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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1996
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 NUMBER 0-10796
VALLEN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-1366847
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
13333 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 462-8700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.50 PAR VALUE
(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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing:
$54,329,999 BASED ON THE CLOSING PRICE OF AUGUST 9, 1996
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date:
COMMON STOCK, $.50 PAR VALUE 7,264,708
(Title of class) (Number of shares outstanding as of
August 9, 1996)
DOCUMENT INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K
Proxy Statement for the 1996 Annual
Meeting of Shareholders Part III
Exhibit Index on Page 31
_______________________________________________________________________________
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P A R T I
ITEM 1. BUSINESS
Vallen Corporation, together with its subsidiaries, (the "Company" or
"Vallen") was incorporated under the laws of Texas in 1960 as the successor to a
business founded in 1947. The Company operates through various domestic
subsidiaries. Through a 50% owned Mexican company, Proveedora de Seguridad
Industrial Del Golfo, S.A. ("Proveedora") the Company engages in distribution in
Mexico. Additionally, the Company owns a 50% interest in an industrial supply
distribution company headquartered in Edmonton, Alberta, Century Sales &
Service, Limited ("Century"). The Company also operates through various
partnerships and other affiliated operations.
Vallen Safety Supply Company ("Vallen Safety") is a distributor of
industrial safety and health products and services designed for the protection
of the individual worker and the workplace environment. Its customer base is
nationwide; major markets serviced include chemical production, railroad and
automotive transportation, petroleum refining, utilities, pulp and paper
products, primary metals extraction, general manufacturing, various governmental
agencies, business services, transportation equipment, steel production, and oil
and gas extraction and construction. Encon Safety Products, Inc. ("Encon")
manufactures industrial safety equipment for sale by Vallen Safety and
unaffiliated distributors. All Supplies, Inc. ("All Supplies") is a Louisiana
based distributor of industrial hardware and welding supplies to industrial and
commercial customers. During the past fiscal year, the distribution and
manufacturing segments contributed 68% and 32%, respectively, of the Company's
operating income before corporate general and administrative expenses.
The table included in Note 12 to the Company's Consolidated Financial
Statements provides certain information regarding Vallen's distribution and
manufacturing industry segments for the Company's last three fiscal years.
The Company's corporate headquarters are in Houston, Texas. Corporate
management has responsibility for overall organization, planning, business
development and control of Company operations, as well as specific oversight in
the areas of compensation and benefits, finance and accounting, data systems,
risk management, taxes and employee training and development.
DISTRIBUTION
Vallen Safety distributes a broad range of personal protective and other
safety and health related products and services, including sales and rental of
approved respiratory equipment and gas detection instruments to meet specific
safety and health needs of industrial customers. Respiratory equipment and
atmospheric hazard detection instruments are used where work is performed in
limited breathing environments, or where workers are exposed to hazards
associated with possible escape of toxic or combustible gases or to carcinogens
and other dangerous atmospheric particulates. Under its Vallen Knowledge
Systems product group, Vallen Safety provides a wide variety of safety training
and instruction services, safety program staffing, and is marketing computer
chip enhanced "Smart Cards" for information storage and documentation programs
for its customers.
Supplied-air respiratory equipment includes both portable self-contained
units and air line respirators worn by industrial, fire fighting and other
personnel in environments where ambient conditions require a dependable,
alternative source of breathable air. Supplied-air respiratory equipment
contributed 6.5%, 7.8% and 9.8% of consolidated net sales for the years ended
May 31, 1996, 1995 and 1994, respectively. The organization distributes air
purifying equipment including gas masks, chemical cartridge and particulate type
respirators for protection against breathing dusts, mists, fumes and fogs
associated with certain industrial process environments.
A wide variety of personal protective equipment and other workplace
commodities is distributed, including eye protection devices, head and hearing
protection items, gloves, first aid products and emergency shower and eye-wash
products, as well as protective clothing and similar items. Vallen Safety
operates a program under which prescription safety eyewear service is provided
at specific customer sites.
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Vallen Safety markets a series of portable electronic instruments and
colorimetric tubes used to detect and measure the presence and levels of toxic
and combustible gases or oxygen deficient atmospheres. Portable devices used in
enforcing industrial pollution control programs are also marketed.
Other product lines include fire safety equipment, fire prevention systems
and fire control agents, ergonometric enhancing products, material handling
equipment and netting, safety signs, lights and alarms.
Vallen Safety has steadily expanded its "in-plant store" concept: safety
stores physically located on the customers' premises. The stores distribute a
variety of products directly to customer personnel, in addition to managing the
safety inventory stocks for the customer. The number of in-plant stores now
totals 61.
Vallen Safety maintains service centers which inspect, repair and calibrate
respiratory equipment, fire protection equipment and electronic atmospheric
hazard detection instruments. Mobile respiratory service vans, staffed by
factory certified technicians who perform scheduled in-plant inspection and
repair work for customers, are operated.
Across the U.S. and Canada, Vallen Safety has six regional hubs that use
their large distribution centers to ship directly to customers and to supply
smaller branch locations and onsite stores. Sales and operations employees
receive training from Vallen Safety and certain of its suppliers regarding
appropriate applications and relevant regulatory and industry standards for
various kinds of safety and health equipment. Vallen Safety also sponsors
safety equipment and safety awareness training programs and seminars for
customer personnel.
Vallen Safety purchased 50% of the outstanding common stock of Proveedora,
a health and safety products distribution company headquartered in Tampico,
Mexico, in 1992. Proveedora, a company organized under the laws of Mexico,
represents many of the same industrial safety equipment suppliers that Vallen
Safety does. It operates through 16 locations throughout Mexico.
Vallen Safety opened its first Canadian branch operation in May, 1993.
Vallen Safety Supply Company, Ltd., a company organized under the laws of
Canada, was formed to conduct those operations. The Canadian company generally
represents the same supplier group as Vallen Safety's U.S. operations. There
are currently 3 Canadian branch operations in Ontario province. Sales at these
locations for the year ended May 31, 1996 were approximately $3,500,000 (U.S.
dollars).
Additionally, the Company purchased a 50% ownership share of the
outstanding common stock of Century Sales & Service Limited ("Century"), an
Edmonton, Alberta based Canadian Corporation on June 6, 1995. Century is a
distributor of mill supply and industrial hardware products. The Company has
the option to purchase the remaining 50% of Century's outstanding stock, based
upon a purchase formula, either 5 or 6 years following the original purchase
closing date. Century operates 12 distribution sites in Alberta and
Saskatchewan provinces, in addition to a central distribution center at its
Edmonton headquarters location. It employs over 200 people in its operations.
Vallen Corporation purchased 100% of the capital stock and the business of
All Supplies, effective August 18, 1995. All Supplies is a Baton Rouge,
Louisiana based distributor of mill, safety and welding supplies, primarily to
an industrial customer base in Louisiana. All Supplies is generally subject to
the same competitive issues as Vallen Safety.
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The Company's distribution subsidiaries sell to a diverse customer base.
No customer accounted for 10% or more of consolidated revenues. Sales to
Proveedora, Century and to domestic companies for export purposes were less than
3% of distribution net sales during the year ended May 31, 1996. Vallen Safety
is unable to assess its overall market position relative to other competing
entities due to the overall fragmented nature of its principal business.
All products sold by Vallen Safety are purchased through other
manufacturers and suppliers. Of the more than 700 suppliers whose products are
regularly distributed by Vallen Safety, the top 10 accounted for approximately
40% for the year ended May 31, 1996. All of the Company's arrangements with
suppliers are terminable by either party on short notice. Sales of respiratory
equipment purchased from Scott Aviation, a division of Figgie International,
Inc., comprised approximately 7.1% in dollar amount of all products sold by
Vallen Safety during the year ended May 31, 1996. Termination of Vallen
Safety's distribution of Scott equipment could have a materially adverse effect
on the Company's business. Vallen has been a distributor of safety equipment
manufactured by Scott continuously since 1953 and considers its relations with
this supplier to be satisfactory. No other supplier accounted for as much as 7%
in dollar amount of distribution products sold during the year ended May 31,
1996.
Competitive factors in distribution of safety and health products include
quality and availability of product lines, technical product knowledge as to
applications and usage, service and repair capability in certain product lines,
and product pricing. The Company maintains adequate inventories in order to
meet rapid delivery requirements in many contractual situations. At May 31,
1996, distribution inventories constituted approximately 28% of consolidated
assets. The Company engages in active competition with a large number of other
safety and health product distributors in each of its product lines and
geographical markets. Most such distributors are small enterprises selling to
customers in a limited geographic area. Most manufacturers of industrial safety
and health products sell through distributors because of the relative direct
marketing costs of a narrow product line to customers. One of the major
competitors in the industry, however, is an integrated manufacturer and
distributor of safety and health products whose sales, earnings and financial
resources exceed Vallen's; however, this competitor's principal geographical
areas of concentration are not within Vallen's primary market areas.
MANUFACTURING
Encon was formed in 1964 to produce specialized safety equipment for which
the Company could find no suitable source of supply to meet customer needs.
Encon currently manufactures various lines of safety equipment for use in
industries where workers are exposed to potentially hazardous conditions. Many
components of its manufactured products are fabricated by others, although on-
site tooling and fabrication have been implemented where justified by volume,
cost and other factors.
Encon produces fixed and portable eye-wash and face-wash equipment and
emergency drench and enclosed showers for use in plant areas where workers risk
contact with dangerous chemicals or other similar hazards.
Encon produces several series of non-prescription goggles and eyewear. The
primary lines include (1) the Encon 160 Series, a heavy duty chemical splash
goggle, ergonometrically designed, and incorporating a replaceable cylindrical
lens for peripheral, unobstructed vision. The 160 Series accommodates
respirators, hard hats and prescription lens present on the worker; (2) the
Encon 500 Series goggle provides an alternative product line, more moderately
priced, featuring regular and fogfree lens composition in various lens colors;
and (3) the Encon 1900 Series Tuff-Spec (R) are high impact performance eye
protection spectacles, featuring a high degree of lens hardness and chemical
resistance properties, which meets industry specifications and standards for
primary protective eyewear.
Encon manufactures cool air delivery systems for individual workers. These
systems utilize the vortex tube assembly (a no-moving-parts heat exchanger) to
separate delivered compressed air into hot and cold streams and, in conjunction
with insulated aluminized reflective garments, permit safe and comfortable
working environments for extended periods in conditions of high ambient
temperature and radiant heat.
Encon manufactures a line of storage cabinets to protect safety, emergency
and industrial equipment located in hazardous or corrosive industrial
environments. The Encon wallcase product group holds and protects SCBA's, fire
extinguishers, escape respirators, gas masks and protective clothing. With high
visibility appearance and virtually air tight, durable design, Encon wallcases
keep valuable customer property and equipment in ready to use condition.
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Encon Custom Plastics, a division of Encon acquired in February 1990, is a
contract manufacturer of vacuum formed and injection molded thermoplastic parts.
Its primary product line includes wall cases for emergency self-contained
breathing apparatus and fire extinguishers, Therma Flow covers, AWARENESS
shower signs and various other products manufactured by vacuum forming and
molding.
During the year ended May 31, 1996, 37% of manufacturing net sales were
made to the Company's distribution operations. The remaining 63% were made
primarily to unaffiliated regional distributors, industrial mail-order catalog
firms, overseas sales representatives, and certain industrial users. Encon also
sells vortex tube assemblies and certain other components to original equipment
manufacturers for incorporation into finished products. Manufactured products
are marketed primarily under the "Encon" name. No single customer accounted for
10% or more of net sales for the manufacturing operations for the year ended May
31, 1996.
Approximately $2,546,000, or 12.2%, of manufacturing net sales for the year
ended May 31, 1996, were to foreign purchasers in various geographical regions.
The Company accepts payment only in United States dollars and makes sales
outside the United States only to established customers or against letters of
credit drawn on major money center banks.
Encon competes with numerous other manufacturers, some of which have
substantially greater resources. The Company does not believe that its
manufactured products account for a significant share of any of its markets.
The Company does not consider that its manufacturing operations or its business
as a whole are materially dependent upon any one product or any related group of
products.
Effective January 12, 1995, Vallen Corporation invested cash to acquire a
50% equity interest in Nuclear Utility Products, Inc. (NUPRO), a new company
formed to manufacture and supply protective clothing and engineered products
used in the nuclear power production business. Vallen, through its wholly-owned
distribution subsidiary, Vallen Safety, has contracts to supply safety products
to nuclear power production facilities of the Tennessee Valley Authority (TVA)
and other nuclear power production customers. Vallen's partner in NUPRO has
significant experience in the manufacture and supply of such protective clothing
and related products to the nuclear power industry. The size of NUPRO and the
results of operations of this company are not significant to Vallen Corporation
or its distribution subsidiary.
The Company's manufacturing operations are not dependent on one or a small
number of suppliers or fabricators for any raw materials or tooled components.
REGULATION
Marketability of the Company's distributed and manufactured products
depends, in many instances, upon compliance with manufacturing, quality control,
performance, test and other published standards of entities such as the
Occupational Safety and Health Administration ("OSHA"), the National Institute
for Occupational Safety and Health ("NIOSH"), the American National Standards
Institute ("ANSI"), the American Society of Testing Materials ("ASTM"),
Underwriters' Laboratories ("UL"), Factory Mutual ("FM"), and the Canadian
Standards Association ("CSA"). To the extent applicable, the Company's
manufactured products currently meet or exceed such published standards or
criteria, and compliance of various other products marketed by Vallen Safety and
All Supplies are certified by their manufacturers. Such standards could,
however, change in the future so as to render one or more of Vallen's products
or product lines at least temporarily unmarketable. The Company believes that
the manufacturers of its products, including its manufacturing subsidiary,
should be able to adapt such products to any reasonably foreseeable new
standards which might be adopted in the future.
The Company believes that compliance by its customers with federal
regulations regarding occupational safety and health has been an important
factor in its past growth. The Company cannot predict the level of future
regulation.
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INSURANCE
Failure of a safety product marketed or manufactured by the Company could
expose it to large damage claims. The Company is named as an additional insured
under the products liability policies maintained by certain of its suppliers and
maintains product liability and other insurance in amounts believed by the
Company to be in accordance with industry practices. Nevertheless, such
insurance coverage may not be adequate to protect the Company against all
liability or loss which might arise from a product failure.
EMPLOYEES
The Company employed 936 persons at May 31, 1996 and believes that
relations with its employees are good.
ITEM 2. PROPERTIES
Vallen's corporate and distribution headquarters are located in a 50,000
square foot building in northwest Houston. The building, constructed in 1978,
and the five-acre tract on which it is situated, are owned by the Company. The
Company constructed a new 65,000 square foot manufacturing facility in Houston
and the Houston manufacturing operation moved into the new facility in fiscal
1991. The Company owns and operates a 10,000 square foot manufacturing facility
in Coudersport, Pennsylvania and leases a 15,000 square foot manufacturing
facility in Houston, Texas. The Company owns branch-warehouses for its
distribution operations with an aggregate of 207,000 square feet of space in
Mobile, Alabama; Bolingbrook (Chicago), Illinois; Baton Rouge, Louisiana;
Philadelphia, Pennsylvania and Beaumont, Brazosport, Corpus Christi, Dallas,
Odessa and Pasadena, Texas; and leases an aggregate of 380,000 square feet of
warehouse and office space in Birmingham, Alabama; Anchorage, Alaska; Phoenix,
Arizona; Sacramento, Martinez and Los Angeles, California; Atlanta, Georgia;
Peoria and Chicago, Illinois; Waterloo, Iowa; Lake Charles, Louisiana; Portland,
Maine, Baltimore, Maryland; Midland and Detroit, Michigan; Albuquerque, New
Mexico; Buffalo and Rochester, New York, Charlotte, North Carolina; Canton,
Ohio; Tulsa, Oklahoma; Pittsburgh, Pennsylvania, Knoxville, Nashville, Kingsport
and Memphis, Tennessee; Austin, Pasadena/Houston, Longview and Texas City,
Texas; Richmond, Virginia; Seattle and Longview, Washington; and Kingston,
Sarnia and Toronto, Ontario, Canada.
Aggregate rentals of real property during the year ended May 31, 1996 were
$1,241,000. Reference is made to Notes 5 and 10 of the Notes to Consolidated
Financial Statements for information regarding mortgages on real estate and
commitments under long-term operating leases. The Company considers all
property owned or leased by it to be well-maintained, adequately insured and
suitable for its purposes. Additional expansion of the Company's operations may
require new warehouse locations in existing or new geographical areas.
ITEM 3. LEGAL PROCEEDINGS
No claims are currently pending against the Company other than claims in
the ordinary course of business which are not material or as to which the
Company believes it either has adequate insurance coverage or has made adequate
provision.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders during the
fourth quarter of the year ended May 31, 1996.
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P A R T I I
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over-the-counter on the NASDAQ
National Market System under the symbol VALN. At August 9, 1996 there were
approximately 1,500 holders of the Company's common stock including individual
participants in certain security position listings. The company has not paid
any cash dividends on its common stock since its organization.
The following table sets forth for the periods indicated the high and low
sale prices for the Company's common stock as reported by the NASDAQ Stock
Market.
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<CAPTION>
QUARTER HIGH LOW
- ------------------------------ ------- -------
<S> <C> <C>
Year Ended May 31, 1996
Fourth $22 1/4 $17 1/8
Third 22 1/4 17 3/8
Second 23 18
First 19 1/4 16 1/2
Year Ended May 31, 1995
Fourth 17 1/4 13
Third 14 1/2 11 1/4
Second 12 1/4 10 1/2
First 12 1/2 10
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
VALLEN CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
IN THOUSANDS (EXCEPT PER SHARE DATA)
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<CAPTION>
OPERATING RESULTS FOR THE YEAR ENDED
MAY 31, 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Net sales $237,042 $203,284 $185,751 $175,605 $167,338
Net earnings $ 7,987 $ 7,142 $ 4,557 $ 6,257 $ 6,306
Net earnings per common share $ 1.10 $ 1.00 $ .65 $ .89 $ .92
FINANCIAL POSITION AT MAY 31,
Total assets $111,663 $ 90,654 $ 81,417 $ 74,367 $ 65,830
Working capital $ 56,554 $ 51,721 $ 44,301 $ 44,508 $ 40,548
Current asset ratio 4.3:1 5.5:1 5.0:1 6.0:1 6.1:1
Long-term debt, excluding current $ 10,705 $ 5,194 $ 3,817 $ 3,722 $ 3,765
maturities
Debt-to-equity ratio 0.1:1 0.1:1 0.1:1 0.1:1 0.1:1
SHAREHOLDERS' EQUITY AT MAY 31,
Shareholders' equity $ 82,317 $ 72,682 $ 65,532 $ 60,323 $ 52,784
Weighted average number of common
shares outstanding 7,242 7,108 7,046 7,004 6,867
Book value per share $ 11.37 $ 10.23 $ 9.30 $ 8.61 $ 7.69
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of certain aspects of the Company's
results of operations and financial conditions should be read in conjunction
with the Consolidated Financial Statements and the Selected Financial Data
included elsewhere herein.
RESULTS OF OPERATIONS
The table below is presented to assist in analyzing changes in operating
results for the fiscal years 1996, 1995 and 1994, indicating changes in various
items in the statement of earnings as a percentage of net sales, and the
increase (decrease) in such items in 1996, 1995 and 1994 compared to the prior
year.
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YEARS ENDED MAY 31,
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ITEMS IN CONSOLIDATED STATEMENT OF PERCENTAGE OF INCREASE
EARNINGS AS A PERCENTAGE OF NET (DECREASE) FROM
SALES PRIOR YEAR
1996 1995 1994 1996 1995 1994
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<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 16.6% 9.4% 5.8%
Cost of sales 74.4 73.8 73.5 17.5 9.9 7.0
Selling, general and
administrative expenses 20.6 20.7 22.2 15.8 2.0 8.6
Other income (expense), .2 .1 (0.1) 140.5 265.3 11.0
net /(1)/
Income taxes 1.8 2.0 1.5 5.8 52.5 (25.0)
Net earnings 3.4 3.5 2.5 11.8 56.7 (27.2)
</TABLE>
(1) Includes categories interest and dividend income, interest expense,
earnings from foreign affiliates and other income and expense. Totals for the
specific categories are noted in the Consolidated Statement of Earnings in the
attached financial statements.
The category "Earnings from Foreign Affiliates" contained herein increased
to $1,056,000 in 1996 from $387,000 in fiscal 1995 (attributable solely to
Proveedora earnings), primarily due to (1) increased earnings from Proveedora
totaling $513,000, and (2) the Company's share of earnings of Century since the
June 6, 1995 date of acquisition of 50% interest by Vallen, totaling $543,000.
The Company purchased a 50% interest in Proveedora, based in Tampico,
Mexico, on December 17, 1992, and purchased a 50% interest in Century, based in
Edmonton, Alberta (Canada), on June 6, 1995. The initial investments and
capital contributions were $2,767,000 and $4,472,000, respectively. Total sales
for the years ended May 31, 1996, in U.S. dollar equivalents, were $ 9,367,000
for Proveedora and $41,322,000 for Century, respectively, compared to Proveedora
sales only for 1995 of $7,701,000.
NET SALES
Consolidated net sales increased $33,758,000 or 16.6% during fiscal 1996 as
compared to an increase of $17,533,000 or 9.4% in 1995. Sales increased 17.6%
in the distribution segment and 5.9% in the manufacturing segment during fiscal
1996. The increase in consolidated sales for fiscal 1996 and 1995 was primarily
due to acquisitions, new distribution branches and in-plant facilities being
opened in fiscal 1996 and 1995, as well as the growth in the national accounts
programs. The increase in the manufacturing sales level was primarily related
to a volume increase in the shower and eye protection lines.
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GROSS PROFIT
Consolidated gross profits as a percentage of net sales were 25.6%, 26.2%
and 26.5% for fiscal years 1996, 1995 and 1994, respectively. The manufacturing
subsidiary's gross profit margins decreased slightly in fiscal 1996. The
distribution subsidiary's sales, which are at a lower gross profit margin, were
a greater percentage of the consolidated total sales. Gross profit margins for
the distribution operations were slightly lower each of the past three years,
due to increased competition for relatively flat markets in the personal
protection product lines, and in part a result of the increasing percentage of
total net sales attributable to high volume, lower margin national supply
contract sales. These factors, in combination with a trend toward lower
distribution margin, resulted in a lower consolidated gross profit margin in
fiscal 1996 and 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, as a percentage of net sales,
were flat at 20.6% in fiscal 1996, compared to 20.7% in 1995 and down compared
to 22.2% in 1994. Included in fiscal 1994's expenses are restructuring charges
of $460,000, comprised of $350,000 of lease obligations and $110,000 of
severance pay for the Company's employee terminations. Selling, general and
administrative expenses increased 15.8% to $48,793,000 in fiscal 1996 and 2.0%
to $42,123,000 in fiscal 1995. The primary reason for the increase in fiscal
year 1996 were the acquisitions of Safety Centers, Inc. and All Supplies in
addition to the opening of new distribution locations.
NET EARNINGS
Consolidated net earnings as a percentage of net sales were 3.4%, 3.5% and
2.5% for fiscal years 1996, 1995 and 1994, respectively. 1996 net earnings of
$7,987,000, or $1.10 per share, represented an 11.8% increase compared to fiscal
1995.
The increase was primarily the result of increased overall sales, primarily
through acquisitions, and reduction of the rate of operating expense growth
relative to the net sales level growth between years. Additionally, higher
earnings recognized from foreign affiliates on the equity method contributed
significantly to the increase in net earnings levels for 1996 over 1995.
EARNINGS FROM FOREIGN AFFILIATES, INTEREST AND DIVIDEND INCOME, AND OTHER INCOME
(EXPENSE)
Earnings from foreign affiliates, net, were $1,056,000 at May 31, 1996
versus $387,000 for the year ended May 31, 1995. The earnings are from the
Company's 50% position in Proveedora, in addition to affiliate earnings from
Century Sales & Service, Ltd. acquired in June, 1995 through a 50% investment.
Through the recognition of an exchange rate variance in 1996 related to the
devaluation of the Mexican peso, the total investment in foreign affiliates was
reduced by $356,000.
Interest and dividend income increased in 1996 by $5,000 and in 1995 by
$298,000 due to fluctuating interest rates and cash levels available for
investment. Interest expense increased in 1996 by $389,000 and in 1995 by
$102,000 primarily due to the increased long-term debt due to the acquisition of
the assets of Safety Centers, Inc. and the assumption of debt related thereto
and the variable interest rates on the Encon industrial development bonds. In
1996, other expense, net increased $4,000 due primarily to increased
amortization of intangibles from acquisition activity and due to the loss on an
equity accounting basis of $169,000 in 1996 from Vallen's investment in Nuclear
Utility Products, Inc.
INCOME TAXES
The effective tax rates for fiscal years 1996, 1995 and 1994 were 35.2%,
36.5% and 37.2%, respectively.
EFFECT OF IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
Effective June 1, 1995, the Company adopted SFAS 121, which establishes the
recognition and measurement standards related to the impairment of long-lived
assets. The adoption of this Standard had no material effect to the Company's
consolidated results of operations. The Company will be required to adopt SFAS
123, effective for the year ending May 31, 1997. See Notes to Consolidated
Financial Statements for more information.
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FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided by operations for fiscal years 1996, 1995 and 1994
was $9,614,000, $5,799,000, and $7,239,000 respectively. The major uses of cash
provided in 1996 were for the acquisition of businesses, $8,866,000, investment
in property and equipment, $1,628,000, and investment in affiliated companies,
$1,045,000.
The Company's financial position remains strong with working capital of
$56.6 million, and a current ratio of 4.3 to 1. Management believes the
Company's liquidity, working capital and borrowing capacity are sufficient to
meet capital expenditure and working capital needs in the future.
LONG-TERM OBLIGATIONS
On March 28, 1990, the Company issued $2,750,000 in industrial development
bonds (See Note 5 of Notes to Consolidated Financial Statements). The bonds are
secured by a letter of credit agreement and further secured by a lien upon a
manufacturing facility in Houston constructed with the proceeds.
On December 1, 1994, the Company signed a long-term loan with a bank for
$1,720,000. The loan is secured by a mortgage on the regional distribution
center and surrounding property in Bolingbrook, Illinois.
On July 24, 1995, Vallen Safety entered into an unsecured, four year credit
facility with a major bank. The facility provides for borrowing of up to $6
million. As of May 31, 1996, Vallen Safety has drawn down $5 million under the
facility. See further details of the Agreement in Note 5 to the financial
statements.
Other long term debt relates to other mortgage debt obligations
outstanding.
IMPACT OF INFLATION
Management of the Company believes that inflation has not significantly
impacted either net sales or net earnings during the three years ended May 31,
1996. The Company has generally been able to pass along price increases from
its manufacturing suppliers.
CAPITAL EXPENDITURES
During fiscal 1996 the Company invested $1,458,000 in capital assets for
its distribution segment and $226,000 for its manufacturing segment. The
distribution expenditures were primarily comprised of $132,000 for rental
equipment, $72,000 for buildings and building improvements, $912,000 for new
computer hardware and software, $342,000 for furniture and operating equipment.
The manufacturing expenditures were primarily for tools, dies and other
equipment used in the manufacturing process.
The capital expenditure program is designed to (1) focus the distribution
activity of the Company in modern, technologically advanced regional centers,
(2) match the Company's management information systems to the demanding,
flexible marketplaces in which the Company competes to maintain its position as
an industry leader in customer satisfaction, and (3) maintain efficient and cost
competitive manufacturing operation facilities.
10
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VALLEN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
REFERENCE
--------------
<S> <C> <C>
12 - Report of KPMG Peat Marwick LLP, Independent Auditors.
13 - Consolidated Balance Sheets -- May 31, 1996 and 1995.
14 - Consolidated Statements of Earnings -- Years ended May 31, 1996, 1995 and 1994.
15 - Consolidated Statements of Shareholders' Equity -- Years ended May 31, 1996, 1995 and 1994
16 - Consolidated Statements of Cash Flows -- Years ended May 31, 1996, 1995 and 1994.
17 - Notes to Consolidated Financial Statements.
</TABLE>
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
VALLEN CORPORATION
We have audited the consolidated financial statements of Vallen Corporation and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vallen Corporation
and subsidiaries as of May 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company adopted the provisions of the Financial
Accounting Standards Board's SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on June 1, 1995.
KPMG PEAT MARWICK LLP
Houston, Texas
July 12, 1996
12
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
MAY 31,
---------------------
ASSETS 1996 1995
---------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 831 $ 3,006
Investment securities, at cost which
approximates market 2,001 7,255
Accounts receivable, less allowance
for doubtful accounts of $301 and
$311 at May 31, 1996 and 1995,
respectively 32,316 26,039
Notes receivable 147 412
Inventories (Note 3) 33,977 24,026
Prepaid expenses and other current 4,621 2,565
assets -------- -------
Total current assets 73,893 63,303
-------- -------
Property, plant and equipment, at cost
(Note 4) 41,580 40,501
Less accumulated depreciation and
amortization 21,191 19,558
-------- -------
Net property, plant and
equipment 20,389 20,943
Notes receivable, non-current 1,599 1,599
Investment in foreign affiliates, net
(Note 9) 8,243 3,070
Intangibles, net of accumulated
amortization of $1,897 and $1,567 at
May 31, 1996 and 1995, respectively 5,107 1,235
Other 2,432 504
-------- -------
$111,663 $90,654
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
(Note 5) $ 464 $ 161
Accounts payable 14,298 8,587
Accrued liabilities 2,290 2,654
Income taxes payable 287 180
-------- -------
Total current liabilities 17,339 11,582
-------- -------
Long-term debt, excluding current
maturities (Note 5) 10,705 5,194
Deferred income taxes (Note 7) 1,302 1,196
Shareholders' equity (Note 6):
Preferred stock, $1.00 par value;
1,000,000 shares authorized and
unissued at May 31, 1996 and 1995
Common stock $.50 par value;
20,000,000 shares authorized;
9,726,875 issued and 7,263,978
outstanding at May 31, 1996 and
9,713,884 issued and 7,122,134
outstanding at May 31, 1995 4,864 4,857
Additional paid-in capital 5,825 3,955
Translation adjustment (773) (417)
Retained earnings 75,015 67,028
-------- -------
84,931 75,423
Less cost of common shares held in
treasury (2,462,897 and 2,591,750
shares at May 31, 1996 and 1995,
respectively) 2,614 2,741
-------- -------
Total shareholders' equity 82,317 72,682
-------- -------
Commitments and contingencies (Notes 8
and 10)
$111,663 $90,654
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of Dollars Except for Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $237,042 $203,284 $185,751
Cost of sales 176,396 150,111 136,605
-------- -------- --------
Gross profit 60,646 53,173 49,146
Selling, general and administrative expenses
(Notes 8 and 10) 48,793 42,123 41,314
Restructuring charges (Note 2) - - 460
-------- -------- --------
Operating income 11,853 11,050 7,372
Earnings from foreign affiliate, net (Note 9) 1,056 387 217
Interest and dividend income 542 537 239
Interest expense (Note 5) (674) (285) (183)
Other income (expense), net (443) (439) (394)
-------- -------- --------
Earnings before income taxes 12,334 11,250 7,251
Income taxes (Note 7) 4,347 4,108 2,694
-------- -------- --------
Net earnings $ 7,987 $ 7,142 $ 4,557
======== ======== ========
Net earnings per common share $ 1.10 $ 1.00 $ .65
======== ======== ========
Weighted average number of common shares outstanding 7,242 7,108 7,046
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHARES OF ADDITIONAL
COMMON STOCK, COMMON PAID-IN
$.50 PAR VALUE STOCK CAPITAL
-------------- ----------- ----------
<S> <C> <C> <C>
Balance at May 31, 1993 9,692,549 $ 4,847 $ 2,971
Net earnings - - -
Employee stock purchases (Note 6) 10,923 5 132
Exercise of stock options (Note 6) - - 459
------------ --------- ---------
Balance at May 31, 1994 9,703,472 $ 4,852 $ 3,562
Net earnings - - -
Employee stock purchases (Note 6) 10,412 5 123
Exercise of stock options (Note 6) - - 270
Currency translation adjustment - - -
------------ --------- ---------
Balance at May 31, 1995 9,713,884 $ 4,857 $ 3,955
Net earnings - - -
Employee stock purchases (Note 6) 12,991 7 171
Stock transactions - - 1,699
Currency translation adjustment - - -
------------ --------- ---------
BALANCE AT MAY 31, 1996 9,726,875 $ 4,864 $ 5,825
============ ========= =========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
TRANSLATION RETAINED TREASURY SHAREHOLDERS'
ADJUSTMENT EARNINGS STOCK EQUITY
------------ -------- --------- -------------
<S> <C> <C> <C> <C>
Balance at May 31, 1993 $ - $ 55,329 $ (2,824) $ 60,323
Net earnings - 4,557 - 4,557
Employee stock purchases (Note 6) - - - 137
Exercise of stock options (Note 6) - - 56 515
------------ --------- --------- -----------
Balance at May 31, 1994 - $ 59,886 $ (2,768) $ 65,532
Net earnings - 7,142 - 7,142
Employee stock purchases (Note 6) - - - 128
Exercise of stock options (Note 6) - - 27 297
Currency translation adjustment (417) - - (417)
------------ --------- --------- -----------
Balance at May 31, 1995 $ (417) $ 67,028 $ (2,741) $ 72,682
Net earnings - 7,987 - 7,987
Employee stock purchases (Note 6) - - - 178
Stock transactions - - 127 1,826
Currency translation adjustment (356) - - (356)
------------ --------- --------- -----------
BALANCE AT MAY 31, 1996 $ (773) $ 75,015 $ (2,614) $ 82,317
============ ========= ========= ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 7,987 $ 7,142 $ 4,557
Adjustments to reconcile
net earnings to net cash
provided by operating activities:
(Gain) loss on disposition of
property, plant & equipment (60) 69 60
Depreciation and amortization 3,439 3,497 3,861
Undistributed earnings of
foreign affiliates, net (702) (387) (217)
Loss from affiliate, net 169 54 -
Decrease (increase) in trading
securities 5,254 (24) 1,054
(Increase)in accounts receivable (1,538) (2,144) (1,154)
(Increase) in inventories (3,086) (1,960) (1,774)
Decrease (increase) in notes
receivable 265 (412) -
(Increase) in prepaid expenses &
other current assets (1,992) (503) (615)
(Increase) in other assets (1,003) (125) (98)
Increase in accounts payable &
other current liabilities 775 511 1,825
Increase (decrease) in deferred
income taxes 106 81 (260)
-------- ------- -------
Net cash provided by operating
activities 9,614 5,799 7,239
INVESTING ACTIVITIES:
Net additions to property, plant and
equipment, net of effects
of acquisitions (1,628) (2,467) (8,397)
Payments for acquisitions of
businesses (8,866) - (605)
Increase in notes receivable - (1,599) -
Investment in affiliates (1,045) (230) -
-------- ------- -------
Net cash used in investing activities (11,539) (4,296) (9,002)
FINANCING ACTIVITIES:
Addition to long term debt - 1,720 135
Reduction of long-term debt (72) (225) (40)
Stock option transactions - 297 515
Employee stock purchases 178 128 137
-------- ------- -------
Net cash provided by financing
activities 106 1,920 747
-------- ------- -------
Net increase (decrease) in cash and
cash equivalents (1,819) 3,423 (1,016)
Effect of exchange rate changes on cash
and cash equivalents (356) (417) -
Cash and cash equivalents at beginning
of year 3,006 - 1,016
-------- ------- -------
Cash and cash equivalents at end of year $ 831 $ 3,006 $ -
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments $ 555 $ 284 $ 191
Income tax payments $ 3,846 $ 3,833 $ 2,965
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company purchased assets or stock of Safety Centers, Inc., All Supplies,
Inc., Century Sales and Service Limited, Shepco Manufacturing, Inc. and Griffin
Fire Safety Company in 1996. In conjunction with the acquisitions, assets
acquired, liabilities assumed and cash paid are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired....................... $15,961
Cost in excess of net assets of companies acquired.. 4,548
-------
Total assets recorded............................... $20,509
-------
Liabilities assumed................................. $(9,817)
Stock issued for common stock and assets............ (1,826)
-------
Cash paid for common stock and assets............... $ 8,866
=======
</TABLE>
16
<PAGE>
See accompanying Notes to Consolidated Financial Statements.
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation --- The consolidated financial statements
include the accounts of Vallen Corporation (the Company) and its wholly-owned
subsidiaries, Vallen Safety Supply Company (Vallen Safety), Encon Safety
Products, Inc. (Encon), Safety World, Inc., All Supplies, Inc. (All Supplies),
and Vallen Safety Supply Company, Limited. All significant inter-company
transactions and amounts have been eliminated in consolidation. Unconsolidated
affiliates are included on the equity basis. Certain prior year amounts have
been reclassified to conform with current year presentation.
Investment Securities --- The Company held only trading securities for
investment in 1996, 1995 and 1994. Cost and estimated fair value were
identical, therefore no unrealized gains or losses occurred in any year
presented. Trading securities consist of obligations of states and political
subdivisions and corporate issuers, and totaled $2,001,000 and $7,255,000 at May
31, 1996 and 1995, respectively.
Inventory Valuation --- Inventories are stated at the lower of cost
(weighted average) for Vallen Safety and All Supplies, and lower of cost (first
in, first out) for Encon, or market (replacement).
Property, Plant and Equipment --- Property, plant and equipment are
stated at cost, less allowances for depreciation. Depreciation expense is
computed using the straight line method over the estimated useful lives of the
related assets. Estimated useful lives range from 5-30 years for buildings and
improvements, 3-8 years for furniture, fixtures and other equipment, and 3-5
years for data processing equipment and software.
Acquisitions --- Acquisitions have been accounted for by the purchase
method and, accordingly, the acquired company's assets are recorded at fair
value as of the acquisition date. Results of operations are included from the
date of acquisition.
Intangibles --- Goodwill, which represents purchase price in excess of
fair value of net assets of acquired businesses, is amortized on a straight line
basis over periods up to 40 years, and the related accumulated amortization was
$314,000 and $167,000 at May 31, 1996 and 1995, respectively. Other intangibles
are amortized over their statutory or estimated useful lives. Accumulated
amortization of these other intangibles was $1,583,000 and $1,400,000 at May 31,
1996 and 1995, respectively.
Income Taxes --- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Uses of Estimates --- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Fair Value of Financial Instruments --- The carrying values of cash and
cash equivalents, accounts receivable and payable, notes receivable and accrued
liabilities are considered to approximate fair value due to the short term
nature of these instruments. The carrying value of long-term debt is estimated
to approximate fair value based on the Company's incremental borrowing rate for
similar types of borrowing arrangements.
17
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(CONTINUED)
Foreign Currency Translation --- The appropriate functional currency is
determined for each consolidated entity and each entity accounted for on the
equity basis. The financial statements of entities for which the U.S. dollar is
determined to be the appropriate functional currency under the requirements of
SFAS 52, Foreign Currency Translation, are translated using appropriate current
and historic exchange rates; any gains or losses from currency transactions for
these entities are included in income for the current period. Financial
statements of all other entities are translated into U.S. dollars from their
functional currencies using current exchange rates, with gains or losses from
translation being accumulated in a separate shareholders' equity account.
Transaction gains and losses are recognized in income for the current period.
<TABLE>
<CAPTION>
Foreign currency effects are summarized as
follows: ($000)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Effect of translation adjustments on
net income (Increase) decrease in earnings $ (56) 107 26
Currency translation losses charged
directly to equity adjustment account $ 356 417 -
</TABLE>
Impairment of Long Lived Assets -- In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). This statement establishes the
recognition and measurement standards related to the impairment of long-lived
assets. Effective June 1, 1995, the Company adopted SFAS 121. Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other non-current assets related to specifically acquired assets
may be impaired, an evaluation of the recoverability of currently recorded costs
would be made. If an evaluation is required, the estimated future value of
undiscounted cash flows associated with the asset is compared to the asset's
carrying value to determine if a write-down to markey value or discounted cash
flow value is required. Adoption of this standard did not have a material
effect on the financial position or consolidated results of operations of the
Company.
Accounting for Stock Based Compensation --- SFAS No. 123 "Accounting for
Stock Based Compensation" was issued in October, 1995. SFAS No. 123 defines a
fair value based method of accounting for employee stock options. This
statement is effective for fiscal years beginning after December 15, 1995.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period;
however, SFAS No. 123 allows an entity to continue to measure compensation cost
in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"). The
Company will continue to account for stock option grants in accordance with APB
25, and accordingly, recognizes no compensation expense for stock options
currently granted. For those companies who choose not to adopt the new rules
SFAS No. 123 requires the company to provide proforma disclosure of net income
and earnings per share, as applicable. The Company will provide this
information beginning in fiscal year 1997.
Earnings Per Common Share --- Earnings per common share computations are
based on the weighted average number of shares of common stock outstanding
during the respective periods. Common stock equivalents have not been included
from the date of their issuance due to their insignificant effect on the
computation.
Statements of Cash Flows --- For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
18
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(CONTINUED)
NOTE 2. RESTRUCTURING CHARGES
In May 1994, the Company completed an extensive assessment of future
distribution plans and strategy. As a result, four distribution branches were
closed in fiscal 1995, due to proximity to regional shipping "hub" locations and
the need to eliminate redundant stocking and shipping activities. Certain
personnel positions associated with those closings were eliminated. Several
positions at the Company's corporate headquarters were also eliminated.
Accordingly, in the fourth quarter of fiscal 1994, the Company recorded a
restructuring charge of $460,000 which included a $350,000 non-cash recognition
of long term lease commitments related to the branches to be closed, and
$110,000 for severance pay for the eliminated positions.
NOTE 3. INVENTORIES
Effective April 1995, Vallen Safety changed its inventory valuation method
from first-in, first-out (FIFO) to a weighted-average valuation method in order
to provide a better matching of inventory cost with the related revenues. The
cumulative effect on prior years and on the operating results for the year ended
May 31, 1996 were immaterial. The All Supplies subsidiary also uses the
weighted average costing in accounting for inventory. The manufacturing
subsidiary continues to utilize the first-in, first-out (FIFO) method.
<TABLE>
<CAPTION>
Inventory costs are summarized as follows:
MAY 31,
----------------------
1996 1995
<S> --------- ---------
<C> <C>
Raw materials (Thousands of Dollars)
Work in process $ 1,323 $ 1,241
Finished goods 740 792
31,914 21,993
Total inventories ------- -------
$33,977 $24,026
======= =======
</TABLE>
<TABLE>
<CAPTION>
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows: MAY 31,
-----------------------
1996 1995
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Land and improvements
Buildings and improvements $ 2,930 $ 2,930
Furniture, fixtures and other equipment 12,673 13,033
Data processing equipment and software 15,842 13,654
10,135 10,884
Total property, plant and equipment ------- -------
$41,580 $40,501
======= =======
</TABLE>
Maintenance and repairs are expensed as incurred. Gains and losses from
sales, and retirements are recognized at the time of disposal.
19
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C>
NOTE 5. LONG-TERM DEBT
Long-term debt is summarized as follows: May 31,
---------------------------
1996 1995
---- ----
(Thousands of Dollars)
Notes payable, bank (1) $ 5,000 $ -
Variable rate, tax exempt, callable at par, industrial development
bonds due March 1, 2020; interest rate resets weekly
(3.85% at May 31, 1996); secured by a letter of credit,
further secured by a manufacturing facility with a depreciated
cost of $2,189 at May 31, 1996 2,750 2,750
9.9% mortgage note payable to a bank, due in equal monthly
installments, final installment due December 1, 2020; secured
by land and building with a depreciated cost of $1,556 at
May 31, 1996 1,558 1,682
9 1/8% first mortgage note payable to an insurance company,
due in equal monthly installments, final installment due
May 1, 2008; secured by land and building with a depreciated
cost of $614 at May 31, 1996 849 881
Other notes payable 1,012 42
------- -------
Total long-term debt 11,169 5,355
Less current maturities 464 161
------- -------
Long-term debt, less current maturities $10,705 $ 5,194
======= =======
</TABLE>
Debt maturities for the five years subsequent to May 31, 1996 are
$464,000 $1,439,000, $1,697,000, $1,444,000, and $1,709,000, respectively.
(1) - On July 24, 1995, in connection with the purchase of assets and assumption
of certain liabilities of Safety Centers, Inc. (SCI), Vallen Safety borrowed $5
million under a $6 million four year credit facility with a major commercial
bank. The unsecured revolving credit facility provides, at Vallen Safety's
option, interest at the prime rate or LIBOR + .75%. Fees related to the
facility are not material. The interest rate at May 31, 1996 was 6.3125%.
Vallen Safety is required, under this agreement, to maintain financial ratios
and maintain a minimum tangible net worth of not less than $9,000,000 at any
time during the period of the Credit Agreement. Vallen Corporation, Vallen
Safety's parent, guarantees repayment of principal and other debt service within
the facility.
20
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
NOTE 6. CAPITAL STOCK PLANS
The Company has a stock option plan for key employees, (the "Plan") and
has reserved for issuance 1,125,000 shares of its common stock. The Plan
authorizes the Company to grant to its key employees options to purchase shares
of common stock at prices per share equal to the fair market value of such stock
at the date of grant.
Under the stock option plan, options have been granted and are
outstanding as to 272,000 shares as of May 31, 1996. These options are
exercisable in increments of 33 1/3% , beginning in years after fiscal 1993,
should the Company achieve three specified consolidated earnings per share
targets. None of these levels were achieved as of the fiscal year ended May 31,
1996.
In connection with the acquisition of 100% of the capital stock of All
Supplies in August, 1995, the Compensation Committee and the Board of Directors
of the Company approved the issuance of 100,000 options to the former owner of
All Supplies under terms of an employment agreement. These options are
exercisable in increments of 33 1/3%, beginning in fiscal year 1996, should the
Company achieve these specified consolidated earnings per share targets, or
should All Supplies achieve certain sales and gross profit levels for the same
fiscal year.
Information relating to stock options is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
SHARES RANGE PER SHARE
-------- ----------------
<S> <C> <C>
Balance outstanding, at May 31, 87,200 $ 4.89 - $8.00
1993
Granted 174,000 $ 15.75
Exercised and expired (80,600) $ 4.89 - $15.75
------- ----------------
Balance outstanding, at May 31,
1994 180,600 $ 8.00 - $15.75
Granted 131,000 $ 12.75 - $13.00
Exercised and expired (33,600) $ 8.00
------- ----------------
Balance outstanding, at May 31,
1995 278,000 $ 12.75 - $15.75
Granted 15,000 $ 21.438
Expired (21,000) $ 15.75
Granted in All Supplies
acquisition (see above) 100,000 $ 14.75
------- ----------------
Balance outstanding, at May 31, 372,000 $12.75 - $21.438
1996
Options exercisable at May 31, 1996 -0- -
</TABLE>
The Company's shareholders approved a non-employee director stock
option plan (the "Director Plan") effective October 12, 1993. The Company has
reserved for issuance 30,000 shares of its common stock to be used in the plan.
The Director Plan authorizes the Company to grant non-employee directors options
to purchase shares of common stock at prices equal to the average last sale
price of the Company's stock for the five most recent trading days on which
trades occurred including the date of grant. Each of the non-employee directors
was granted 5,000 options based upon a formula set forth in the Director Plan.
The options are exercisable ratably on the first, second and third anniversary
dates of the grant date. None of the options granted were exercised on the first
or second anniversary date.
The Company adopted an employee stock purchase plan effective January
1, 1991. The Company has reserved for issuance 675,000 shares of its common
stock to be used in the plan. The plan allows eligible employees to purchase
shares at 85% of the lower of market value on January 1 or December 31. The
difference between the employees' actual purchase price and the price on
December 31 is compensation expense to the Company. Employee stock purchase plan
expense was $24,000 for both years ended May 31, 1996 and 1995.
During fiscal year 1996, the Company and its shareholders established
an Executive Incentive Compensation Plan for executive officers and key
employees of the Company and its subsidiaries. The incentive plan is
administered by the Compensation Committee of the Board of Directors. The
Company has reserved 100,000 shares of the Company's common stock for issuance
in connection with the stock portion of the incentive awards. Under the Plan,
the award pool criteria is to be established at the beginning of each fiscal
year by the Compensation Committee based upon net earnings levels and return on
shareholder equity criteria. The specific employee participants to be included
in the incentive program are to be designated at the same time by this
Committee. At the discretion of the Committee, up to 50% of each designated
participant's award will be paid in the form of Company stock, with the
remaining portion to be paid in cash at the end of the fiscal year.
21
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(CONTINUED)
<TABLE>
<CAPTION>
NOTE 7. INCOME TAXES
<S> <C> <C> <C>
Income tax expense (benefit)
consists of: YEAR ENDED MAY 31,
-----------------------
1996 1995 1994
------ ------ ------
(Thousands of Dollars)
Current:
Federal $3,913 $3,600 $2,749
State 490 408 312
------ ------ ------
4,403 4,008 3,061
Deferred:
Federal and State (56) 100 (367)
------ ------ ------
$4,347 $4,108 $2,694
====== ====== ======
</TABLE>
The reasons for the differences between the amount of tax expense provided
and the amount of tax expense computed by applying the federal statutory income
tax rate of 34% in 1996, 1995 and 1994, to earnings before income taxes were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED MAY 31,
-----------------------
1996 1995 1994
------ ------ ------
(Thousands of Dollars)
Tax expense at statutory rates $4,217 $3,825 $2,465
State tax expense, net of federal
benefit 323 269 206
Non-includable foreign losses
(earnings) (298) (44) 27
Other, net 105 58 (4)
------ ------ ------
$4,347 $4,108 $2,694
====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at May 31, 1996 and 1995 are
presented below.
<TABLE>
<CAPTION>
Deferred tax assets:
1996 1995
---------- ----------
<S> <C> <C>
(Thousands of Dollars)
Inventories, principally due to
additional costs inventoried
for tax purposes $ 657 $ 472
Accounts receivable allowance
account 101 104
Other 45 65
----- -----
Total deferred tax assets $ 803 $ 641
----- -----
</TABLE>
22
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
<TABLE>
<CAPTION>
Deferred tax liabilities:
1996 1995
---------- ----------
<S> <C> <C>
(Thousands of Dollars)
Plant and equipment, principally
due to differences
in depreciation $ 866 $ 812
Software development expensed
for tax 262 248
Accelerated property tax
deduction 174 136
------ ------
Total deferred tax liability $1,302 $1,196
------ ------
Net deferred tax liability $ 499 $ 555
====== ======
</TABLE>
There is no valuation allowance for the fiscal years ended May 31, 1996 or
May 31, 1995. It is the opinion of management that future operations will more
likely than not generate taxable income to realize the deferred tax assets.
Deferred tax assets are included in the prepaid expenses and other current
assets category on the Consolidated Balance Sheets.
NOTE 8. PROFIT SHARING, DEFERRED COMPENSATION AND BONUS INCENTIVE PLANS
The Company has established a profit sharing trust which covers
substantially all employees. The Company makes quarterly cash contributions of
10% of the net earnings of consolidated operations, as defined by the trust
agreement. Total profit sharing expense for the years ended May 31, 1996, 1995
and 1994 was $632,000, $622,000 and $520,000, respectively.
During December 1990, the Company amended the profit sharing plan to
include a 401(k) deferred compensation plan covering a majority of the Company's
employees. Under the terms of the 401(k) plan, the Company makes matching
contributions equal to 25% of the participants' contributions subject to certain
participant vesting requirements. Total Company 401(k) contribution expense for
the years ended May 31, 1996, 1995 and 1994 was $338,000, $236,000 and $218,000,
respectively.
The Company also has bonus incentive plans for its officers, managers and
other key employees. Cash bonuses are awarded based on incentive award
schedules which measure achievement of individual and corporate objectives,
among other factors. Bonus incentive plan expense was $729,000, $713,000 and
$258,000, for the years ended May 31, 1996, 1995 and 1994, respectively.
23
<PAGE>
NOTE 9. INVESTMENT IN FOREIGN AFFILIATES
A summary of investment in foreign affiliates as of May 31, 1996 is as
follows:
<TABLE>
<CAPTION>
PROVEEDORA DE CENTURY SALES & SERVICE
SEGURIDAD INDUSTRIAL LIMITED (1) TOTAL
--------------------- ------------------------ -------
<S> <C> <C> <C>
Domicile Mexico Canada
Ownership % by the Company 50% 50%
Date of original investment December 17, 1992 June 6, 1995
Amount of original investment ($000) $2,767 $4,472 $7,239
Translation adjustment (unrealized)
adjusted in equity section of
balance sheet (773) -0- (773)
Equity earnings since acquisition,
net of goodwill amortization and
foreign currency translation
amounts recognized in income 1,234 543 1,777
----- ------ ------
Investment at May 31, 1996 $3,228 $5,015 $8,243
====== ====== ======
</TABLE>
(1) Under the terms of the Stock Purchase Agreement, the Company has the option
to elect to purchase the remaining 50% of the outstanding capital stock of
Century Sales at either five or six years from the date of the original stock
purchase transaction, based upon formulas contained in the Agreement.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company conducts certain operations from leased premises under
noncancellable operating leases. Under the terms of some of the leases, the
Company pays taxes, maintenance, insurance and certain other operating expenses.
Various computer, transportation and other equipment is also leased under short-
term operating leases. Management generally intends to renew leases that expire
during the normal course of business. Rental expense for the years ended May
31, 1996, 1995 and 1994 amounted to $1,689,000, $1,639,000 and $2,056,000,
respectively. Lease commitments for noncancellable operating leases for the
five years subsequent to May 31, 1996 are $1,881,000, $1,234,000, $707,000,
$230,000 and $167,000, respectively.
The Company's Vallen Safety subsidiary, in its capacity as a general
partner in a limited partnership whose operations are to provide procurement and
distribution services to the U. S. Air Force, is a guarantor for up to $750,000
of a $3 million revolving term loan agreement facility taken out by the
partnership with a major commercial bank. Under terms of the loan facility, the
guaranty may be reduced or completely eliminated by June 30, 1997, as a result
of the partnership reaching certain financial ratio tests. Vallen Safety's
partner, also a general partner in the partnership, has the same guaranty
requirements under the loan facility.
24
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
Certain claims that result from litigation incurred in the ordinary course
of business have been asserted against the Company. Management believes that
the ultimate resolution of such matters will not materially affect the financial
position or results of operations of the Company.
NOTE 11. CONCENTRATION OF CREDIT RISK
The Company has a broad customer base, representing many diverse
industries, doing business in most regions of the United States and in Mexico
and Canada. The Company evaluates credit risks on an individual customer basis
before extending credit, and believes the allowance for doubtful accounts
adequately provides for losses on uncollectible accounts. In each of the years
ended May 31, 1996, 1995 and 1994, no single customer accounted for more than
10% of consolidated sales. Letters of credit are required on most foreign
sales, except to customers in Mexico and Canada. Consequently, in management's
opinion, no significant concentration of credit risk exists for the Company.
NOTE 12. BUSINESS SEGMENTS
The Company operates in two business segments, distribution of a variety of
safety, health and maintenance products and services and the manufacturing of
industrial safety equipment. The following table summarizes, for the periods
indicated, the amounts of consolidated net sales, operating income, identifiable
assets, capital expenditures and depreciation and amortization attributable to
the Company's distribution and manufacturing operations. Substantially all
intersegment sales are based on published price lists, the same as to
unaffiliated customers. The Company does not derive 10% or more of its net
sales from any single customer, nor does the Company derive 10% or more of its
net sales from foreign sources. Sales of supplied-air respiratory equipment
contributed 6.5%, 7.8% and 9.9% of consolidated net sales for the year ended May
31, 1996, 1995 and 1994, respectively. The effect of the Company's operations
in Mexico and Canada is immaterial on the amounts in the table below.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1996 1995 1994
---------- --------- ----------
<S> <C> <C> <C>
(Thousands of Dollars)
Net sales:
Distribution $224,084 $190,610 $174,282
Manufacturing 20,856 19,691 18,461
-------- -------- --------
244,940 210,301 192,743
Intersegment sales (7,898) (7,017) (6,992)
-------- -------- --------
$237,042 $203,284 $185,751
Operating income: ======== ======== ========
Distribution $ 10,338 $ 9,281 $ 5,626
Manufacturing 4,966 4,367 3,994
-------- -------- --------
15,304 13,648 9,620
Corporate general and (3,451) (2,598) (2,248)
administrative expenses -------- -------- --------
Total $ 11,853 $ 11,050 $ 7,372
Identifiable assets: ======== ======== ========
Distribution $102,349 $ 81,905 $ 72,478
Manufacturing 9,314 8,749 8,939
-------- -------- --------
Total $111,663 $ 90,654 $ 81,417
Capital expenditures: ======== ======== ========
Distribution $ 1,458 $ 2,590 $ 8,265
Manufacturing 226 262 201
-------- -------- --------
Total $ 1,684 $ 2,852 $ 8,466
Depreciation and amortization: ======== ======== ========
Distribution $ 3,040 $ 2,992 $ 3,319
Manufacturing 399 505 542
-------- -------- --------
Total $ 3,439 $ 3,497 $ 3,861
======== ======== ========
</TABLE>
25
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
NOTE 12. BUSINESS SEGMENTS (CONTINUED)
Summarized financial information for significant unconsolidated subsidiaries:
The Company uses the equity method of accounting for investments in
unconsolidated subsidiaries over which it exercises ownership of 20% - 50%. The
summarized balance sheet and income statement information presented below
includes amounts related to the following significant equity investees:
Proveedora de Seguridad Industrial Del Golfo, S.A. (Mexico) (50%), Century Sales
& Service Limited (Canada) (50%), and Nuclear Utility Products, Inc. (NUPRO)
(Delaware) (50%). The summarized financial information below includes 100% of
the individual company's assets, liabilities, revenues, and expenses as of and
for the year ended May 31, 1996.
<TABLE>
<CAPTION>
1996
------------------------
(Thousands of Dollars)
<S> <C>
Current assets $ 20,242
Non-current assets 3,620
-------
Total assets $ 23,862
=======
Current liabilities $ 8,892
Non-current liabilities 2,223
-------
Total liabilities $ 11,115
=======
Net sales $ 53,207
Gross profit 13,682
Income from continuing operation 3,055
Net income $ 1,988
=======
</TABLE>
<TABLE>
<CAPTION>
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly operating results for 1996 and 1995 are summarized as
follows:
<S> <C> <C> <C> <C>
QUARTER ENDED
------------------------------------------------------------
AUGUST 31 NOVEMBER 30 FEBRUARY 29 MAY 31
--------- ----------- ----------- -------
(Thousands of Dollars, Except for Per Share Amounts)
1996
Net Sales $52,002 $60,830 $61,516 $62,694
======= ======= ======= =======
Gross profit $13,465 $15,370 $15,577 $16,234
======= ======= ======= =======
Net earnings $ 1,557 $ 2,149 $ 2,028 $ 2,253
======= ======= ======= =======
Net earnings per common share $.22 $ .30 $ .28 $ .31
======= ======= ======= =======
1995
Net sales $46,062 $50,956 $50,680 $55,586
======= ======= ======= =======
Gross profit $12,032 $13,106 $13,498 $14,537
======= ======= ======= =======
Net earnings $ 1,205 $ 1,885 $ 1,807 $ 2,245
======= ======= ======= =======
Net earnings per common share $.17 $ .27 $ .25 $ .31
======= ======= ======= =======
</TABLE>
26
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The following table provides information as of August 1, 1996 regarding
each of Vallen's directors:
<TABLE>
<CAPTION>
OTHER POSITIONS AND OFFICES
CURRENTLY HELD WITH THE COMPANY (AND OTHER
DIRECTOR CURRENT PRINCIPAL OCCUPATION, IF
NAME AGE SINCE DIFFERENT)
- --------------------------- ---- -------- --------------------------------------------
<S> <C> <C> <C>
Leonard J. Bruce (76) 1960 Chairman of the Board; Member,
Compensation Committee
James W. Thompson (45) 1994 President and Chief Executive
Officer ,
Vallen Safety Supply Company
Darvin M. Winick (66) 1984 Member, Audit and Compensation
Committees
(President of Winick Consultants)
Kirby Attwell (60) 1978 Member, Audit and Compensation
Committees(President of Travis
International, Inc.)
</TABLE>
Mr. Bruce, who has 49 years of experience in safety equipment distribution,
founded the Company in 1947. He has been Chairman of the Board of Directors
since 1960.
Mr. Thompson joined the Company in June of 1994 as President and Chief
Operating Officer of Vallen Safety Supply Company. He was named President and
Chief Executive of Vallen Corporation in December, 1994. He was formerly
employed by Westburne Supply Company of Montreal, Quebec, Canada as Senior Group
Vice President, and prior to that he was with Westinghouse Electric Supply
Company for 18 years.
Dr. Winick has been President of Winick Consultants, or its related
management consulting firms, since 1981.
Mr. Attwell has been President of Travis International, Inc., a holding
company for industrial distribution operations, since January 1987.
27
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information as of August 1, 1996 regarding
each of Vallen's executive officers:
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE POSITION WITH THE COMPANY SINCE
---- --- ------------------------- ---------
<S> <C> <C> <C>
Leonard J. Bruce 76 Chairman of the Board and Director 1960
James W. Thompson 45 President, C.E.O. and Director 1994
Roland C. Wolff 50 Executive Vice President, Marketing 1995
Robin R. Hutton 50 Executive Vice President, Sales 1981
Leighton J. Stephenson 48 Vice President - Finance, Secretary and Treasurer 1993
Kent M. Edwards 48 Vice President - Human Resources, Assistant Secretary 1990
David G. Key 40 Vice President and General Manager,
Encon Safety Products, Inc. 1996
</TABLE>
The terms of each officer will expire at the next annual meeting of
directors or when his successor is elected and qualified.
Mr. Bruce, who has over 49 years of experience in safety equipment
distribution, founded the Company in 1947. He has been Chairman of the Board of
Directors since 1960.
Mr. Thompson joined the Company in June 1994 as President and Chief
Operating Officer of Vallen Safety Supply Company. He was named President and
Chief Executive Officer of Vallen Corporation in December 1994. He was formerly
with Westburne Supply Company and Westinghouse Electric Supply Company. Mr.
Thompson was elected to the Board of Directors in June 1994.
Mr. Wolff joined the Company in February, 1995, as Executive Vice President
of Marketing. He was formerly with Wesco/Westinghouse Electric Corporation.
Mr. Hutton has been with the Company since 1968. He was elected Vice
President - Southwest Region in 1981 and after serving in several sales and
managerial positions, including Marketing Manager of North Texas. He was named
Executive Vice President of Sales in 1989.
Mr. Stephenson has been employed with the Company since December, 1993.
Before joining Vallen, he was with United Artists Entertainment and worked six
years with the audit firm of Coopers & Lybrand.
Mr. Edwards has been with the Company since 1974. He has served Vallen in
a variety of sales and staff positions including corporate level
responsibilities for Administrative Services and Human Resources. He was named
Vice President - Human Resources in 1990.
Mr. Key joined the Company in March 1996 as General Manager of Encon Safety
Products, Inc., the Company's manufacturing subsidiary. He was previously with
3M.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
P A R T I I I
In accordance with General Instruction G(3) to Form 10-K, items 10, 11, 12
and 13 have been incorporated by reference to the Company's definitive proxy
statement complying with Regulation 14A involving the election of directors
which will be filed with the Commission not later than 120 days after the close
of its fiscal year.
28
<PAGE>
P A R T I V
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements are filed as part of this report.
1. Consolidated Financial Statements, as listed in the Index to Financial
Statements provided in response to Item 8 hereof. (see page 11 for
Index)
2. Financial Statement Schedules, as listed in the Index to Financial
Statements provided in response to Item 8 hereof. (see page 11 for
Index)
3. The following exhibits are filed as part of this report:
3i. Restated Articles of Incorporation as amended. Incorporated by
reference is Exhibit 3a to the Company's 1990 Form 10-K as filed
with the Securities and Exchange Commission on August 17, 1990 (the
"1990 Form 10-K").
3ii. Bylaws of the Company as amended. Incorporated by reference is
Exhibit 3ii to the Company's 1995 Form 10-K as filed with the
Securities and Exchange Commission on August 25, 1995.
10a. Vallen Corporation Stock Incentive Plan, specimen Non-qualified
Stock Option Agreement and specimen Stock Appreciation Rights
Agreement. Incorporated by reference is Exhibit 5.1 to the
Company's Registration Statement No. 2-65349 on Form S-1 as filed
with the Securities and Exchange Commission on August 27, 1979. *
10b. Vallen Corporation 1985 Stock Option Plan for Key Employees.
Incorporated by reference is Exhibit 10b. to the Company's Form 1
K as filed with the Securities and Exchange Commission on August
27, 1985 (the "1985 Form 10-K"). *
10c. Amendment to Vallen Corporation 1985 Stock Option Plan for Key
Employees, as amended. Incorporated by reference is Exhibit 10c to
the Company's 1995 Form 10-K as filed with the Securities and
Exchange Commission on August 25, 1995.
10d. Vallen Corporation 1990 Employee Stock Purchase Plan.
Incorporated by reference is Exhibit 10d to the 1990 Form 10-K. *
10e. Agreement dated June 6, 1994 between the Company and James W.
Thompson. Incorporated by reference is Exhibit 10f to the
Company's Form 10-K as filed with the Securities and Exchange
Commission on August 17, 1994. *
10f. Vallen Corporation Executive Incentive Compensation Plan -
attached. *
21. Subsidiaries of the Company - attached.
23. Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule - attachment.
4. The Company hereby agrees to furnish to the Commission, on request, a
copy of any instrument which defines the rights of holders of any long
term debt of the Company in excess of 10% of the total assets of the
Company.
(b) No reports on Form 8-K were required to be filed by this registrant
during the last quarter of the fiscal year covered by this report.
* Management compensation agreement
29
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
VALLEN CORPORATION
By /s/ JAMES W. THOMPSON
------------------------------
JAMES W. THOMPSON
President
Date: August 16, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
- ------------------------------- ------------------------------ ---------------
<S> <C> <C>
/s/ JAMES W. THOMPSON President, Principal Executive
- ------------------------------- Officer and Director August 16, 1996
James W. Thompson
/s/ LEIGHTON J. STEPHENSON Vice President -- Finance
- ------------------------------- Principal Financial and
Leighton J. Stephenson Accounting Officer August 16, 1996
/s/ KIRBY ATTWELL Director August 16, 1996
- -------------------------------
Kirby Attwell
/s / LEONARD J. BRUCE Director August 16, 1996
- -------------------------------
Leonard J. Bruce
/s/ DARVIN M. WINICK Director August 16, 1996
- -------------------------------
Darvin M. Winick
</TABLE>
30
<PAGE>
INDEX TO EXHIBITS
Exhibit numbers are in accordance with exhibit table in Item 601 of Regulation
S-K.
10f. - Vallen Corporation Executive Incentive Plan - attached.
21. - Subsidiaries of the Company.
23. - Consent of KPMG Peat Marwick LLP - attached.
27. - Financial Data Schedule.
31
<PAGE>
EXHIBIT 10
VALLEN CORPORATION
EXECUTIVE INCENTIVE COMPENSATION PLAN
ARTICLE I
DEFINITIONS
As used in this Plan with initial capital letters, the following terms have
the meanings hereinafter set forth, unless the context reasonably requires a
broader, narrower or different meaning.
1.1 AWARD. "Award" means the amount determined under Section 6.1.
1.2 BENEFICIARY. "Beneficiary" means a person designated by the
Participant, in accordance with Section 7.4, to receive any unpaid portion of
any Award distributable under the Plan on account of the death of the
Participant.
1.3 BOARD. "Board" means the Board of Directors of the Company.
1.4 CODE. "Code" means the Internal Revenue Code of 1986, as amended.
1.5 COMMITTEE. "Committee" means the committee appointed by the outside
directors of the Compensation Committee of the Board to administer the Plan.
1.6 COMPANY. "Company" means Vallen Corporation, a Texas corporation, or
any successor which assumes the Plan.
1.7 COMPANY STOCK. "Company Stock" means shares of the Company's common
stock, $.50 par value, including those reserved under Section 2.3 for issuance
in connection with any stock payment under Section 7.3.
1.8 DESIGNATED PERCENTAGE. "Designated Percentage" means that certain
numerical percentage established by the Committee as early as reasonably
practicable in each Year with respect to the calculation of certain elements of
the Annual Award Pool for that Year, with different Designated Percentages
applying to different elements.
1.9 DESIGNATED RETURN ON SHAREHOLDER EQUITY. "Designated Return on
Shareholder Equity" means a certain percentage return on Shareholder Equity to
be established by the Committee as early as reasonably practicable in each Year,
with "Shareholder Equity" meaning the average of each of the twelve monthly
averages of the beginning and ending shareholders' equity of the Company for the
applicable year as determined by the Company in accordance with generally
accepted accounting principles then in force.
<PAGE>
1.10 EARNINGS PER SHARE. "Earnings Per Share" means the earnings per
share of Common Stock, as determined by the Company in accordance with generally
accepted accounting principles then in force, as shown on the Company's
financial statements.
1.11 EFFECTIVE DATE. "Effective Date" means June 1, 1995.
1.12 EMPLOYEE(S). "Employee(s)" means executive officers or other key
employee(s) of the Company or of any designated Subsidiary.
1.13 MARKET PRICE. "Market Price" means the average of each of the twelve
arithmetical means between the highest and lowest trading prices of the Company
Stock on the last trading date of each month during the applicable year, as
reported on the National Association of Securities Dealers Automatic Quotations
System (National Market System). Notwithstanding the foregoing, if there shall
be any material alteration in the present system of reporting sales prices of
the Company Stock, or if the Company Stock shall no longer be quoted on the
over-the-counter markets, the Market Price of the Company Stock shall be
determined using such method as shall be determined by the Committee.
1.14 NET INCOME. "Net Income" means net earnings, as determined by the
Company in accordance with generally accepted accounting principles then in
force, as shown on the Company's financial statements.
1.15 PARTICIPANT. "Participant" means each Employee of the Company or a
Subsidiary who at any time during the Year is selected by the Committee to
participate in the Plan.
1.16 PLAN. "Plan" means the Vallen Corporation Annual Incentive
Compensation Plan, the terms of which are set forth herein, and as the same may
hereafter be amended from time to time.
1.17 SUBSIDIARY. "Subsidiary" means any wholly-owned subsidiary of the
Company or of any wholly-owned subsidiary thereof or any other corporation or
business venture in which the Company owns, directly or indirectly, a
significant financial interest if the Board designates such corporation or
business venture to be a Subsidiary for the sole purposes of this Plan for any
Year, and if the board of directors (or equivalent governing authority) of such
corporation or business venture consents to being so designated as a Subsidiary.
1.18 VALLEN TAX RATE. "Vallen Tax Rate" means for the applicable Year the
highest stated federal income tax rate applicable to the Company as a U.S.
corporation.
1.19 WEIGHTED AVERAGE NUMBER OF OUTSTANDING SHARES. "Weighted Average
Number of Outstanding Shares" means the average of each of the twelve monthly
weighted averages of the number of shares of Common Stock outstanding during the
applicable Year, as determined by the Company in accordance with generally
accepted accounting principles then in force, provided that if shares of Common
Stock have been issued during the applicable Year in connection with an
acquisition that is treated for accounting purposes as a "pooling of
2
<PAGE>
interests," then the determination under this definition shall treat the shares
so issued as having been outstanding for the entire applicable Year.
1.20 YEAR. "Year" means the twelve-month period corresponding to the
fiscal year of the Company and for purposes of this Plan refers to the Year for
which Awards have been made pursuant to Section 4.1.
ARTICLE II
THE PLAN
2.1 NAME. The Plan generally shall be known as the "Vallen Corporation
Executive Incentive Compensation Plan." Each Year's Plan shall be designated by
the Year to which it relates.
2.2 PURPOSE. The purpose of the Plan is to promote the growth and general
prosperity of the Company and each Subsidiary, motivate Employees to achieve
strategic, financial and operating objectives, reward improvement in financial
performances, and provide a total compensation package that is competitive in
industry by permitting the Company and each Subsidiary to attract and retain
superior personnel for positions of substantial responsibility and to provide
key Employees with an additional incentive to contribute to the success of the
Company and each Subsidiary.
2.3 COMPANY STOCK RESERVE. The Company shall reserve 100,000 shares of
Company Stock for issuance under the Plan. In the event that the shares of
Company Stock should, as a result of a stock split or stock dividend or
combination of shares or any other change, or exchange for other securities, by
reclassification, reorganization, merger, consolidation, recapitalization or
otherwise, be increased or decreased or changed into or exchanged for a
different number or kind of shares of stock or other securities of the Company
or of another corporation, the number of reserved shares of Common Stock then
remaining shall be appropriately adjusted to reflect such action. If any such
adjustment shall result in a fractional share, such fraction shall be
disregarded. Upon the allocation of shares under Section 7.3, this reserve
shall be reduced by the number of shares so allocated, and upon the
reacquisition of any shares pursuant to Section 7.3, Section 7.5 or Section 8.1,
the reserve shall be increased by such number of shares, and such shares may
again be the subject of allocations under the Plan. Distributions of shares of
Company Stock may, as the Board shall in its sole discretion determine, be made
from authorized but unissued shares or from treasury shares. All authorized and
unissued shares issued in accordance with the Plan shall be fully paid and
nonassessable shares and free from preemptive rights.
2.4 EFFECTIVE DATE. The Plan shall become effective upon the Effective
Date. Each successive annual Plan shall become effective as of the first day of
the Year to which it relates.
3
<PAGE>
ARTICLE III
ADMINISTRATION
3.1 COMPOSITION OF THE COMMITTEE. The Plan shall be solely
administered by a committee to be appointed by the Board, which Committee shall
consist of at least two members of the Board. The members of the Committee
shall be "disinterested persons" as such term is defined from time to time in
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, or any
successor rule. The Board shall have the power from time to time to remove
members of the Committee and to fill vacancies on the Committee arising by
resignation, death, removal, or otherwise. The Committee shall designate a
chairman from among its members, who shall preside at all of its meetings, and
shall designate a secretary, without regard to whether that person is a member
of the Committee, who shall keep the minutes of the proceedings and all records,
documents, and data pertaining to its administration of the Plan. Meetings
shall be held at such times and places as shall be determined by the Committee.
3.2 ADMINISTRATION BY COMMITTEE. The Plan shall be administered by
the Committee. Subject to the express provisions of the Plan, the Committee
shall have sole discretion and authority to determine from among Employees the
ones to whom and the time or times at which Awards may be made. Subject to the
express provisions of the Plan, the Committee shall also have complete authority
to interpret and construe the Plan, to prescribe, amend, and rescind rules and
regulations relating to it, to determine the need for, or the details and
provisions of an award agreement, and to make all other determinations necessary
or advisable in the administration of the Plan.
3.3 ACTION BY COMMITTEE. A majority of the members of the Committee
shall constitute a quorum for the transaction of business, and the vote of a
majority of those members present at any meeting at which a quorum is present
shall decide any question brought before the meeting and shall be the act of the
Committee. In addition, the Committee may take any other action otherwise
proper under the Plan by an affirmative vote, taken without a meeting, of a
majority of its members.
3.4 DELEGATION. The Committee may, in its discretion, delegate one
or more of its duties to an officer or Employee of the Company or a committee
composed of officers and Employees of the Company, but may not delegate its
authority to construe the Plan or to make the determinations specified in
Section 3.2.
3.5 RELIANCE UPON INFORMATION. The Committee shall not be liable for
any decision or action taken in good faith in connection with the administration
of the Plan. Without limiting the generality of the foregoing, any such
decision or action taken by the Committee in reliance upon any information
supplied to it by any officer of the Company or any Subsidiary, the Company's or
any Subsidiary's legal counsel or the Company's or any Subsidiary's independent
accountants in connection with the administration of the Plan shall be deemed to
have been taken in good faith.
4
<PAGE>
3.6 RESPONSIBILITY AND INDEMNITY. No member of the Committee shall
be liable for any act done or any determination made hereunder in good faith.
The Company and each Subsidiary hereby agrees to indemnify and hold harmless
each member of the Committee from and against any and all losses, claims,
damages, liabilities, costs and expenses, including but not limited to,
liability for any judgments or settlements consented to in writing by any such
member of the Committee, which consent will not be unreasonably withheld, and
reasonable attorneys' fees arising out of or in connection with or as a direct
or indirect result of such member's serving on the Committee, except only those
losses, claims, damages, liabilities, costs and expenses, if any, arising out
of, or in connection with, or as a direct or indirect result of, the Committee
member's bad faith, gross negligence or willful neglect of his duties hereunder.
Each affected member of the Committee shall promptly notify the Company and each
Subsidiary of any claim, action or proceeding for which such member may seek
indemnity. Such indemnity is a continuing obligation and shall be binding on
the Company and each Subsidiary and their successors, whether by merger or
otherwise, and assigns. In addition, such indemnity shall survive the
resignation or removal of the Committee member and/or the termination of the
Plan.
ARTICLE IV
PARTICIPATION
4.1 PARTICIPATION. For each Year, the Committee shall select those
Employees of the Company who shall be Participants. The Committee's
determination shall be communicated to Participants as early as reasonably
practical in each Year. An individual shall be a Participant in the Plan only
with respect to each Year for which he has been selected by the Committee.
Unless the Committee in its absolute discretion waives this requirement, a
Participant must be in the employment of the Company on the date of allocation
of the Annual Award Pool pursuant to Section 6.1 in order to be allocated a
percentage of the Annual Award Pool for the applicable year.
ARTICLE V
ANNUAL AWARD POOL
5.1 ANNUAL AWARD POOL. The "Annual Award Pool" for each Year shall be
an amount equal to the sum of the following:
(i) an amount equal to a Designated Percentage of the product of (x)
the increase in Earnings Per Share for the current Year over the prior
Year, multiplied by (y) the Weighted Average Number of Outstanding Shares
for the current Year, provided that if during the Year there has been a
stock split or stock dividend as combination of shares or any other change
in the outstanding number of shares of Common Stock the Committee in its
discretion may increase or decrease the amount determined pursuant to this
clause (i) to appropriately reflect such change;
5
<PAGE>
(ii) an amount equal to a Designated Percentage of that portion of Net
Income for the Year in excess of Net Income required to achieve the
Designated Return on Shareholder Equity (with the sum of clause (i) plus
clause (ii) being referred to herein as the "Formula Amount"); and
(iii) an amount equal to (x) the Formula Amount, divided by (y) 1
minus the Vallen Tax Rate, minus (z) the Formula Amount.
ARTICLE VI
ALLOCATION OF AWARDS
6.1 ALLOCATION OF ANNUAL AWARD POOL. As soon as practicable after audited
financial statements for the Company are available following the close of each
Year and the determination of the Annual Award Pool for that Year, the Annual
Award Pool shall be allocated by the Committee in its absolute discretion among
Participants. The Committee may in its absolute discretion allocate all, a
portion of or none of an Annual Award Pool for any given Year. The Chief
Executive Officer may offer advice to the Committee regarding the allocation of
the Annual Award Pool to Participants who report to the CEO.
6.2 LIMITATION ON AWARD. No Participant shall receive an Annual Award in
excess of one hundred percent (100%) of his or her annual base salary for the
applicable Year.
ARTICLE VII
DISTRIBUTIONS AND PAYMENTS
7.1 PAYOR OF AWARDS. Subject to the following provisions hereof, any
Award payable under the Plan with respect to a Participant for a given Year
shall be the obligation of and paid by the Company or any Subsidiary, whichever
may be applicable, or any successor pursuant to Section 9.2, which employed the
Participant at the time the Award was made. Adoption and maintenance of the
Plan by the Company and any Subsidiary shall not create a joint venture or
partnership relationship among or between such persons for purposes of payment
of Awards under the Plan or for any other purpose.
7.2 CASH PAYMENT. Fifty percent (50%) of the Award shall be paid to the
Participant (or Beneficiary) in full in the form of a single sum payment in cash
as promptly as administratively possible following the last day of the Year,
except that any Award to Leonard J. Bruce if he is a Participant in the
applicable Year shall be paid one hundred percent (100%) in cash on the same
terms. The Committee shall cause the Company or Subsidiary, as the case may be,
to deduct from amounts paid under this Section 7.2 any taxes required to be
withheld by the federal or any state or local government.
6
<PAGE>
7.3 STOCK PAYMENT
(a) AMOUNT AND TIMING OF DELIVERY OF COMPANY STOCK. Fifty percent (50%) of
the Award is to be paid as hereinafter provided to the Participant in the form
of Company Stock, except that any Award to Leonard J. Bruce if he is a
Participant in the applicable Year shall be paid one hundred percent (100%) in
cash pursuant to Section 7.2. The number of shares of Company Stock shall be
determined by dividing the stock payment amount by the Market Price and such
shares of Company Stock shall be issued in the form of a certificate for such
shares as promptly as administratively possible. If necessary to assure
compliance with provisions of Rule 16b-3 promulgated by the Securities and
Exchange Commission, or any successor or similar provisions thereto, requiring
that equity securities issued under the Plan be held for six months from the
date of grant in order for such grant to be exempt from Section 16(b) of the
Securities Act of 1933 (the "Securities Act"), the certificates issued pursuant
to the immediately preceding sentence shall be held by the Company and (subject
to Section 7.3(c) and Section 7.3(d)) delivered to Participants as promptly as
administratively practicable following the six-month anniversary of the date on
which the Committee allocates the Annual Award Pool.
(b) ADJUSTMENTS FOR CHANGES IN THE COMPANY'S CAPITAL STRUCTURE, In the
event that the shares of Company Stock should, as a result of a stock split or
stock dividend or combination of shares or any other change, or exchange for
other securities, by reclassification, reorganization, merger, consolidation,
recapitalization or otherwise, be increased or decreased or changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation, the number of shares then allocated
for the stock payment portion of an Award shall be appropriately adjusted to
reflect such action. If any such adjustment shall result in a fractional share,
such fraction shall be disregarded. In the event any such transaction shall
result in holders of Common Stock acquiring the right to receive other
securities or property in addition to or in lieu of Common Stock, the Committee
may make such adjustments or take such action as, in its discretion, it deems
appropriate to reflect such transaction.
(c) OBLIGATION TO ISSUE COMPANY STOCK. The Company shall not be required
to issue any shares of Company Stock if the issuance of such shares shall
constitute a violation by the Participant, the Company or a Subsidiary of any
provisions of any law or regulation of any governmental authority, including the
Securities Act and the Securities Exchange Act of 1934 (the "Exchange Act").
Specifically, the Company shall not be required to issue shares of Company Stock
unless either (i) a registration statement under the Securities Act is in effect
with respect to such shares, (ii) the Committee has received an opinion of
counsel, in form and substance satisfactory to it, or other evidence
satisfactory to it to the effect that such registration is not required and that
such shares may be resold or transferred by the Participant without such a
registration statement being in effect or (iii) the Committee has received
evidence satisfactory to it to the effect that the Participant is acquiring such
shares for investment and not with a view of the distribution thereof and unless
the certificate issued representing such shares bears, in addition to any other
legends required under this Plan, the following legend:
7
<PAGE>
The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities laws of
any State and may not be sold or transferred except upon such registration
or upon receipt by the Company of an opinion of counsel satisfactory to the
Company, in form and substance satisfactory to the Company, that
registration is not required for such sale or transfer.
Any determination in this connection by the Committee shall be final, binding
and conclusive. At such time as a registration statement under the Securities
Act is in effect with respect to any shares of Company Stock represented by
certificates bearing the above legend or at such time as, in the opinion of
counsel for the Company, such legend is no longer required solely for compliance
with applicable securities laws, then the holders of such certificates shall be
entitled to exchange such certificates for certificates representing a like
number of shares but without such legend. The Company may, but shall in no
event be obligated to, register any securities covered hereby pursuant to the
Securities Act (as now in effect or as hereafter amended). The Company shall
not be obligated to take any other affirmative action in order to cause the
issuance of shares of Company Stock to comply with any law or regulation of any
governmental authority.
(d) WITHHOLDING. The Committee may require the Participant or Beneficiary
to pay to the Company or a Subsidiary an amount equal to any federal, state or
local taxes (which the Committee deems necessary or appropriate to be withheld
in connection with the issuance of Company Stock) in such forms of payment as
may be permitted by the Committee. In the event that Participant or Beneficiary
does not pay the Company or a Subsidiary, whichever may be applicable, the
amount required for withholding taxes, the employer (for payroll tax purposes)
of Participant shall have the right to withhold such amount from any sum
payable, or to become payable, to Participant, upon such terms and conditions as
the Committee in its discretion shall prescribe. In the event that funds are
not otherwise available to cover any required withholding tax, the Company or a
Subsidiary, whichever may be applicable, shall have no obligation to pay to the
Participant or Beneficiary shares of Company Stock otherwise payable.
7.4 DEATH OF PARTICIPANT. Each Participant shall have the right to
designate a Beneficiary to receive any Award remaining unpaid, in whole or in
part, at the death of the Participant, and to specify the time and manner of
payment thereof to such Beneficiary in accordance with rules established by the
Committee. The designation of Beneficiary shall be delivered in writing to the
Committee, or such representative thereof as the Committee may designate, and
may be changed at any time by written notice delivered to the Committee or its
representative. If no such designation of Beneficiary is delivered by a
Participant to the Committee or its representative, or if all of the designated
Beneficiaries have predeceased the Participant or otherwise ceased to exist, any
Award remaining unpaid, in whole or in part, at the death of a Participant shall
be paid to the legal representative of the Participant's estate in a single
payment of cash and Company Stock as soon as administratively possible following
the death of the Participant. Any payment hereunder that would otherwise be
made in Company Stock may be made in cash in the sole discretion of the
Committee.
8
<PAGE>
7.5 FORFEITURE. Until such time as the full amount of his Award has been
actually paid to any Participant, his right to receive any unpaid amount thereof
shall be wholly contingent and shall be forfeited if, prior to the payment
thereof, the Participant at any time prior to his retirement or termination of
Employment with the Company or a Subsidiary shall engage in conduct which is
determined by the Committee to be detrimental to or in competition with the
Company, or any of its Subsidiaries or affiliates.
7.6 NONALIENATION OF BENEFITS. Interests of Participants in this Plan or
in any securities to be issued pursuant to this Plan are not transferable by the
Participant other than in accordance with Rule 16b-3 promulgated by the
Securities and Exchange Commission, or any successor or similar provisions
thereto. No right or benefit under this Plan shall be subject to anticipation,
alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to
anticipate, alienate, sell, assign, pledge, encumber, or charge the same will be
void. No right or benefit hereunder shall in any manner be liable for or
subject to any debts, contracts, liabilities, or torts of the person entitled to
such benefits. If any Participant or Beneficiary hereunder shall become
bankrupt or attempt to anticipate, alienate, assign, sell, pledge, encumber, or
charge any right or benefit hereunder, or if any creditor shall attempt to
subject the same to a writ of garnishment, attachment, execution, sequestration,
or any other form of process or involuntary lien or seizure, then such right or
benefit shall, in the discretion of the Committee, cease and terminate.
ARTICLE VIII
TERMINATION OR AMENDMENT OF THE PLAN
8.1 TERMINATION OR AMENDMENT. The Board may modify, revise or terminate
this Plan at any time and from time to time; provided, however, that any such
amendment to the Plan that would require the vote or approval of a specified
percentage of the Company's stockholders in order to assure that the Plan
complies with Rule 16b-3 promulgated by the Securities and Exchange Commission,
or any successor or similar provisions thereto, shall only be made upon
obtaining such required stockholder vote, or taking such other action in
connection with such amendment as the Board deems advisable to operate the Plan
in accordance with Rule 16b-3 or any successor or similar rule.
8.2 CANCELLATION FOLLOWING AWARD. Termination or amendment of the Plan
shall not adversely affect rights or obligations under the Plan with respect to
any vested portion of Awards, unless the affected person or persons consent.
9
<PAGE>
ARTICLE IX
MISCELLANEOUS
9.1 OTHER COMPENSATION PLANS. The adoption of the Plan shall not
affect any other compensation plans in effect for the Company or any Subsidiary
or affiliate of the Company, nor shall the Plan preclude the Company or any
Subsidiary or affiliate thereof from establishing any other forms of incentive
or other compensation for Employees.
9.2 POWERS OF THE COMPANY. The existence of outstanding and unpaid
Awards under the Plan shall not affect in any way the right or power of the
Company or any Subsidiary to make or authorize any adjustments,
recapitalization, reorganization or other changes in the Company's or
Subsidiary's capital structure or in its business, or any merger or
consolidation of the Company or any Subsidiary, or any issue of bonds,
debentures, common or preferred stock, if applicable, or the dissolution or
liquidation of the Company or any Subsidiary, or any sale or transfer of all or
any part of its assets or business, or any other act or proceeding, whether of a
similar character or otherwise.
Should the Company or any Subsidiary (or any successor thereto) elect
to dissolve, enter into a sale of its assets, or enter into any reorganization
incident to which it is not the surviving entity, unless the surviving or
successor entity shall formally agree to assume the Plan, the Plan shall
terminate with respect to the Company or any Subsidiary (or any successor
thereto) on the earlier of the date of closing or the effective date, whichever
may be applicable, of such transaction and the full amount of any remaining
unpaid vested Awards shall be promptly paid to each such Participant (or
Beneficiary) in a single lump sum payment of cash and Company Stock. Any
payment hereunder that would otherwise be made in Company Stock may be made in
cash in the sole discretion of the Committee.
9.3 PLAN BINDING ON SUCCESSORS. The Plan shall be binding upon the
successors and assigns of the Company and any Subsidiary.
9.4 PLAN NOT A CONTRACT. This Plan will not be deemed to constitute
a contract between the Company, a Subsidiary and any Participant or to be in
consideration of or an inducement for the Employment of any Participant or
Employee. Nothing contained in this Plan shall be deemed to give any
Participant or Employee the right to be retained in the service of the Company
or any Subsidiary or affiliate of the Company or to interfere with the right of
the Company or any Subsidiary or affiliate of the Company to discharge any
Participant or Employee at any time regardless of the effect which such
discharge shall have upon him as a Participant of the Plan.
9.5 LIABILITY OF EMPLOYER. Each Participant, Beneficiary or any
other person who shall claim a right or benefit under this Plan, shall be
entitled only to look to the Participant's employer for such benefit.
10
<PAGE>
9.6 PAYMENT OF PLAN EXPENSES. The Company and each Subsidiary will
pay its pro rata share of all expenses that may arise in connection with the
administration of this Plan.
9.7 HEADINGS. Any headings or subheadings in this Plan are inserted
for convenience of reference only and are to be ignored in the construction of
any provisions hereof. All references in this Plan to Articles and Sections are
to Articles and Sections of this Plan unless specified otherwise.
9.8 GENDER AND TENSE. Any words herein used in the masculine shall
be read and construed in the feminine where they would so apply. Words in the
singular shall be read and construed as though in the plural in all cases where
they would so apply.
9.9 GOVERNING LAW. This Plan shall be construed in accordance with
the laws of the State of Texas to the extent federal law does not supersede and
preempt Texas law.
9.10 SEVERABILITY. In the event that any provision of this Plan
shall be held illegal, invalid, or unenforceable for any reason, such provision
shall be fully severable, but shall not affect the remaining provisions of the
Plan, and the Plan shall be construed and enforced as if the illegal, invalid,
or unenforceable provision had never been included herein.
9.11 NO GUARANTEE OF TAX CONSEQUENCES. Neither the Company,
Subsidiary nor the Committee makes any commitment or guarantee that any federal
or state tax treatment will apply or be available to any person participating or
eligible to participate in this Plan.
9.12 NOTICE. Whenever any notice is required or permitted hereunder,
such notice must be in writing and personally delivered or sent by mail. Any
notice required or permitted to be delivered hereunder shall be deemed to be
delivered on the date which it is personally delivered, or, whether actually
received or not, on the third business day after it is deposited in the United
States mail, certified or registered, postage prepaid, addressed to the person
who is to receive it at the address which such person has theretofore specified
by written notice delivered in accordance herewith. Any party may change, at
any time and from time to time, by written notice to the other, the address
which it or he had theretofore specified for receiving notices. Until changed
in accordance herewith, the Company or a Subsidiary shall be entitled to use the
address of a Participant as it appears in the personnel records of his employer.
Any person entitled to notice hereunder may waive such notice.
9.13 STOCKHOLDER APPROVAL. Notwithstanding any other provisions of
the Plan, in order for the Plan to continue as effective, on or before the date
which occurs twelve (12) months after the date the Plan is adopted by the Board,
the Plan must be approved by the stockholders holding at least a majority of the
voting stock (unless applicable state law or the Company's charter or by-laws
require a greater number) of the Company voting in person, or by proxy, at a
duly held stockholder's meeting, and no shares of Company Stock shall be issued
under the Plan until such approval has been secured.
11
<PAGE>
IN WITNESS WHEREOF, Vallen Corporation acting by and through its duly
authorized officers, has executed this instrument effective the 1st day of June,
1995.
ATTEST: VALLEN CORPORATION
By: /s/LEIGHTON J. STEPHENSON By: /s/JAMES W. THOMPSON
------------------------- -----------------------
Secretary President
12
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF VALLEN CORPORATION
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
- ---- ---------------
<S> <C>
Vallen Safety Supply Company Delaware
Encon Safety Products, Inc. Pennsylvania
Safety World, Inc. Delaware
All Supplies, Inc. Louisiana
Century Sales and Service Limited Canada
Vallen Contract Supply Company Nevada
Vallen Safety Supply Company, Ltd. Canada
Proveedora de Seguridad Industrial Del Mexico
Golfo, S.A. de C.V.
</TABLE>
Each subsidiary does business under its respective corporate name. All
subsidiaries are wholly-owned, except Proveedora de Seguridad Industrial Del
Golfo, S.A. de C.V., which is 50% owned by Vallen Safety Supply Company, and
Century Sales and Service Limited, which is 50% owned by Vallen Corporation.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
THE BOARD OF DIRECTORS
VALLEN CORPORATION
We consent to incorporation by reference in the Registration Statements (No.
333-03915, 333-03917 and 333-03919) on Form S-8 of Vallen Corporation of our
report dated July 12, 1996, relating to the consolidated balance sheets of
Vallen Corporation and subsidiaries as of May 31, 1996 and 1995, and the related
consolidated statements of earnings, shareholders' equity and cash flows and
related schedules for each of the years in the three-year period ended May 31,
1996, which report appears in the May 31, 1996 annual report on Form 10-K of
Vallen Corporation.
KPMG PEAT MARWICK LLP
Houston, Texas
August 22, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> MAY-31-1996 MAY-31-1996
<PERIOD-START> MAR-01-1996 JUN-01-1995
<PERIOD-END> MAY-31-1996 MAY-31-1996
<CASH> 0 831
<SECURITIES> 0 2,001
<RECEIVABLES> 0 32,617
<ALLOWANCES> 0 301
<INVENTORY> 0 33,977
<CURRENT-ASSETS> 0 73,893
<PP&E> 0 41,580
<DEPRECIATION> 0 21,191
<TOTAL-ASSETS> 0 111,663
<CURRENT-LIABILITIES> 0 17,339
<BONDS> 0 0
0 0
0 0
<COMMON> 0 4,864
<OTHER-SE> 0 77,453
<TOTAL-LIABILITY-AND-EQUITY> 0 111,663
<SALES> 62,694 237,042
<TOTAL-REVENUES> 62,694 237,042
<CGS> 46,460 176,396
<TOTAL-COSTS> 46,460 176,396
<OTHER-EXPENSES> 12,702 48,793
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 160 674
<INCOME-PRETAX> 3,708 12,334
<INCOME-TAX> 1,455 4,347
<INCOME-CONTINUING> 2,253 7,987
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,253 7,987
<EPS-PRIMARY> .31 1.10
<EPS-DILUTED> .31 1.10
</TABLE>
