed default and what action Borrower is taking or proposes to take
with respect thereto, or (iii) any legal, judicial or regulatory proceedings
affecting Borrower or any of the properties of Borrower in which the amount
involved is material and is not covered by insurance or which, if adversely
determined would have a material adverse effect on the financial condition of
Borrower; or (iv) any dispute between Borrower and any governmental or
regulatory body or any other Person which, it adversely determined would have a
material adverse effect on the financial condition of Borrower; or (v) any event
or condition having a material adverse effect on the financial condition of
Borrower.
5.13 Notice of the Existence of Pollutants. Borrower shall cause any
Pollutants which are now or may hereafter be used or generated in the operations
of Borrower or any Subsidiary in hazardous quantities. as set forth in any
applicable statute, to be stored, used and disposed of in compliance with all
applicable federal, state, and local laws and regulations. Borrower will notify
Bank One immediately upon obtaining knowledge that:
(i) any Premises are the subject of an environmental investigation
by any federal, state or local governmental agency having jurisdiction
over the regulation of any Pollutants, the purpose of which investigation
is to quantify the levels of Pollutants located on such Premises, or
(ii) Borrower or any Subsidiary has been named or is threatened to
be named as a party responsible for the possible contamination of any
real property or ground water with Pollutants, including, but not limited
to the contamination of past and present waste disposal sites.
If Borrower or any Subsidiary is notified of any event described at items
(i) or (ii) above, Borrower shall, upon reasonable request by Bank One, engage
or cause the Subsidiary to engage a firm or firms of engineers or environmental
consultants appropriately qualified to determine as quickly as practical the
extent of contamination and the potential financial liability of Borrower or the
Subsidiary with respect thereto, and Bank One shall be provided with a copy of
any report prepared by such firm or by any governmental agency as to such
matters as soon as any such report becomes available to Borrower and such
reports shall be held confidential by Bank One. The selection of any engineers
or environmental consultants engaged pursuant to the requirements of this
Section shall be subject to the approval of Bank One, which approval shall not
be unreasonably withheld.
5.14 Inspection of Books and Records. Upon request by Bank One, Borrower
shall make available for inspection to duly authorized representatives of Bank
One any of its books and records, and shall furnish to Bank One any information
regarding its
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business affairs and financial condition including copies of any contracts
entered into by Borrower within a reasonable time after receipt of written
request therefor.
ARTICLE 6. NEGATIVE COVENANTS
Except with prior written consent of Bank One which consent shall not be
unreasonably withheld, Borrower shall not:
6.1 Encumbering Assets. Create, incur, assume or permit to continue any
mortgage, pledge, encumbrance, lien or charge of any kind upon or security
interest in any of its property or assets, whether now owned or hereafter
acquired, except Permitted Liens as defined herein, nor promise to any other
Person other than Bank One not to create, incur, assume or permit to continue
any mortgage, pledge, encumbrance, lien or charge of any kind upon or security
interest in any of its property or assets, whether now owned or hereafter
acquired.
6.2 Incurring Other Debt. Create, incur, assume or suffer to exist any
Debt except: (i) Debt represented by the Revolving Credit Note issued hereunder;
(ii) other indebtedness to Bank One; (iii) unsecured indebtedness to trade
creditors arising out of the ordinary course of Borrower's business; (iv)
purchase money indebtedness; (v) operating leases in which Borrower is the
lessee; and (vi) any other indebtedness, so long as the sum of indebtedness
resulting from 6.2(iv), (v) and (vi) does not exceed $1,000,000 of new
indebtedness on an annual basis.
6.3 Guaranty of Others' Debts. Assume, guarantee, endorse, contingently
agree to purchase of otherwise become liable upon the obligation of any Person,
except for endorsements of instruments for deposit or collection in the ordinary
course of business.
6.4 Merger or Consolidation. Merge or consolidate with any Person not
controlled by Borrower.
6.5 Transfer of Substantial Portion of Assets. Liquidate or sell, lease,
transfer or otherwise dispose of all or a substantial pan of its assets other
than in the ordinary course of business. All proceeds from any such sale, lease
or transfer shall be remitted by Borrower to Bank One to be applied to the
Revolving Credit Note.
6.6 Disposing of Notes/Accounts Receivable. Discount or sell any of its
notes or accounts receivable for less than their true value unless in Borrower's
ordinary course of business consistent with Borrower's prior methods of keeping
its books and records.
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6.7 Amount of Tangible Net Worth. Permit Tangible Net Worth to be less
than Twenty Five Million Dollars ($25,000,000) plus 50% of its Net Income after
taxes determined annually.
6.8 Funded Debt to EBITDA. Permit the ratio of Funded Debt to EBITDA to
be no greater than 3.50 to 1.00 at any time calculated on a rolling four quarter
basis.
6.9 Interest Coverage Ratio. Permit the Interest Coverage Ratio (defined
as the ratio of Borrower's net income, plus taxes, plus interest expense divided
by Borrower's total interest expense) to be less than 2.50 to 1.00 at any time
calculated on a rolling four quarter basis.
6.10 Year 2000 Covenants. Borrower shall:
(a) Furnish such additional information, statements and other
reports with respect to Borrower's activities, course of action and
progress towards becoming Year 2000 Compliant as Bank One may reasonably
request from time to time.
(b) In the event of any change in circumstances that causes any of
Borrower's representations and warranties with respect to its being or
becoming Year 2000 Compliant to no longer be true (hereinafter, referred
to as a "Change in Circumstances"), then Borrower shall promptly, and in
any event within twenty (20) days of receipt of information regarding a
Change in Circumstances, provide Bank One with written notice (the
"Notice") that describes in reasonable detail the Change in Circumstances
and how such Change in Circumstances caused or will likely cause
Borrower's representations and warranties with respect to being or
becoming Year 2000 Compliant to no longer be true. Borrower shall, within
ten (10) days of a request, also provide Bank One with any additional
information Bank One requests of Borrower in connection with the Notice
and/or a Change in Circumstances.
(c) Give any representative of Bank One access during all business
hours to, and permit such representative to examine, copy or make excerpts
from, any and all books, records and documents in the possession of
Borrower and relating to its affairs, and to inspect any of the properties
and Systems of Borrower, and to project test the Systems to determine if
they are Year 2000 Compliant in an integrated environment, all at the sole
cost and expense of Bank One and without disruption to Borrower's
business.
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6.11 Transactions with Affiliated Persons. Borrower shall not:
(a) Enter into any transaction, including without limitation, the
purchase, sale or exchange of property or the rendering of any
services, with any Affiliated Person or any officer or director
thereof, enter into, assume or suffer to exist any employment or
consulting contract with any Affiliated Person, except any transaction
or contract which is in the ordinary course of Borrower's business and
which is upon fair and reasonable terms no less favorable to Borrower
than it would obtain in a comparable arms-length transaction.
(b) Make any advance or loan to any Affiliated Person or any
director or officer thereof or to any trust of which any of the
foregoing is a beneficiary, or to any Person on the guaranty of any of
the foregoing except any advance or loan which is in the ordinary
course of Borrower's business and which is upon fair and reasonable
terms no less favorable to Borrower than it would obtain in a
comparable arms-length transaction.
(c) Pay any fees or expenses to, or reimburse or assume any
obligation for the reimbursement of any expenses incurred by, any
Affiliated Person or any officer or director thereof, except as may be
permitted in accordance with the preceding clauses of this paragraph.
ARTICLE 7. EVENTS OF DEFAULT AND REMEDIES
7.1 Events of Default. if any of the following events ("Events of
Default") shall occur and be continuing:
(a) Borrower shall default in the payment of any installment of the
principal of the Revolving Credit Note when and as the same shall become
due and payable, whether at the due date thereof or at a date fixed for
prepayment or by acceleration or otherwise, provided such default shall
continue for a period of ten (10) calendar days after written notice;
(b) Borrower shall default in the payment of interest on the
Revolving Credit Note, when and as the same shall become due and payable,
whether at the due date thereof or at a date fixed for prepayment or by
acceleration or otherwise, provided such default shall continue for a
period of ten (10) calendar days after written notice;
(c) Any representation or warranty made by Borrower in this
Agreement or in connection with the Revolving Credit Loan hereunder, or
in any report, certificate, Financial Statement or other instrument
furnished in
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connection with this Agreement shall prove to be false or misleading in any
material respect;
(d) Borrower shall fail to observe or perform any covenant, condition
or agreement in Article 6 of the Agreement (provided such failure shall
continue for a period of thirty (30) days) after written notice;
(e) Borrower shall fail to observe or perform any covenant, condition
or agreement to be observed or performed pursuant to the terms hereof
(other than the covenants, conditions and agreements described in
subsections 7.1(a) through 7.1(d) above), provided such default shall
continue unremedied for forty-five (45) days after written notice, which
notice shall include a description of the Event of Default thereof to
Borrower by Bank One;
(f) Borrower or Guarantor shall default with regard to any payment of
principal or interest on or the performance or observance of any covenant,
condition or agreement of any other instrument of indebtedness executed by
Borrower or Guarantor;
(g) Final judgment for the payment of money in excess of Two Hundred
Fifty Thousand Dollars ($250,000) shall be rendered against Borrower and
the same shall remain undischarged for a period of thirty (30) consecutive
days during which the execution shall not be effectively stayed;
(h) Guarantor shall default in the payment of any amount due and
payable under the Guaranty;
(i) Guarantor shall fail to observe or perform any covenant, condition
or agreement in Section 10 of the Guaranty (provided such failure shall
continue for a period of thirty (30) days) after written notice;
(j) Any representation or warranty made by Guarantor in the Guaranty
shall prove to be false or misleading in any material respect;
(k) Borrower or Guarantor shall (i) apply for or consent to the
appointment of a receiver, trustee or liquidator for it or for any of their
respective property, (ii) admit in writing their inability to pay their
respective debts as they mature, (iii) make a general assignment for the
benefit of creditors, (iv) be adjudicated a bankrupt or insolvent, or (v)
file a voluntary petition in bankruptcy, or a petition or an answer seeking
reorganization or an arrangement with creditors to take advantage of any
bankruptcy, reorganization, insolvency, readjustment of debt, dissolution
or liquidation law or statute, or an answer admitting the material
allegations of a petition filed
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against it in any proceeding under any such law of if corporate
action shall be taken by Borrower for the purpose of effecting any of
the foregoing;
(l) An order, judgment or decree shall be entered without to
application, approval or consent of Borrower by any court of competent
jurisdiction, approving a petition seeking reorganization of Borrower or
Guarantor or appointing a receiver, trustee or liquidator of Borrower or
Guarantor or of all or a substantial part of the assets thereof, and such
order, judgment or decree shall continue unstayed and in effect for any
period of sixty (60) days;
then upon the occurrence of any such Event of Default specified in subdivisions
(a), (b), (c), (d), (e), (f), (g), (h), (i), (j) and (k) of this Section, Bank
One shall have the option to cease disbursements of the Revolving Credit Loan
and/or to terminate its commitment to lend and to declare all amounts due under
the Revolving Credit Note to be immediately due and payable both as to principal
and interest. Automatically upon the occurrence of any of the events specified
in subdivision (m) of this Section, Bank One's commitment to lend shall
terminate and all amounts due under the Revolving Credit Note shall become
immediately due and payable. In all cases, the Revolving Credit Note shall
become immediately due and payable without presentment, demand, protest, or
notice of any kind, all of which are hereby expressly waived, anything contained
herein or in the Revolving Credit Note to the contrary notwithstanding. It is
understood that the remedies of Bank One hereunder shall be cumulative in
nature rather than exclusive and that the failure of Bank One to exercise its
rights upon a Default by Borrower hereunder shall not be deemed to be a waiver
by Bank One of that Event of Default or any of its rights hereunder.
ARTICLE 8. DEFINITIONS
8.1 Definitions. For purposes of this Agreement, the following terms
shall have the following meaning:
"Affiliated Person" shall mean any Person which owns 51% or more of the
outstanding capital stock of or of which 51% or more of the capital stock is
owned by the Borrower, including the Guarantor and any Subsidiary of the
Borrower, or any Person of which 51% or more of the capital stock is owned by
any Person which owns or is owned by the Borrower.
"Agreement" shall mean this Loan Agreement.
"Bank One" is defined in the preamble.
"Borrower" is defined in the preamble.
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"Borrowing Date" is defined in Section 1.1.
"Business Day" shall mean any day other than Saturdays, Sundays and other
legal holidays or days on which the principal office of the Lender is closed.
"Business Year" shall mean a year of 360 days.
"Change in Circumstances" is defined in Section 6.10(b).
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Debt" shall mean for Borrower:
(i) any indebtedness for borrowed money which Borrower directly
or indirectly created, incurred, assumed, endorsed (other than for
collection in the ordinary course of business), discounted with
recourse or in respect of which Borrower is otherwise directly or
indirectly liable including, without limitation, indebtedness in
effect guaranteed by Borrower through any agreement (contingent or
otherwise) to purchase, repurchase or otherwise acquire such
indebtedness or any security therefore, or to provide funds for the
payment or discharge of such indebtedness or any liability of the
obligor of such indebtedness (whether in the form of loans, advances,
stock purchases, capital contributions or otherwise) or to maintain
the solvency or other financial condition of the obligor of such
indebtedness, or to make payment for any products, materials or
supplies or for any transportation or service regardless of the
nondelivery or nonfurnishing thereof, in any such case if the purpose
or intent of such agreement is to provide assurance that such
indebtedness will be paid or discharged, or that any agreement
relating thereto will be complied with, or that the holders of such
indebtedness will be protected against loss in respect thereof,
(ii) any indebtedness, whether or not for borrowed money, which
Borrower has incurred, assumed, guaranteed or with respect to which
Borrower has become directly or indirectly liable (including, without
limitation, through any agreement of the character referred to in
clause (i) hereof) and which represents or has been incurred to
finance the purchase price of any property or business, whether by
purchase, consolidation, merger or otherwise,
(iii) any indebtedness, whether or not for borrowed money, which
is secured by any mortgage, pledge, security interest, lien or
conditional sale or other title retention agreement existing on any
property owned or held by
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Borrower subject thereto, whether or not Borrower has any personal
liability for such indebtedness.
"EBITDA" shall mean the Borrower's earnings for the respective period
before deducting interest, federal, state and local taxes, depreciation and
amortization.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"ERISA Affiliate" shall mean each trade or business, including
Borrower, whether or not incorporated, which together with Borrower would be
treated as a single employer under 4001 of ERISA.
"Events of Default" shall mean any of the events specified in Section
7.1 provided that there has been satisfied any requirements in connection with
such event for the giving of notice, or the lapse of time, or the happening of
any further condition, event or act, and "Default" shall mean any of such
events, whether or not any such requirement has been satisfied.
"Financial Statement" shall mean for any period a balance sheet as of
the close of the period, an operating statement for the period including
detailed expense schedules, a statement of changes in cash flows and a
reconciliation of retained earnings, all prepared in accordance with generally
accepted accounting principles applied on a consistent basis.
"Funded Debt" shall mean all Debt of the Borrower to Bank One and any
other financial provider but shall exclude any Debt of the Borrower to the
Guarantor.
"Guarantor" means Denison International, plc., an English company.
"Guaranty" means the Unconditional Corporate Guaranty Agreement given
by Guarantor to Bank One dated of even date with this Agreement.
"Interest Payment Date" is defined in Section 1.3(b).
"Interest Period" with respect to (i) any LIBOR Rate Loan, shall mean
the period commencing on the Borrowing Date or the conversion date, as
contemplated in Section 1.2, and ending on the date one, two, three or six
months thereafter as selected by Borrower in its notice of borrowing as provided
in Section 1.1, or its notice of conversion as provided in Section 1.2.
The foregoing provisions relating to Interest Periods are subject to
the following:
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(i) Any Interest Period with respect to a LIBOR Rate Loan that
shall commence on the last London Banking Day of the calendar month (or
on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last London
Banking Day of the appropriate subsequent calendar month.
(ii) Each Interest Period with respect to a LIBOR Rate Loan that
would otherwise end on a day which is not a London Banking Day shall end
on the next succeeding London Banking Day or, if such next succeeding
London Banking Day falls in the next succeeding calendar month, on the
next preceding London Banking Day.
(iii) No Interest Period on a LIBOR Rate Loan may end after the
Termination Date.
"LIBOR BANKING DAYS" shall mean days which are both Business Days and
London Banking Days.
"LIBOR RATE" shall mean with respect to each Interest Period (as
hereinafter defined), the offered rate for U.S. Dollar deposits of not less than
$1,000,000 as of 11:00 a.m. City of London, England time two London Banking
Days prior to the first date of each Interest Period as shown on the display
designated as "British Bankers Assoc. Interest Settlement Rates" on the Telerate
System ("Telerate"), Page 3750 or Page 3740, or such other page or pages as may
replace such pages on Telerate for the purpose of displaying such rate;
provided, however, that if such rate is not available on Telerate, then such
offered rate shall be otherwise independently determined by Bank One from an
alternate, substantially similar independent source available to Bank One or
shall be calculated by Bank One by a substantially similar methodology as that
theretofore used to determine such offered rate in Telerate. Each change in the
LIBOR Rate on a Revolving Credit Loan shall become effective without notice on
the commencement of each Interest Period.
"LIBOR Rate Loan(s) is defined in Section 1.1.
"London Banking Day(s)" shall mean day(s) on which transactions are
carried out in the London Interbank Market.
"Margin" shall be determined as provided in Section 1.3(c).
"Multiemployer Plan" shall mean a Plan described in 4001(a)(3) of ERISA
to which Borrower is required to contribute on behalf of any of its employees.
"Notice" is defined in Section 6.10(b).
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<PAGE>
"PBGC" shall mean the Pension Benefit Guarantee Corporation established
pursuant to Subtitle A of Title IV of ERISA.
"Permitted Liens" shall mean:
(i) Liens securing taxes, assessments, fees or other governmental
charges or levies, or the claims of materialmen, mechanics, owners,
warehouse men, landlords, and other similar Persons;
(ii) Liens incurred or deposits made in the ordinary course of
business (a) in connection with workers' compensation, unemployment
insurance, social security and other similar laws, or (b) to secure the
performance of bids, tenders, sales, contracts, public or statutory
obligations, customs, appeal and performance bonds, or (c) other similar
obligations not incurred in connection with the borrowing of money, the
obtaining of advances, or the payment of the deferred purchase price of
property;
(iii) Reservations, exceptions, encroachments, easements, rights
of way, covenants, conditions, restriction, leases and other similar
title exceptions or encumbrances affecting real property, provided
they do not in the aggregate materially detract from the value of such
properties or materially interfere with their use in the ordinary
conduct of Borrower's business;
(iv) Liens in favor of Bank One;
(v) Liens permitted in this Agreement and liens securing
indebtedness permitted in Section 6.2.
"Person" shall mean and include an individual, trust, partnership,
limited liability company, corporation, unincorporated organization and a
government or any department or agency thereof.
"Plan" shall mean any plan, benefit or program of benefits or perquisites
which has been or is being currently provided to one or more employees or which
may in the future be established, maintained, or contributed to by Borrower (or
in which Borrower or any of its employees participate, which provides benefits
to employees or former employees of Borrower), including any "employee benefit
plan" as defined in ERISA, any payroll practice or personnel policy, and any
system of governmental or other benefits to the costs of which Borrower
contributes by any means.
"Pollutants" is defined in Section 4.16.
"Premises" shall mean any premises which have at any time been owned or
occupied by or have been under lease to Borrower.
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"Prime Rate" shall mean on any day the per annum rate published or
announced by Bank One from time to time as its prime rate, which may not be
Bank One's lowest rate.
"Reportable Event" shall mean any of the events set forth in Section
4043(b) of ERISA or the regulations thereunder, a withdrawal from a Plan
described in Section 4063 of ERISA, a cessation of operations described in
Section 4068(f) of ERISA, an amendment to a Plan necessitating the posting of
security under Section 401(a)(20) of the Code, or a failure to make a payment
required by Section 412(m) of the Code and Section 302(e) of ERISA when due.
"Revolving Credit Commitment" is defined in Section 1.1.
"Revolving Credit Loan" shall mean a loan made by Bank One to Borrower
pursuant to Section 1.1 hereof, and evidenced by the Revolving Credit Note.
"Revolving Credit Note" shall mean the note in the form of Exhibit "A"
attached hereto executed by Borrower and delivered to Bank One.
"Subsidiary" shall mean any corporation fifty-one percent (51%) or more
of the voting stock of which is controlled by Borrower.
"Systems" is defined in Section 4.20(i).
"Tangible Net Worth" shall mean the amount by which the total
consolidated assets of Borrower exceeds the sum of (i) the total consolidated
liabilities of Borrower plus (ii) consolidated Intangible Assets of Borrower.
"Intangible Assets" shall mean, goodwill, patents, trademarks, excess of cost
over book value of assets acquired, deferred research and development expenses,
deferred operational expenses, appraisal surplus and other assets.
"Termination Date" is defined in Section 1.1.
"Variable Rate Loan(s)" is defined in Section 1.1.
"Year 2000 Compliant" is defined in Section 4.20(i).
8.2 Generally Accepted Accounting Principles. All accounting terms not
specifically defined herein shall have the meanings of such terms as used in
accordance with generally accepted accounting principles in the United States
applied on a consistent basis.
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ARTICLE 9. MISCELLANEOUS
9.1 Successors and Assigns. All covenants and agreements in this
Agreement contained by or on behalf of either of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto whether so expressed or not provided that Borrower's rights under this
Agreement shall not be assignable without the prior written consent of Bank One.
Bank One shall give notice to Borrower it it sells, participates or otherwise
transfers its rights under this Agreement to any party other than Bank One
Corporation or any of Bank One Corporation's affiliates. Notwithstanding the
foregoing, this provision shall not be applicable in the event Bank One is paid
in full hereunder and the Revolving Credit Commitment is cancelled.
9.2 Notices. Unless otherwise set forth in this agreement, all notices,
requests and demands to or upon the parties hereto to be effective shall be in
writing or by telecopy or telex and shall be deemed to have been duly given or
made when delivered by hand, or when deposited in the mail, postage prepaid,
or, in the case of facsimile notice, shall be deemed given when confirmed
addressed as follows in the case of Borrower and Bank One or to such address or
other address as may be hereafter notified by the parties hereto:
Borrower: Denison Hydraulics, Inc.
14249 Industrial Parkway
Marysville, Ohio 43040
Attention: Bruce A. Smith, CFO
Facsimile: (937) 644-0827
Bank One: Bank One, N.A.
100 East Broad Street
Columbus, Ohio 43271-0170
Attention: David Clark, Vice President
Facsimile: (614) 248-5518
9.3 Waiver. No delay on the part of Bank One in exercising any right,
power or privilege granted hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or privilege
preclude any other or further exercise thereof. The rights and remedies herein
expressly specified, are cumulative and not exclusive of any other rights and
remedies which Bank One would otherwise have.
9.4 Duration. This Agreement and all covenants, agreements,
representations and warranties made herein and in the various certificates
delivered pursuant hereto shall survive the making of the Revolving Credit Loan
by Bank One and the execution and delivery to Bank One by Borrower of the
Revolving Credit Note
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and shall continue in full force and effect until Borrower no longer retains
the right to borrow hereunder and the Revolving Credit Note is paid in full.
9.5 Governing Law and Jurisdiction. This Agreement shall in all respects
be interpreted in accordance with and enforceable under the laws of the State of
Ohio. In the event of a dispute hereunder, it is agreed that exclusive venue
lies in a Court of competent jurisdiction in Franklin County, Ohio.
9.6 Amendments. Notwithstanding any provision to the contrary contained
herein, any term of this Agreement may be amended by consent of the parties;
provided that no amendment, modification, or waiver of any provision of this
Agreement or of the Revolving Credit Note shall be effective unless the same
shall be in writing and signed by Borrower and Bank One.
9.7 Severability. In the event that any one or more of the provisions
contained in this Agreement or in the Revolving Credit Note shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement or the Revolving Credit Note.
9.8 Captions. Section captions used in this Agreement are for convenience
only and shall not affect the construction of this Agreement.
9.9 Arbitration. Bank One and Borrower agree that upon the written demand
of either party, whether made before or after the institution of any legal
proceedings, but prior to the rendering of any judgment in that proceeding, all
disputes, claims and controversies between them, whether individual, joint, or
class in nature, arising from this Agreement the Revolving Credit Note, and the
Guaranty, or otherwise, including without limitation contract disputes and tort
claims, shall be resolved by binding arbitration pursuant to the Commercial
Rules of the American Arbitration Association. Any arbitration proceeding held
pursuant to this arbitration provision shall be conducted in the city nearest
the Borrower's address having an AAA regional office, or at any other place
selected by mutual agreement of the parties. This arbitration provision shall
not limit the right of either party during any dispute, claim or controversy to
seek, use, and employ ancillary, or preliminary rights and/or remedies, judicial
or otherwise, for the purposes of realizing upon, preserving, protecting,
foreclosing upon or proceeding under forcible entry and detainer for possession
of, any real or personal property, and any such action shall not be deemed an
election of remedies. Such remedies include, without limitation, obtaining
injunctive relief or a temporary restraining order, invoking a power of sale
under any deed of trust or mortgage, obtaining a writ of attachment or
imposition of a receivership, or exercising any rights relating to personal
property, including taking or disposing of such property with or without
judicial process pursuant to Article 9 of the Uniform Commercial Code or when
applicable, a judgment by confession of
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judgment. Any disputes, claim or controversies concerning the lawfulness or
reasonableness of an act, or exercise of any right or remedy concerning any
collateral, including any claim to rescind, reform, or otherwise modify any
agreement relating to the collateral, shall also be arbitrated; provided,
however that no arbitrator shall have the right or the power to enjoin or
restrain any act of either party. Judgment upon any award rendered by any
arbitrator may be entered in any court having jurisdiction. Nothing in this
arbitration provision shall preclude either party from seeking equitable relief
from a court of competent jurisdiction. The statute of limitations, estoppel,
waiver, laches and similar doctrines which would otherwise be applicable in an
action brought by a party shall be applicable in any arbitration proceeding, and
the commencement of an arbitration proceeding shall be deemed the commencement
of any action for these purposes. The Federal Arbitration Act (Title 9 of the
United States Code) shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
9.10 Entire Agreement. This Agreement (including the Exhibit and the
Schedule which are hereby incorporated herein by reference) together with all
other documents executed in connection with this Agreement constitutes the only
agreement and understanding between Bank One and Borrower and supersede any and
all prior agreements and understandings, oral or written, relating to this
Agreement and all other documents executed in connection with this Agreement.
Borrower acknowledges that it has not relied on any oral promises or
representations by Bank One other than those set forth in this Agreement and all
other documents executed in connection with this Agreement.
9.11 Waiver of Jury Trial. BANK ONE AND BORROWER HEREBY VOLUNTARILY,
IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN
RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE BETWEEN
BANK ONE AND BORROWER ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN BANK ONE AND BORROWER
PURSUANT TO THIS AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT EXECUTED OR
DELIVERED IN CONNECTION HEREWITH OR THEREWITH. THIS PROVISION IS A MATERIAL
INDUCEMENT TO BANK ONE TO ENTER INTO THE TRANSACTIONS DESCRIBED IN THIS
AGREEMENT. THIS PROVISION SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR
MODIFY BANK ONE'S ABILITY TO PURSUE ANY REMEDIES AVAILABLE TO IT.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the day and year
first above written.
BANK ONE, N.A.
By: /s/ DAVID CLARK
---------------------------
David Clark, Vice President
DENISON HYDRAULICS, INC.
By: /s/ BRUCE A. SMITH
---------------------------
Its: CHIEF FINANCIAL OFFICER
--------------------------
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EXHIBIT "A"
REVOLVING CREDIT NOTE
$15,000,000 COLUMBUS, OHIO MAY __, 1999
On or before April 30, 2002, for value received, the undersigned promises
to Pay to the order of Bank One, N.A. (hereinafter called "Bank One") the sum of
Fifteen Million Dollars ($15,000,000) Or so much thereof as may from time to
time be outstanding, with interest (computed on the basis as determined in the
Loan Agreement, defined below) before maturity on the balance from time to time
remaining unpaid at an interest rate as determined under that certain Revolving
Credit Loan Agreement dated May 18, 1999 between the undersigned and Bank One
(the "Loan Agreement"). Interest shall be computed and payable as set forth in
the Loan Agreement. Both principal and interest are payable in lawful money of
the United States at the Main Office of Bank One, N.A., 100 East Broad Street,
Columbus, Ohio 43271-0170.
This promissory note evidences a borrowing under and is entitled to the
benefits of the Loan Agreement. The principal may become due or may be declared
forthwith due and payable in the manner and upon the terms and conditions and
with the effect provided in the Loan Agreement.
BANK ONE AND THE UNDERSIGNED HEREBY VOLUNTARILY, KNOWINGLY, IRREVOCABLY
AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE (WHETHER BASED UPON CONTRACT, TORT OR OTHERWISE) BETWEEN BANK ONE AND
THE UNDERSIGNED ARISING OUT OF OR IN ANY WAY RELATED TO THE RELATIONSHIP BETWEEN
BANK ONE AND THE UNDERSIGNED PURSUANT TO THIS NOTE, THE LOAN AGREEMENT, OR ANY
OTHER AGREEMENT OR DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR
THEREWITH. THIS PROVISION IS A MATERIAL INDUCEMENT TO BANK ONE TO ENTER INTO THE
TRANSACTIONS DESCRIBED IN THIS AGREEMENT. THIS PROVISION SHALL NOT IN ANY WAY
AFFECT, WAIVE, LIMIT, AMEND OR MODIFY BANK ONE'S ABILITY TO PURSUE ANY REMEDIES
AVAILABLE TO IT.
The undersigned agrees that upon the written demand of either Bank One or
the undersigned, whether made before or after the institution of any legal
proceedings, but prior to the rendering of any judgment in that proceeding, all
disputes, claims and controversies between them, whether individual, joint, or
class in nature, arising from this Note and the Loan Agreement, or otherwise,
including without limitation contract disputes and tort claims, shall be
resolved by binding arbitration pursuant to the Commercial Rules of the American
Arbitration Association.
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Any arbitration proceeding held pursuant to this arbitration provision shall be
conducted in the city nearest the undersigned's address having an AAA regional
office, or at any other piece selected by mutual agreement of the parties. This
arbitration provision shall not limit the right of either party during any
dispute, claim or controversy to seek, use, and employ ancillary, or preliminary
rights and/or remedies, judicial or otherwise, for the purposes of realizing
upon, preserving, protecting, foreclosing upon or proceeding under forcible
entry and detainer for possession of, any real or personal property, and any
such action shall not be deemed an election of remedies. Such remedies include,
without limitation, obtaining injunctive relief or a temporary restraining
order, invoking a power of sale under any deed of trust or mortgage, obtaining a
writ of attachment or imposition of a receivership, or exercising any rights
relating to personal property, including taking or disposing of such property
with or without judicial process pursuant to Article 9 of the Uniform Commercial
Code or when applicable, a judgment by confession of judgment. Any disputes,
claims or controversies concerning the lawfulness or reasonableness of an act,
or exercise of any right or remedy concerning any collateral, including any
claim to rescind, reform, or otherwise modify any agreement relating to the
collateral, shall also be arbitrated; provided, however that no arbitrator shall
have the right or the power to enjoin or restrain any act of either Party.
Judgment upon any award rendered by any arbitrator may be entered in any court
having jurisdiction. Nothing in this arbitration provision shall preclude either
party from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an arbitration
proceeding shall be deemed the commencement of any action for these purposes.
The Federal Arbitration Act (Title 9 of the United States Code) shall apply to
the construction, interpretation, and enforcement of this arbitration provision.
The undersigned hereby irrevocably authorizes any attorney-at-law to
appear for the undersigned in an action on this Note at any time after the same
becomes due in any court of record in or of the State of Ohio, and to waive the
issuing and service of process against the undersigned and to confess judgment
in favor of the holder of this Note against the undersigned for the amount that
may be due, with interest at the rate herein mentioned and cost of suit, and to
waive and release all errors in such proceedings and judgment, and all petitions
in error and rights of appeal from the judgment rendered. The foregoing warrants
of attorney shall survive any judgment, and, if any judgment be vacated for any
reason, the holder hereof nevertheless may thereafter use the foregoing warrant
of attorney to obtain an additional judgment or judgments against the
undersigned. The undersigned waives any conflict of interest in Bank One's
attorney confessing judgment against the undersigned pursuant to the foregoing
warrant of attorney and further agrees that the attorney confessing judgment
pursuant to the foregoing warrant of attorney may receive a legal fee or other
thing of value from Bank One
A-2
<PAGE>
THIS NOTE HAS BEEN DELIVERED IN UNION COUNTY, OHIO AND SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF OHIO.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT
OR ANY OTHER CAUSE.
DENISON HYDRAULICS. INC.
By:
-----------------------------
Its:
-----------------------------
A-3
<PAGE>
UNCONDITIONAL CORPORATE GUARANTY AGREEMENT
This UNCONDITIONAL CORPORATE GUARANTY AGREEMENT (the "Corporate Guaranty
Agreement") is entered into on May 18, 1999 by and between DENISON
INTERNATIONAL, plc., an English company (the "Guarantor"), and BANK ONE, N.A., a
national banking association (the "Bank").
BACKGROUND
The following is a mutual statement by the parties of certain factual
matters which form the basis of this Corporate Guaranty Agreement.
A. REVOLVING CREDIT LOAN AGREEMENT. Denison Hydraulics, Inc., a New York
corporation and a wholly owned subsidiary of the Guarantor (the "Borrower"), has
requested that the Bank make a loan to the Borrower in the original principal
amount of $15,000,000 (the "Loan"). The Bank has agreed to make the Loan
pursuant to the terms and conditions of that certain Revolving Credit Loan
Agreement, dated May 18, 1999, by and between the Bank and the Borrower (the
"Loan Agreement").
B. CORPORATE GUARANTY AGREEMENT. The Bank is willing to enter into the
Loan Agreement upon the condition that (i) all amounts owing by the Borrower
pursuant to the Loan Agreement and the Revolving Credit Note executed in
connection therewith (the "Note"), (ii) the Borrower's performance of, and
compliance with, all of the terms, covenants, conditions, stipulations and
agreements contained in the Loan Agreement and the Note, and (iii) all other
present and future obligations, agreements or indebtedness between the Borrower
and the Bank or any of the Bank's affiliates (collectively, the "Obligations"),
be guaranteed by the Guarantor. Terms used herein which are defined in the Loan
Agreement shall have the meanings set forth in the Loan Agreement, unless the
context hereof clearly requires otherwise.
STATEMENT OF AGREEMENT
The Guarantor, in consideration of the premises and for the purpose of
inducing the Bank to enter into the Loan Agreement, does hereby covenant and
agree to and for the benefit of the Bank as follows:
ss. 1. GUARANTY. In order to induce the Bank to enter into the Loan
Agreement and in consideration of the mutual promises of the Borrower, the Bank
and the Guarantor, the Guarantor hereby absolutely and unconditionally
guarantees the full and prompt payment when due, by acceleration or otherwise of
the Obligations. The
<PAGE>
Guarantor further agrees to pay all expenses (including without limitation
attorneys' fees and legal expenses) paid or incurred by the Bank in endeavoring
to collect the Obligations or any part thereof and in enforcing this Corporate
Guaranty Agreement.
2. RESCISSION OR RETURN OF PAYMENTS. The Guarantor agrees that, if at any
time all or any part of any payment theretofore applied by the Bank to any of
the Obligations is or must be rescinded or returned by the Bank for any reason
whatsoever (including without limitation the insolvency, bankruptcy or
reorganization of the Borrower), such Obligations shall, for the purposes of
this Corporate Guaranty Agreement, to the extent that such payment is or must be
rescinded or returned, be deemed to have continued in existence, notwithstanding
such application by the Bank, and this Corporate Guaranty Agreement shall
continue to be effective or reinstated, as the case may be, as to such
Obligations, all as though such application by the Bank had not been made.
3. UNCONDITIONAL NONRECOURSE OBLIGATIONS. The obligations of the
Guarantor under this Corporate Guaranty Agreement are unconditional and shall
not be impaired by any action or omission to act, with or without notice to the
Guarantor, of the bank or any other holder of any of the Obligations, or by
reason of any other circumstance which might otherwise constitute a discharge or
defense of a guarantor including specifically the right to cure any default of
the Borrower in any third party. Without limitation of the foregoing, the Bank
may, from time to time, at its sole discretion and without notice to the
Guarantor, take any or all of the following actions without discharging or in
any way impairing any of the obligations of the Guarantor hereunder: (i) retain
or obtain a security interest in any property to secure any of the Obligations
or any obligation hereunder, (ii) retain or obtain the primary or secondary
obligation of any obligor or obligors, in addition to the Guarantor, with
respect to any of the Obligations, (iii) extend or renew for one or more periods
(whether or not longer than the original period), alter or exchange any of the
Obligations, or release or compromise any obligation of the Guarantor hereunder
or any obligation of any nature of any other obligor with respect to any of the
Obligations, (iv) release its security interest in, or surrender, release or
permit any substitution or exchange for, all or any part of any property
securing any of the Obligations or any obligation hereunder, or extend or renew
for one or more periods (whether or not longer than the original period) or
release, compromise, alter or exchange any obligations of any nature of any
obligor with respect to any such property, and (v) resort to the Guarantor for
payment of any of the Obligations, whether or not the Bank shall have resorted
to any collateral or other property securing any of the Obligations or any
obligation hereunder or shall have proceeded against any other obligor primarily
or secondarily obligated with respect to any of the Obligations.
4. SET-OFFS AND CLAIMS BY THE GUARANNTOR. No set-off, counterclaim,
reduction or diminution of an obligation, or any defense of any kind or nature
(excepting payment in fact) which the Guarantor has or may have against the BANK
-2-
<PAGE>
12. EXCESS LIABILITIES. The creation or existence from time to time of
Obligations in excess of the amount evidenced by the Loan Agreement is hereby
authorized, without notice to the Guarantor and shall in no way affect or impair
the rights of the Bank and the obligations of the Guarantor under this
Corporate Guaranty Agreement.
13. ASSIGNMENT OR TRANSFER OF LIABILITIES. The Bank may, from time to
time, without notice to the Guarantor, assign or transfer any or all of the
Obligations or any interest therein; and, notwithstanding any such assignment or
transfer or any subsequent assignment or transfer thereof, such Obligations
shall be and remain Obligations for the purposes of this Corporate Guaranty
Agreement, and each and every immediate and successive assignee or transferee of
any of the Obligations or of any such interest therein shall, to the extent of
the interest of such assignee or transferee in the Obligations, be entitled to
the benefits of this Corporate Guaranty AGREEMENT TO the same extent as if such
assignee or transferee were the transferor; provided, however, that, unless the
Bank shelf otherwise consent in writing, the Bank shall have an unimpaired
right, prior and superior to that of any such assignee or transferee, to enforce
this Corporate Guaranty Agreement, for the benefit of the Bank, as to those of
the Obligations which shall not have been assigned or transferred
14. EVENTS OF DEFAULT. Each of the following shall constitute an event of
default, whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment or
order of any court or any order, rule or regulation of any governmental or
non-governmental body:
(a) An Event of Default as defined in the Loan Agreement.
(b) Any representation or warranty made by the Guarantor under
this Corporate Guaranty Agreement or any other agreement,
report, certificate, financial statement or other instrument
referred to in and furnished to the Bank in connection
herewith shall prove incorrect or misleading in any material
respect when made or when deemed to have been made.
(c) The Guarantor shall default in the performance or observance
of any agreement or covenant contained in this Corporate
Guaranty Agreement (other than a covenant or agreement or
default in the performance or observance of which is
elsewhere in this ss. 14 specifically dealt with) and
the continuance of such default for a period of forty-five
(45) days.
(d) The filing by the Guarantor of a Petition for the
appointment of a trustee with respect to itself or any of
its property.
-3-
<PAGE>
(e) The making by the Guarantor of an assignment for the benefit
of creditors,
(f) The commencement by the Guarantor of a case in bankruptcy or
insolvency or for compromise, adjustment or other relief
under the laws of the United States or of any state relating
to the relief of debtors.
(g) The failure of the Guarantor to obtain the dismissal, within
sixty (60) days after service upon the Guarantor of any case
commenced against the Guarantor (i) for the appointment of a
trustee for the Guarantor, of any of its property or (ii) in
bankruptcy or insolvency or for compromise, adjustment or
other relief under the laws of the United States or of any
state relating to the relief of debtors.
(h) The failure of the Guarantor to generally pay its debts as
such debts become due.
(i) The making, or the attempted making, by the Guarantor of a
fraudulent conveyance within the meaning of the Uniform
Fraudulent Conveyances Act
15. Consequences of Event of Default. If any Event of Default shall
have occurred and be continuing, the Bank may proceed hereunder against the
Guarantor and the Bank shall have, in its sole discretion, the right to proceed
first and directly against the Guarantor under this Corporate Guaranty Agreement
without proceeding first or concurrently against the Borrower, exhausting any
other remedies it may have (including without limitation, any remedies under the
Loan Agreement) or without resorting to any other security held by the Bank.
This is a guaranty of payment and not of collection and the Guarantor further
waives any right to require that any action first be brought against the
Borrower or any other person or party or to require THAT RESORT be had to any
security.
16. Cumulative Remedies, Delays. No delay on the part of the Bank in
the exercise of any right or remedy shall operate as a waiver thereof, and no
single or partial exercise by the Bank of any right or remedy shall preclude
other or further exercise thereof or the exercise of any other right or remedy;
nor shall any modification or waiver of any of the provisions of this Corporate
Guaranty Agreement be binding upon the Bank except as expressly set forth in a
writing duly signed and delivered by the Bank. No action of the Bank permitted
hereunder shall in any way affect or impair the rights of the Bank and the
obligations of the Guarantor under this Corporate Guaranty Agreement. For the
purpose of this Corporate Guaranty Agreement, Obligations shall include all
Obligations, notwithstanding any right or
-4-
<PAGE>
power of the Borrower or anyone else to assert any claim or defense, as to the
invalidity or unenforceability of any such Obligations, and no such claim or
defense shall affect or impair the obligations of the Guarantor hereunder.
17. SUBORDINATION. The Guarantor hereby subordinates any and all claims
which it now has, or in the future may acquire, as a creditor of the Borrower to
the prior payment and satisfaction in full of this Corporate Guaranty Agreement.
If prior to the payment and satisfaction of this Corporate Guaranty Agreement,
the Guarantor would, without reference to the provisions of this ss. 17, be
entitled to receive any payment on account of any claim of this Guarantor
against the Borrower, all such Payments shall be made instead to the Bank until
the Obligations have been paid and satisfied in full, and the Guarantor hereby
so directs. If the Guarantor receives any payment on account of any claim of the
Guarantor against the Borrower, the Guarantor shall immediately pay the same
over to the Bank to be applied to the payment or satisfaction of the
Obligations, if any. Notwithstanding the foregoing, unless an Event of Default
has occurred, and any such Event of Default has not been either waived or
acknowledged to have been cured in writing by the Bank, the Guarantor may
receive and retain payments from the Borrower.
18. NOTICES. Each notice, certificate, request or other communication
to be given or made in accordance with this Corporate Guaranty Agreement shall
be deemed to be made or given on the earlier of (i) three (3) days after the
same is mailed (first-class mail, postage prepaid) to the party to receive the
same at its address set forth below, or (ii) the date such notice is actually
received.
It to Bank:
Bank One, N.A.
100 East Broad Street
Columbus, Ohio 43271-0170
Attention- David Clark, Vice President
Facsimile: (614) 248-5518
If to the Guarantor
Denison International, plc.
142-49 Industrial Parkway
Marysville, Ohio 43040
Attention: Bruce A. Smith
Facsimile: (937) 644-0827
or to such other address which the Bank or the Guarantor shelf have given to the
other.
-5-
<PAGE>
ss. 19. AMENDMENTS, MODIFICATIONS, ETC. No amendment, modification,
termination, or waiver of any provision of this Corporate Guaranty Agreement nor
consent to any departure by the Guarantor therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Bank, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given. No notice or demand on the Guarantor in
any case shall entitle the Guarantor to any other or further notice or demand in
similar or other circumstances
ss. 20. APPLICABLE LAW This Corporate Guaranty Agreement shall be deemed
to be a contract made under the laws of the State of Ohio and for all purposes
shall be governed by and construed in accordance with the laws of the State of
Ohio.
ss. 21. SEVERABILITY. Any provision of this Corporate Guaranty Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provisions in any other
jurisdiction.
ss. 22. COUNTERPARTS. This Corporate Guaranty Agreement may be signed in
any number of counterparts with the same effect as if the signatures thereto
were upon the same instrument.
ss. 23. MERGER. This Corporate Guaranty Agreement reflects the entire
understanding of the parties with respect to its subject matter and supersedes
all prior agreements or understandings with respect thereto in their entirety.
This Corporate Guaranty Agreement may be executed simultaneously in several
counterparts, each of which shall be regarded as an original.
ss. 24. HEADINGS. Headings of the sections of this Corporate Guaranty
Agreement are for convenience only and shall not affect the construction of this
Corporate Guaranty Agreement.
ss. 25. EFFECTIVE DATE. This Corporate Guaranty Agreement shall become
effective upon the execution, consent or acknowledgment of a counterpart hereof
by each of the parties.
ss. 26. WAIVER OF JURY TRIAL. THE BANK AND THE GUARANTOR HEREBY
VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE
A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT,
OR OTHERWISE) BETWEEN THE BANK AND THE GUARANTOR ARISING OUT OF, OR IN ANY WAY
RELATED TO, THIS CORPORATE GUARANTY AGREEMENT, ANY OTHER RELATED DOCUMENTS, OR
ANY RELATIONSHIP BETWEEN THE BANK AND THE GUARANTOR PURSUANT TO THIS CORPORATE
GUARANTY AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH. THIS
-6-
<PAGE>
PROVISION IS A MATERIAL INDUCEMENT TO THE BANK TO ENTER INTO THE TRANSACTIONS
DESCRIBED IN THIS CORPORATE GUARANTY AGREEMENT. THIS PROVISION SHALL NOT IN ANY
WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THE BANK'S ABILITY TO PURSUE ANY
REMEDIES AVAILA1BLE TO IT.
27. ARBITRATION. The Bank and the Guarantor agree that upon the written
demand of either party, whether made before or after the institution of any
legal proceedings, but prior to the rendering of any judgment in that
proceeding, all disputes, claims and controversies between them, whether
individual, joint, or class in nature, arising from this Corporate Guaranty
Agreement, or otherwise, including without limitation contract disputes and tort
claims, shall be resolved by binding arbitration pursuant to the Commercial
Rules of the American Arbitration Association. Any arbitration proceeding held
pursuant to this arbitration provision shall be conducted in the city nearest
the Borrower's address having an AAA regional office, or at any other piece
selected by mutual agreement of the parties. No act to take or dispose of any
collateral contemplated in the Corporate Guaranty Agreement hereunder shall
constitute a waiver of this arbitration agreement or be prohibited by this
arbitration agreement. This arbitration provision shall not limit the right of
either party during any dispute, claim or controversy to seek, use, and employ
ancillary, or preliminary rights and/or remedies, judicial or otherwise, for the
purposes of realizing upon, preserving, protecting, foreclosing upon or
proceeding under forcible entry and detainer for possession of, any real or
personal property, and any such action shall not be deemed an election of
remedies. Such remedies include, without limitation, obtaining injunctive relief
or a temporary restraining order, invoking a power of sale under any deed of
trust or mortgage, obtaining a writ of attachment or imposition of a
receivership, or exercising any rights relating to personal property, including
taking or disposing of such property with or without judicial process pursuant
to Article 9 of the Uniform Commercial Code or when applicable, a judgment by
confession of judgment. Any disputes, claims or controversies concerning the
lawfulness of reasonableness of an act, or exercise of any right or remedy
concerning any collateral, including any claim to rescind, reform, or otherwise
modify any agreement relating to the collateral, shall also be arbitrated;
provided, however that no arbitrator shall have the right or the power to enjoin
or restrain any act of either party. Judgment upon any award tendered by any
arbitrator may be entered in any court having jurisdiction. Nothing in this
arbitration provision shall preclude either party from seeking equitable relief
from a court of competent jurisdiction. The statute of limitations, estoppel,
waiver, laches and similar doctrines which would otherwise be applicable in an
action brought by a party shall be applicable in any arbitration proceeding, and
the commencement of an arbitration proceeding shall be deemed the commencement
of any action for these purposes. The Federal Arbitration Act (Title 9 of the
United States Code) shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
28. Confession of Judgment. The Guarantor hereby, irrevocably
authorizes any attorney-at-law to appear for the undersigned in an action on
this Corporate
-7-
<PAGE>
Guaranty Agreement at any time after the same becomes effective in any court of
record in or of the State of Ohio, and to waive the issuing and service of
process against the undersigned and to confess judgment in favor of the holder
of this Corporate Guaranty Agreement against the undersigned for the amount that
may be due pursuant to the Obligations, with interest at the rate therein
mentioned and cost of suit, and to waive and release all errors in such
proceedings and judgment, and all petitions in error and rights of appeal from
the judgment rendered. The foregoing warrants of attorney shall survive any
judgment, and, if any Judgment be vacated for any reason, the holder hereof
nevertheless may thereafter use the foregoing warrant of attorney to obtain an
additional judgment or judgments against the undersigned. The undersigned waives
any conflict of interest in the Bank's attorney confessing Judgment against the
undersigned pursuant to the foregoing warrant of attorney and further agrees
that the attorney confessing judgment pursuant to the foregoing warrant of
attorney may receive a legal fee or other thing of value from the Bank.
This Corporate Guaranty Agreement has been executed by the Guarantor and
has been acknowledged by the Bank all effective as of the date first written
above.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT
OR ANY OTHER CAUSE.
DENISON INTERNATIONAL, plc.
By:
Acknowledged and Agreed:
BANK ONE, N.A.
By:
Title:
-8-
<PAGE>
Exhibit 21.1
DENISON INTERNATIONAL PLC
ORGANIZATION STRUCTURE
o Denison International plc (UK)
o Denison Holdings Limited (UK)
o Denison Financial Holdings Limited (UK)
o Denison Hydraulics U.K. Limited
o Denison Hydraulik Svenska Ab (Sweden)
o Denison Hydraulik Danmark AS (Denmark)
o Merifire Oy (Finland)
o Denison Lokomec Oy (Finland)
o Denison Hydraulics Benelux B.V. (Holland)
o European Distribution Centre Denison B.V. (Holland)
o Denison Hydraulik GmbH (Germany)
o Denison Hydraulics France S.A.
o Denison Hydraulics S.A. (Spain)
o Denison Hydraulics Italy S.r.l.
o Denison Hydraulics Inc. (Japan)
o Denison Hydraulics Limited (Hong Kong)
o Shanghai Denison Hydraulics ENGG. Ltd.
o Denison Hydraulics SEA Pte Limited (Singapore)
o Denison Hydraulics (Proprietary) Limited (Australia)
o Denison Hydraulics Canada Incorporated
o Denison Hydraulics Inc. (USA)
o Denison Hydraulics FSC, Inc. (Barbados)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8, No. 333-07500) pertaining to the Denison International
Stock Option Plan of our report dated February 11, 2000, with respect to the
consolidated financial statements of Denison International plc and subsidiaries
included in its Annual Report on Form 10-K for the year ended December 31, 1999.
/s/ ERNST & YOUNG
Columbus, Ohio
March 26, 2000
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