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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
COMMISSION FILE 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 and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing:
$107,883,960 based on the closing price of August 9, 1999
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 7,192,264
(Title of class) (Number of shares outstanding as of August 9, 1999)
DOCUMENTS INCORPORATED BY REFERENCE
Document PART OF FORM 10-K
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Proxy Statement for the 1999 Annual Part III
Meeting of Shareholders
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PART I
ITEM 1. BUSINESS
Vallen Corporation, together with its subsidiaries, (the "Company" or
"Vallen") was incorporated under the laws of Texas in 1960. The Company is in
the following business segments: Industrial Distribution and Industrial Safety
Product Manufacturing. The Company operates through various domestic
subsidiaries and international affiliates.
The industrial distribution segment serves commercial, U.S. and local
government markets with a wide variety of products and support services involved
in maintaining individual worker safety and workplace environment protection.
The Company also distributes industrial hardware and welding supplies to
commercial markets in the U.S. and Canada. The industrial safety products
manufacturing segment, through its Encon Safety Products, Inc. (Encon)
subsidiary, manufactures industrial safety equipment and non-prescription
optical quality eyewear marketed through the Company's industrial distribution
outlets and other unaffiliated distributors.
The table included in Note 11 to the Company's Consolidated Financial
Statements provides certain information regarding Vallen's distribution and
manufacturing industry segments for the Company's most recent 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, business development, taxes and employee training and
development.
INDUSTRIAL DISTRIBUTION
The Industrial Distribution segment consists of operating subsidiaries
Vallen Safety Supply Company, All Supplies, Inc. and Vallen Safety Supply
Company, Ltd. a Canadian corporation. Also included in this segment are
operations of three 50% owned affiliates: (1) Proveedora de Seguridad
Industrial del Golfo, S.A, (Proveedora), a Mexican company who distributes
safety products and support services throughout Mexico; (2) Century Sales &
Service Limited (Century), an Edmonton, Alberta based Canadian corporation that
distributes mill supply industrial hardware and safety equipment; and (3)
Vallen-Acetogen Safety Chile, S.A., a Chilean corporation formed in December,
1998, which distributes safety equipment products into commercial markets from
its Santiago base.
Operating from 162 locations, including 59 onsite stores at customer
locations throughout North American and in Chile, this segment is one of North
America's leading distributors of personal and workplace related safety products
and related services, in addition to a regionally dispersed distributor of
industrial mill supply products. Its markets served include numerous commercial
and industrial customers, intrinsic industry segments, including oil and
petrochemical process industries, energy producing utilities, pulp and paper,
agribusiness and general manufacturing. The distribution segment also serves
federal and local government units and agencies. Its computer-linked
distribution and services centers provide integrated safety solution on a timely
basis for single and multiple location customers, featuring availability of over
25,000 products and support services featuring personal protection products,
service and repair of respirator/breathing apparatus, environmental monitoring
equipment and fire safety systems installation, maintenance and inspection. The
Company also provides OSHA-based safety training and onsite consulting and risk
evaluation services. In addition to traditional lines offered, value added
processes such as onsite real time delivery, inventory management process and
computerized, electronic based ordering and payment capability are provided to
the Company's diverse customer base.
The industrial distribution segment, accounting for 95% of the Company's
total sales, distributes products and provides related services from more than
1,600 suppliers worldwide, including products bearing the Company's private
label. The top 10 suppliers accounted for approximately 33% of its total sales
turnover for the year ended May 31, 1999. The Company believes that competitive
sources of supply are available for substantially all of the products sold in
its distribution businesses. In fiscal 1999, no single supplier accounted for
as much as 7% of distribution segment products sold.
Most safety and industrial health product manufacturers sell through
distributors such as Vallen Safety due to the relatively high direct marketing
costs of relatively narrow product lines.
At May 31, 1999, distribution segment inventories comprised approximately
30% of consolidated assets. As of May 31, 1999 and 1998, backlog orders entered
totaled $7,467,000 and $7,226,000, respectively for the distribution business.
The Company expects that these orders can be filled in the ordinary course of
business in the following twelve months.
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Vallen Safety's "in-plant store" units are physically located on the
customers' premises in order to provide top quality products and services for
continuous operating schedules. 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 59.
Vallen Safety maintains service centers that inspect, repair and calibrate
respiratory equipment, fire protection equipment and electronic atmospheric
hazard detection instruments. Mobile respiratory service van units are staffed
by factory certified technicians who perform scheduled in-plant inspection and
repair work for customers.
Across the U.S. and Canada, Vallen Safety has regional hubs that use their
large distribution centers to ship products directly to customers and to supply
service support units for smaller branch locations and onsite and just-in-time
locations. 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 as well as seminars for customer employees.
All Supplies, Inc., a wholly-owned subsidiary, 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.
The Company's distribution subsidiaries sell to a diverse customer base.
No customer accounted for 5% or more of distribution segment revenues for the
year ended May 31, 1999. Sales to Proveedora, Century and to domestic companies
for export purposes were less than 2% of distribution net sales during the year
ended May 31, 1999.
During the last half of the fiscal year ended May 31, 1999, demand for
traditional product lines in the distribution segment within key market
segments, including process industries, petrochemicals, paper processing and
utilities were lower across the board, putting pressure on operating earnings.
Additionally, Century's sales and margins were adversely affected as a result of
depressed market in their primarily energy industry based economy in Alberta and
Saskatchewan, resulting in lower equity earnings levels for the Company from
this affiliate.
Sales and operating results for Proveedora, the Company's Mexican
distribution affiliate reached record levels in the current fiscal year.
Significant to its operating results were contracts to supply the state-owned
energy company, Pemex, with the total solution based package of products and
services offered by Vallen to provide that group with world class safety
programs for its drilling operators. Year over year double-digit growth was
achieved in all its major markets.
Vallen's industrial distribution businesses work with its diverse customer
base to provide total solutions to safety and other MRO issues, assisting
customers to develop world class safety programs with value added products and
services delivered.
The Company's primary domestic distribution subsidiary, Vallen Safety
Supply Company (Vallen Safety) increased its services based business lines
across all geographic markets during the year ended May 31, 1999. Environmental
detection instrument sales and services, services and repair of SCBA units, and
inspection and maintenance of portable fire service units via service contracts,
primarily for larger, multiple location customers, as well as knowledge based
training and consulting services are lines of business that are supplementary to
the core business product lines distributed. These lines accounted for
approximately 11% of the industrial distribution business for the current year,
8% in fiscal 1998 and 4.5% in fiscal 1997.
In order to bring its operating costs in line with current market returns
in its core products distribution business, the Company instituted a cost-
restructuring program in its Vallen Safety subsidiary in the second half of the
1999 fiscal year. The total costs incurred in the program were approximately
$1,900,000. The costs were primarily comprised of (1) personnel severance and
related benefits, (2) consulting costs for re-engineering assessment, and (3)
branch re-sizing and relocation expenditures.
Additionally, the Company incurred approximately $500,000 in fiscal 1999 in
non-recurring external and internal costs preparing the information processing
systems in its industrial distribution and industrial safety products
manufacturing segments for compliance with Y2K requirements. The Company's
internal systems have been successfully tested for compliance as of May 31,
1999.
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INDUSTRIAL SAFETY MANUFACTURING
Vallen's Encon Safety Products Company (Encon) produces a variety of safety
products and other commercial application products in its three locations.
Others fabricate many components of its manufactured products, with Encon
providing assembly completion where cost and logistics consideration justify it.
Its full lines of emergency shower and eyewash products, as well as non-
prescription safety eyewear are marketed across many domestic and international
commercial and industrial markets. Its products are used extensively in
industries where workers are exposed to potentially hazardous environmental
conditions.
Encon's shower and eyewash products group includes fixed systems designed
for use in plant layouts where standard plumbing systems are in place. Its
standard lines are employed where environmental conditions are not subject to
freezing temperatures. Freeze-protected shower units are marketed for
environments where extreme cold temperatures exist, primarily in outdoor
locations. Tempered water showers are used in indoor or outdoor applications,
designed to provide tepid water supplies while affording freeze protection.
Self-contained portable eyewash/drench hose models have applications in
environments where no potable water sources are available and are competitively
priced.
Encon's diverse line of lightweight non-prescription eyewear sales is
targeted to protect individuals in work related and recreation activities.
Encon's industry-standard setting industrial goggle lines are designed for
diverse application, including providing protection with hard hat usage and/or
prescription eyewear inserts, as well as use with a broad line of respirator
units as distributed by Vallen's safety distribution business. Other specialty
goggle lines offer fog free lenses, high impact performance models and Mylar(R)
covers used in confined space areas, at moderate prices and in multiple lens
colors. Encon's new Encompass(TM) goggles are ergonometrically designed to fit a
wide spectrum of global facial features with secure seal ability.
The Company's Veratti(TM) line of lightweight designer safety sunglasses
has become a favorite with today's generation of workers who demand safety with
style. This line of eyewear meets ANSI-87 and CSA standards for such products,
and is popularly priced, coming in many color frames and replaceable tinted
lenses. Veratti lines have been recently introduced in association with
NASCAR(R) and Colt(R) groups. These lines compete in markets with numerous other
suppliers, some of which have much broader distribution markets than Encon.
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 self-
contained breathing apparatus (SCBA), fire extinguishers, escape respirators,
and protective clothing. The cabinets have a high visibility appearance and
virtually air tight, durable design. The wallcase lines keep valuable customer
property and equipment accessible and in ready to use condition.
During the year ended May 31, 1999, 35% of manufacturing net sales were
made to the Company's distribution operations. The remaining 65% were made
primarily to unaffiliated regional distributors, industrial mail order catalog
firms, overseas sales representatives, and certain industrial users.
Manufactured products are marketed primarily under the "Encon" name. Other than
to the Company's distribution operations, no single customer accounted for 5% of
more of consolidated revenues for the manufacturing operations for the year
ended May 31, 1999.
Approximately $3,100,000 or 14.8% of manufacturing net sales for the year
ended May 31, 1999 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.
As of May 31, 1999 and 1998, backlog orders entered totaled $1,900,000 and
$1,949,000 respectively for the manufacturing business. It is expected that all
of the backlog orders as of the end of fiscal 1999 can be reasonably expected to
be filled within twelve months of the year end date.
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.
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.
4
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Encon's sales for the current fiscal year were flat compared to the prior
year. A continued slowdown in Encon's traditional industrial customers in the
U.S. and Canada over the past year has resulted in a flat to slightly downturned
level for the U.S. shower and eyewash industry output, although Encon continues
to maintain its market share percentage. Eyewear sales year over year were up
15.8 %, the third straight year of comparable growth, particularly in the new
lightweight eyeglass lines.
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,
Limited 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 that 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.
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 product liability policies maintained by certain of its suppliers and
maintains product liability and other insurance coverage 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 1,100 full-time and part-time employees as of May 31,
1999. The manufacturing operations employed 132 of the total. The balance of
employees is employed in the Company's distribution operations and corporate
offices. None of the Company's employees are employed under collective
borrowing agreements. The Company considers its relationship with its employees
to be satisfactory.
5
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FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Consolidated operations for the Company included the U.S, and Canada.
Information herein relates solely to these consolidated entities (Thousands of
dollars):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1999 1998 1997
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<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $291,835 $283,025 $247,875
Canada 11,109 7,844 3,881
Export Sales to unaffiliated customers:
Mexico $ 1,120 $ 2,892 $ 3,785
Other 2,054 1,102 2,245
Operating Profit or loss:
United States $ 5,272 $ 11,437 $ 12,114
Canada (117) (277) (96)
Identifiable assets:
United States $138,091 $134,950 $116,013
Canada 3,835 1,619 1,389
</TABLE>
ITEM 2. PROPERTIES
Vallen's corporate and distribution headquarters are located in a 50,000
square foot building in northwest Houston. The building and the five-acre
tract, on which it is situated, are leased by the Company, following the sale of
the property near the end of the 1998 fiscal year. The Company is scheduled to
move into new quarters on an adjacent tract of land when a planned commercial
office building is completed in late 1999. The Company owns a 65,000 square
foot manufacturing facility in Houston, which also houses its instrument
servicing and knowledge systems operations. 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. The Company owns
branch-warehouses for its distribution operations with an aggregate of 31,494
square feet of space in Brazosport, Corpus Christi, and Odessa, Texas; it leases
an aggregate of 647,000 square feet of warehouse and office space in over 60
locations throughout the United States and Canada. During the fiscal year ended
May 31, 1998, the Company entered into a sale and leaseback transaction covering
six office/warehouse facilities for a period of ten years.
Aggregate rentals of real property during the year ended May 31, 1999 were
$3,469,000. Reference is made to Notes 4 and 9 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
The Company is a party to incidental litigation in the ordinary course of
business, primarily related to silicosis claims in the State of Texas, none of
which individually or in the aggregate, is considered to be material to its
operations or financial condition. The Company maintains insurance coverage
against certain liabilities that may occur from time to time.
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, 1999.
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PART II
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 7, 1999 there were
approximately 1,350 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. During the year
ended May 31, 1999, the Company purchased 85,100 shares of its Common stock in
open market transactions under a stock repurchase plan previously approved by
the Company's Board of Directors.
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.
<TABLE>
<CAPTION>
QUARTER HIGH LOW
- ------- ------- --------
<S> <C> <C>
Year Ended May 31, 1999
Fourth $18 3/4 $ 14 7/8
Third 21 5/8 18 5/8
Second 20 5/8 17
First 22 18
Year Ended May 31, 1998
Fourth $ 21 $ 20
Third 21 1/8 19 7/16
Second 22 3/8 18 3/4
First 19 7/8 17 7/8
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
VALLEN CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
In thousands (except per share data)
<TABLE>
<CAPTION>
OPERATING RESULTS FOR THE YEAR ENDED MAY 31,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $306,118 $294,863 $257,786 $237,042 $203,284
Net earnings $ 7,346 $ 10,235 $ 8,764 $ 7,987 $ 7,142
Diluted earnings per common share $ 1.01 $ 1.39 $ 1.19 $ 1.09 $ 1.00
FINANCIAL POSITION AT MAY 31,
Total assets $142,980 $136,569 $117,402 $111,663 $ 90,654
Working capital $ 84,316 $ 77,793 $ 63,009 $ 56,554 $ 51,721
Current asset ratio 5.4:1 4.7:1 5.3:1 4.3:1 5.5:1
Long-term debt $ 16,790 $ 13,631 $ 10,968 $ 11,169 $ 5,355
Debt-to-equity ratio 0.16:1 0.1:1 0.1:1 0.1:1 0.1:1
SHAREHOLDERS' EQUITY AT MAY 31,
Shareholders' equity $106,887 $100,870 $ 91,339 $ 82,317 $ 72,682
Weighted average number of common
shares outstanding - diluted 7,290 7,365 7,335 7,337 7,108
Book value per share $ 14.66 $ 13.70 $ 12.45 $ 11.22 $ 10.23
</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 1999, 1998 and 1997, indicating changes in various
items in the statement of earnings as a percentage of net sales, and the
increase (decrease) in such items in 1999, 1998 and 1997 compared to the prior
year.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
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PERCENTAGE OF INCREASE
ITEMS IN CONSOLIDATED STATEMENT OF (DECREASE) FROM
EARNINGS AS A PERCENTAGE OF NET SALES PRIOR YEAR
----------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 3.8% 14.4% 8.8%
Cost of sales 75.7 75.3 75.3 4.3 14.4 10.0
Gross profit 24.3 24.7 24.7 2.3 14.3 5.1
Selling, general and
administrative expenses 22.6 20.9 20.1 12.5 19.3 6.0
Other income (expense), net /(1)/ 1.3 1.3 .6 1.7 152.9 220.6
Income taxes 0.6 1.6 1.9 (59.1) .6 10.3
Net earnings 2.4 3.5 3.4 (28.2) 16.8 9.7
</TABLE>
__________________________
/(1)/ Includes the 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, net" contained herein
increased to $4,098,000 in 1999 from $3,426,000 in fiscal 1998 due to increased
earnings from Proveedora totaling $1,170,000, decreased earnings from Century
totaling $463,000 and a fiscal year 1999 loss of $35,000 for Vallen-Acetogen.
The Company purchased a 50% interest in Proveedora, based in Tampico,
Mexico, on December 17, 1992; purchased a 50% interest in Century, based in
Edmonton, Alberta (Canada), on June 6, 1995; and acquired a 50% interest in
Vallen-Acetogen Safety Chile, S.A. (Chile) on December 21, 1998. The initial
investments and capital contributions were $2,767,000, $4,472,000, and $260,000,
respectively. Total sales for the years ended May 31, 1999 in U.S. dollar
equivalents, were $37,444,000 for Proveedora, $44,986,000 for Century, and
$122,000 for Vallen-Acetogen, respectively, compared to $27,269,000 for
Proveedora, $52,008,000 for Century and $0 for Vallen-Acetogen, respectively in
1998.
NET SALES
Consolidated net sales increased $11,255,000 or 3.8% during fiscal 1999 as
compared to an increase of $37,077,000 or 14.4% in 1998. Sales increased 3% in
the distribution segment and 2.6% in the manufacturing segment during fiscal
1999. The increase in distribution sales for fiscal 1999 and 1998 was primarily
due to acquisitions and expansion of services revenues and sales from new annual
contracts in fiscal 1999 and 1998. The increase in the manufacturing sales
level was primarily related to the increased market penetration of non-
prescription eyewear lines and new eyewear products introduced during the
period.
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GROSS PROFIT
Consolidated gross profits as a percentage of net sales were 24.3%, 24.7%
and 24.7% for fiscal years 1999, 1998 and 1997 respectively. Manufacturing
gross profits increased in 1999 from 1998 as a result of improved sales,
primarily in the eye protection product group. The manufacturing subsidiary's
overall gross profit margins decreased in 1998 compared to 1997 primarily as a
result of competition in its core shower and eyewash lines. Eyewear lines
margins remained strong compared to 1997. The distribution subsidiaries' sales,
which are at lower gross profit margins, accounted for the significant
percentage of total Company sales. Total distribution sales as a percentage of
consolidated sales were 95% for 1999, 1998 and 1997, respectively. Gross
profit margins for the distribution operations were slightly lower in 1999
compared to 1998 and 1997 in part a result of the high volume, lower margin
contracts with large multiple location customers. This erosion was offset in
part due to the increasing percentage of total net sales attributable to
supplementary service lines that have higher gross profits levels than product
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, as a percentage of net sales,
were 22.7% in fiscal 1999 compared to 20.9% in 1998 and 20.1% in 1997. These
operating expenses in dollar terms increased 12.5% to $69,362,000 in fiscal 1999
and 19.3% to $61,678,000 in fiscal 1998. In fiscal 1999, the increase was
primarily attributable to restructuring charges of approximately $1,900,000 in
the distribution segment related to branch consolidations, personnel severance
and benefits, and re-engineering consulting costs. In fiscal 1998, the increase
resulted primarily from added expenses from companies acquired as well as
expenses related to adding more supplementary services lines to provide
customers with the Company's broader concept of safety distribution lines.
Additionally, payroll increases, increases in occupancy costs related to
additional locations acquired and the result of a significant sale-and-leaseback
transaction in April 1998 added to the higher operating costs relative to sales
levels in 1999 as compared to 1998.
NET EARNINGS
Consolidated net earnings as a percentage of net sales were 2.4%, 3.5% and
3.4% for fiscal years 1999, 1998 and 1997 respectively. Fiscal year 1999 net
earnings of $7,346,000, or $1.01 per diluted share, represented a 28% decrease
compared to fiscal 1998. Fiscal year 1998 net earnings or $10,235,000, or $1.39
per diluted share, represents a 16.8% increase over fiscal 1997.
Lower earnings in 1999 compared to 1998 were attributable to lower sales
levels in the fourth quarter of 1999 in the core distribution products group,
restructuring expenses as noted above, and lower earnings results in the
Company's Canadian affiliate, Century Sales, due to market softness in the
energy market in Western Canada. The increase in 1998 over 1997 is primarily
attributable to increased earnings of foreign affiliates, higher overall sales,
and in part related to acquisitions and better operating results from the
manufacturing segment's eyewear business. Continued price competition in the
Company's core domestic distribution lines partially offset these gains in 1998.
EARNINGS FROM FOREIGN AFFILIATES, INTEREST AND DIVIDEND INCOME, AND OTHER INCOME
(EXPENSE)
Earnings from foreign affiliates, net to the Company, were $4,098,000 at
May 31, 1999 versus $3,426,000 for the year ended May 31, 1998. The earnings
are from the Company's 50% equity position in its Mexican affiliate
(Proveedora), Canadian affiliate (Century Sales), and Chilean affiliate (Vallen-
Acetogen). Through the recognition of an exchange rate variance in 1999 related
to the Mexican peso, the total investment in foreign affiliates was reduced by
$84,000. The earnings from the Mexican affiliate were significantly enhanced in
1999 through completion of a large service contract with government-owned Pemex.
The earnings recorded from Century Sales, whose functional currency is the
Canadian dollar were negatively impacted by the falling value of that currency
versus the U.S. dollar and the downturn in the energy business in Western Canada
throughout the fiscal year.
Interest and dividend income increased in 1999 by $52,000 to $250,000 when
compared to fiscal year 1998 due to higher cash levels available for investment.
Interest expense increased in 1999 by $82,000 and in 1998 by $120,000 primarily
due to the increased levels of long-term debt added from acquisition
transactions in the Company's distribution operations, as well as slightly
higher rates in 1999 for the variable rate industrial development bonds
outstanding for Encon.
9
<PAGE>
In 1999, other income, net decreased to $510,000 from $1,085,000 in fiscal
year 1998 due primarily to a $591,000 reduction in gains realized on sales of
assets. In 1998 gains on sales of real estate of $574,000 were recorded
compared to no such sales in 1999. In 1998, other income, net increased to
$1,085,000 as a result of earnings from the Lion-Vallen Limited Partnership of
$771,000, the aforementioned real estate gains partially offset by the loss on
an equity accounting basis of $131,000 from Vallen's investment in Nuclear
Utility Products, Inc. (NUPRO) as well as amortization of intangible assets
including goodwill. Comparatively, in 1997, the earnings from the Lion-Vallen
Partnership totaled $699,000, gains on sale of real estate totaled $416,000 and
the equity loss from the investment in NUPRO was $303,000.
INCOME TAXES
The effective tax rates for fiscal years 1999, 1998 and 1997 were 21.6%,
32.0% and 35.4%, respectively. The effective tax provision for 1999 was lower
primarily due to lower taxable income for domestic operations and due to tax
planning strategies lowering effective state tax rates. The effective tax rate
in 1998 was lower than the previous two years primarily due to the increase in
equity earnings provided by foreign operation relative to overall taxable income
from domestic operations, as well as the results of tax savings strategy at the
state taxation level.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided by (used in) operations for fiscal years 1999, 1998
and 1997 was $2,754,000, $(2,955,000), and $2,998,000, respectively. Reduction
in finished goods inventories in the distribution segment and more efficient
collection of accounts receivable balances accounted for the increase in 1999
over 1998. The major decrease in cash provided in 1998 related to the
significant increase in undistributed earnings of foreign affiliates and the net
increase in receivables and inventories from expansion in the distribution
business. Net cash used in investing activities totaled $4,049,000 for fiscal
1999, compared to a net cash provided position in 1998 of $1,236,000 and used in
1997 of $2,831,000. The net usage of funds for investments in 1999 was primarily
attributable to the purchase of new equipment in the manufacturing segment and
in improvements for building expansion in its regional hub sites. The primary
increase in proceeds from investing in 1998 related to the sale of real estate.
During fiscal year 1998, Vallen entered into a 10-year sale and leaseback
transaction related to six previously owned distribution center sites in the
U.S. Additionally, the Company sold the corporate office location for
approximately $1.8 million in May 1998. Cash used in acquisition of businesses
totaled $780,000 in 1999 was down from the level of acquisitions in 1998. Net
cash used in investing activities in 1998 was significantly lower than in 1997
due to the asset sales mentioned above partially offset by higher capital
expenditures and business acquisition costs.
Long term debt increased in 1999 in the net amount of $3,159,000, resulting
from additional borrowings under bank lines of credit for acquisitions, business
expansion and operating purposes, offset in part by debt repaid relative to
revolving bank loans. Total long-term debt, including current maturities, at
May 31, 1999, 1998 and 1997; respectively were $16,790,000, $13,631,000 and
$10,968,000.
The Company's financial position remains strong with working capital of $84
million, and a current ratio of 5.4 to 1. In addition to internal cash flow
sources, the Company has unused committed borrowing capacity through major
commercial banks. Management believes that its resources are more than adequate
to fund working capital and normal expansion plans, including planned capital
expenditure levels, at this time.
10
<PAGE>
LONG-TERM OBLIGATIONS
On March 28, 1990, the Company issued $2,750,000 in industrial development
bonds (See Note 4 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 July 24, 1995, Vallen Safety entered into an unsecured facility with a
major bank. The facility has been subsequently amended so that borrowing
capacity under the facility is $13.5 million. The Agreement has been amended in
1997, 1998 and 1999 to extend the onset of the beginning amortization period by
one year. The impact of these amendments has been to reclassify $1,300,000 and
$1,470,000 to non-current debt category in 1999 and 1998, respectively. As of
May 31, 1999, $13 million is outstanding under the facility. See further
details of the Agreement in Note 4 to the financial statements.
Concurrent with the purchase of a majority of the outstanding stock of
Superior Safety of Ontario, Canada in October 1997 and the simultaneous merger
of Superior into Vallen Safety Supply Company, Ltd., bank debt in the amount of
$601,000 was assumed. As of May 31, 1999, the outstanding debt under this
facility was equal to $869,000. See note 4 to the financial statements for
further details.
Other long-term debt relates to other obligations related to acquisition
payouts.
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,
1999. The Company has generally been able to pass along price increases from
its manufacturing suppliers.
CAPITAL EXPENDITURES
During fiscal 1999 the Company invested $2,575,000 in capital assets for
its distribution segment and $641,000 for its manufacturing segment. The
distribution expenditures were primarily comprised of $1,033,000 for rental
equipment, $70,000 for buildings and improvements, $437,000 for new computer
hardware and software, and $1,035,000 for fixtures and operating equipment. The
manufacturing expenditures were primarily for tools, dies and computer equipment
used in the manufacturing process.
The capital expenditure program for the 2000 fiscal year is expected to
total approximately $3,300,000. Of this total, expenditures for equipment and
molds for the manufacturing group are projected to be approximately $470,000.
The remainder is spread among warehouse fixtures and equipment, vehicles and
order processing equipment. Management anticipates funding its commitments for
capital expenditures with cash generated from operations and/or its borrowing
capacities.
11
<PAGE>
YEAR 2000
The Company's business is heavily dependent on its information systems.
These systems are critical in providing users with information regarding product
pricing and availability; order status; warehouse operations; inventory
purchases and management; financial reporting; and other operational functions.
Year 2000 issues exist when year dates in computer programs are recorded
using two digits, instead of four, and are then used for arithmetic operations,
comparisons or sorting. A two-digit date recording may recognize a date using
"00" as 1900 rather that 2000, and that could cause the Company's computer
systems to perform inaccurate computations. The Company's Year 2000 issues
relate not only to its own systems, but also to those of its customers and
suppliers.
The Company has conducted a comprehensive review of its internal computer
systems and applications to identity those that might be affected by the year
2000 issue and developed an implementation plan to resolve the year 2000 issue.
The initial planning and assessment phases were completed in 1998, and testing
to confirm compliance was also conducted. All critical Company computer systems
are now year 2000 compliant. Conversion of other internal computer systems is
ongoing with completion in June 1999. In May 1999, Vallen was notified by its
data communications provider that it was planning to abandon the existing
network by the end of 1999 since it would not be remedied to be year 2000
compliant. The provider has proposed an alternative to the existing network
that is compliant. The Company is studying the alternative and plans to
implement either it or another alternative by October 1, 1999. Further, the
Company could continue to conduct business through its dial backup network with
no impact to its other processes. The Company believes it will be able to
modify or replace the remaining affected systems and applications in time to
avoid any material detrimental impact on its operations.
The Company has incurred internal staff costs as well as consulting and
other expenses related to infrastructure and facilities enhancements necessary
to prepare its systems and applications for the year 2000 issue. Through
May 31, 1999 approximately $500 thousand has been spent for year 2000 corrective
and replacement activities. Management does not anticipate that the costs of
addressing remaining Y2K issues will be material to the Company's financial
position, results of operations or cash flows in future periods. Although the
Company does not anticipate incurring significant costs to modify its computer
systems, there can be no assurance that significant costs will not be incurred.
It is management's understanding that all year 2000 compliance efforts will
be completed by October 31, 1999, including testing. However, if such
modifications and conversions were not completed accurately, the year 2000 issue
may have a material impact on the operations of the company. The Company is also
working to ensure that products purchased by Vallen, as well as services
utilized by Vallen, will be year 2000 compliant. However no assurance can be
given that such compliance will happen.
Vallen has established a year 2000 business resumption planning committee
to evaluate business disruption scenarios, coordinate the establishment of year
2000 contingency plans, and identify and implement preemptive strategies.
Detailed contingency plans for critical business processes were developed in
fiscal year 1999.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The information discussed herein includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (The "Exchange Act"). All statements other than statements of
historical facts included herein regarding planned capital expenditures, the
Company's financial position, business strategy and other plans and objectives
for future operations, are forward-looking statements (typically using words
such as "expert," "plan," "anticipate," "believe," and similar expressions).
Although the Company believes that such forward looking statements reasonably
reflect expected outcomes, certain risks and assumptions are involved, and there
is no conclusive evidence that such expectations will ultimately prove correct.
Factors which may come into play that could cause actual results to vary from
anticipated results include acquisition programs involved in expansion
strategies, market competition affecting operating margins, depressed business
environments for the Company's customers, the Company's ability to compete
successfully with other competitors for the same markets (some of whom may be
larger and have greater resources than the Company), ability to obtain products
needed to remain competitive over long periods of time, ability to continue to
produce technically competitive products in its manufacturing segment, possible
exchange rate fluctuations related to affiliates in other countries, and changes
in regulatory requirements in its geographic markets.
12
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Total debt at May 31, 1999 included $16.6 of floating rate debt to banks
and for industrial development bonds. As a result, the Company's annual
interest cost in fiscal year 2000 will fluctuate based on short-term interest
rates. The impact on annual cash flow of a 100 basis point change in the
floating rate would be approximately $105,000.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company conducts a portion of its business in the Canadian dollar and
is therefore subject to foreign currency exchange rate risk on cash flows
related to sales, expenses, financing and investing transactions. Exposure from
market rate fluctuations related to activities in Canada, where the Company's
functional currency is the Canadian dollar, is not material at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VALLEN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE REFERENCE
14 - Report of KPMG LLP, Independent Auditors.
15 - Consolidated Balance Sheets -- May 31, 1999 and 1998.
16 - Consolidated Statements of Earnings -- Years ended May 31, 1999,
1998 and 1997.
17 - Cosolidated Statements of Comprehensive Earnings -- Years ended May
31, 1999, 1998 and 1997.
18 - Consolidated Statements of Shareholders' Equity -- Years ended
May 31, 1999, 1998 and 1997.
19 - Consolidated Statements of Cash Flows -- Years ended May 31, 1999,
1998 and 1997.
20 - Notes to Consolidated Financial Statements.
13
<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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Houston, Texas
July 23, 1999
14
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
MAY 31,
----------------------
ASSETS 1999 1998
--------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,524 $ 1,041
Investment securities, at cost which approximates market 3,000 3,000
Accounts receivable, less allowance for doubtful accounts of $541 and $518 at
May 31, 1999 and 1998, respectively 50,878 48,382
Inventories 42,674 42,340
Prepaid expenses and other current assets 5,239 4,211
-------- --------
Total current assets 103,315 98,974
-------- --------
Property, plant and equipment, at cost 39,453 37,825
Less accumulated depreciation and amortization 25,234 24,175
-------- --------
Net property, plant and equipment 14,219 13,650
Notes receivable, non-current, affiliate 427 557
Investment in foreign affiliates, net 17,002 13,138
Intangibles, net of accumulated amortization of $2,966 and $2,506 at
May 31, 1999 and 1998, respectively 7,108 6,919
Other 909 3,331
-------- --------
$142,980 $136,569
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 961 $ 898
Accounts payable 15,057 14,316
Accrued liabilities 2,981 5,178
Income taxes payable - 789
-------- --------
Total current liabilities 18,999 21,181
-------- --------
Long-term debt, excluding current maturities 15,829 12,733
Deferred income taxes 834 973
Other non current liabilities 764 945
Minority interest (333) (133)
Shareholders' equity :
Preferred stock, $1.00 par value; 1,000,000 shares authorized and unissued at
May 31, 1999 and 1998
Common stock $.50 par value; 20,000,000 shares authorized; 9,758,075 issued and
7,182,264 outstanding at May 31, 1999 and 9,758,075 issued and 7,249,658
outstanding at May 31, 1998 4,879 4,879
Additional paid-in capital 6,861 6,544
Accumulated other comprehensive loss (837) (776)
Retained earnings 101,360 94,014
-------- --------
112,263 104,661
Less cost of common shares held in treasury (2,575,811 and 2,508,417
shares at May 31, 1999 and 1998, respectively) (5,376) (3,791)
-------- --------
Total shareholders' equity 106,887 100,870
-------- --------
Commitments and contingencies
$142,980 $136,569
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of Dollars Except for Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $306,118 $294,863 $257,786
Cost of sales 231,601 222,025 194,060
-------- -------- --------
Gross profit 74,517 72,838 63,726
Selling, general and administrative expenses 69,362 61,678 51,708
-------- -------- --------
Operating income 5,155 11,160 12,018
Earnings from foreign affiliates, net 4,098 3,426 1,453
Interest and dividend income 250 198 252
Interest expense (891) (809) (689)
Other income (expense), net 510 952 526
-------- -------- --------
Earnings before income taxes and minority interests 9,122 14,927 13,560
Income taxes 1,975 4,825 4,796
Minority interest 199 133 -
-------- -------- --------
Net earnings $ 7,346 $ 10,235 $ 8,764
======== ======== ========
Net earnings per common share:
Basic $1.02 $1.41 $1.21
======== ======== ========
Diluted $1.01 $1.39 $1.19
======== ======== ========
Weighted average number of common shares outstanding:
Basic 7,198 7,273 7,269
======== ======== ========
Diluted 7,290 7,365 7,335
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Thousands of Dollars)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Net earnings $7,346 $10,235 $8,764
Other comprehensive earnings:
Foreign currency translation losses (61) (3) -
------ ------- ------
Total comprehensive earnings $7,285 $10,232 $8,764
====== ======= ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Thousands of Dollars, Except for Share Amounts)
<TABLE>
<CAPTION>
ACCUMULATED
SHARES OF ADDITIONAL OTHER COM- TOTAL
COMMON STOCK, COMMON PAID-IN PREHENSIVE RETAINED TREASURY SHAREHOLDERS'
$.50 PAR VALUE STOCK CAPITAL LOSS EARNINGS STOCK EQUITY
---------------- ------- ---------- ------------ -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at May 31, 1996 9,726,875 $4,864 $5,825 $(773) $ 75,015 $(2,614) $ 82,317
Net earnings - - - - 8,764 - 8,764
Employee stock purchases 13,999 7 223 - - - 230
Stock transactions - - 28 - - - 28
---------- ------ ------ ----- -------- ------- --------
Balances at May 31, 1997 9,740,874 $4,871 $6,076 $(773) $ 83,779 $(2,614) $ 91,339
Net earnings - - - - 10,235 - 10,235
Employee stock purchases 14,201 7 226 - - - 233
Exercise of stock options 3,000 1 242 - - 17 260
Stock transactions - - - - - (1,194) (1,194)
Currency translation adjustment - - - (3) - - (3)
---------- ------ ------ ----- -------- ------- --------
Balances at May 31, 1998 9,758,075 $4,879 $6,544 $(776) $ 94,014 $(3,791) $100,870
Net earnings - - - - 7,346 - 7,346
Employee stock purchases - - 189 - - 22 211
Employee stock awards - - 128 - - 12 140
Stock transactions - - - - - (1,619) (1,619)
Currency translation adjustment - - - (61) - - (61)
---------- ------ ------ ----- -------- ------- --------
BALANCES AT MAY 31, 1999 9,758,075 $4,879 $6,861 $(837) $101,360 $(5,376) $106,887
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 7,346 $ 10,235 $ 8,764
Adjustments to reconcile net earnings to net cash
Provided by operating activities:
(Gain) loss on disposition of property, plant & equipment 8 (583) (421)
Depreciation and amortization 3,238 3,744 3,421
Deferred income taxes 389 (383) (230)
Undistributed earnings of foreign affiliates, net (3,605) (3,426) (1,453)
Undistributed earnings from U.S. partnership, net 518 (480) (699)
Loss from affiliate, net - 145 303
Compensation expense related to restricted stock award 52 - -
Change in minority interest of majority-owned affiliates (199) (133) -
(Increase) in trading securities - (950) (49)
(Increase)in accounts receivable (3,444) (12,088) (2,166)
(Increase) in inventories (221) (5,362) (1,273)
Decrease (increase) in notes receivable, current - 650 (503)
(Increase) decrease in prepaid expenses & other current assets (502) (1,280) 2,077
(Increase) decrease in other assets (23) 651 (1,048)
Increase (decrease) in accounts payable & other current (803) 6,305 (3,725)
liabilities ------- -------- -------
Net cash provided by (used in) operating activities 2,754 (2,955) 2,998
INVESTING ACTIVITIES:
Proceeds from disposition of assets 77 8,316 841
Net additions to property, plant and equipment,
net of effects of acquisitions (3,216) (4,200) (2,832)
Payments for acquisitions of businesses (780) (3,384) (1,234)
Decrease in notes receivable, non-current 130 - 1,042
Investment in affiliates (260) 504 (648)
------- -------- -------
Net cash provided by (used in) investing activities (4,049) 1,236 (2,831)
FINANCING ACTIVITIES:
Addition to long term debt 7,783 5,594 -
Reduction of long-term debt (4,624) (2,931) (427)
Treasury stock purchases (1,619) (1,194) -
Stock option transactions - 260 -
Employee stock transactions 299 233 230
------- -------- -------
Net cash provided by (used in) financing activities 1,839 1,962 (197)
------- -------- -------
Net increase (decrease) in cash and cash equivalents 544 243 (30)
Effect of exchange rate changes on cash and cash equivalents (61) (3) -
Cash and cash equivalents at beginning of year 1,041 801 831
------- -------- -------
Cash and cash equivalents at end of year $ 1,524 $ 1,041 $ 801
======= ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments $ 891 $ 729 $ 760
Income tax payments $ 3,773 $ 4,453 $ 4,600
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In fiscal year 1999, the Company purchased assets of Fire Safety Service, Inc.
The Company purchased assets of Sheridan Safety, Inc. in fiscal year 1998. In
fiscal year 1997, the Company purchased assets of Pagel Safety, Inc. and the
safety distribution division of Southeast Rubber & Safety, Inc. In conjunction
with the acquisitions, assets acquired, liabilities assumed and cash paid are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Fair value of assets acquired $ 445 $2,298 $ 2,132
Cost in excess of net assets of companies acquired 354 2,012 204
----- ------ -------
Total assets recorded 799 4,310 2,336
Liabilities assumed (19) (926) (1,102)
----- ------ -------
Cash paid for common stock and assets $ 780 $3,384 $ 1,234
===== ====== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
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 consolidated
subsidiaries, Vallen Safety Supply Company (Vallen Safety), Encon Safety
Products, Inc. (Encon), Safety World, Inc., All Supplies, Inc. (All Supplies),
Valcap Insurance Company Ltd., Vallen International Sales Corporation, and
Vallen Safety Supply Company, Limited. All significant inter-company
transactions and amounts have been eliminated in consolidation. Investments in
unconsolidated affiliates are included on the equity basis. Certain prior year
amounts have been reclassified to conform to current year presentation.
Investment Securities --- The Company held only trading securities for
investment in 1999, 1998 and 1997. 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 $3,000,000 at May 31, 1999 and
1998, 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, 3-7 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
$841,000 and $601,000 at May 31, 1999 and 1998, respectively. Other intangibles
are amortized over their estimated useful lives. Accumulated amortization of
these other intangibles was $2,125,000 and $1,905,000 at May 31, 1999 and 1998,
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 approximate the fair value due to short-term return of these
instruments. The carrying value of 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.
20
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(CONTINUED)
Impairment of Long Lived Assets -- The Company applies the provisions of
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"). When the 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 market
value or discounted cash flow value is required.
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. Assets and
liabilities of all other entities are translated into U.S. dollars from their
functional currencies using current exchange rates at the balance sheet date,
and income and expense accounts at the average exchange rates during the year,
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.
Foreign currency effects are summarized as follows: ($000)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ---------
<S> <C> <C> <C>
Decrease in earnings due to the effects of
translation adjustments on net income $ 84 $ 338 $ 59
Currency translation losses charged directly
to accumulated other comprehensive loss $ 61 $ 3 $ -
</TABLE>
Earnings Per Common Share --- Net earnings per share were computed per the
requirements of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"). SFAS 128 requires a dual presentation of basic and
diluted earnings per share ("EPS"). Basic EPS was computed by dividing net
earnings by the weighted average number of shares outstanding during the
periods. Diluted EPS was calculated by dividing net earnings by the combination
of weighted average number of shares outstanding and the impact of dilutive
potential common shares outstanding during the period. The net earnings for
both basic and diluted EPS were $7.3 million, $10.2 million and $8.8 million for
the years ended May 31, 1999, 1998 and 1997, respectively. The weighted average
shares outstanding for the years ended May 31, 1999, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------------------------
1999 1998 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Basic 7,198,000 7,273,000 7,269,000
Restricted stock grant 13,000 -0- -0-
Incremental shares from exercise of
outstanding stock options 79,000 92,000 66,000
--------- --------- ---------
Diluted 7,290,000 7,365,000 7,335,000
========= ========= =========
</TABLE>
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.
21
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(CONTINUED)
NOTE 2. INVENTORIES
Distribution subsidiaries including Vallen Safety Supply Company state
inventories at the weighted-average valuation method in order to provide a
better matching of inventory cost with the related revenues. The manufacturing
subsidiary continues to utilize the first-in, first-out (FIFO) method.
Inventory costs are summarized as follows:
<TABLE>
<CAPTION>
MAY 31,
------------------------------------
1999 1998
------- --------
<S> <C> <C>
(Thousands of Dollars)
Raw materials $ 1,878 $ 1,897
Work in process 157 746
Finished goods 40,639 39,697
------- -------
Total inventories $42,674 $42,340
======= =======
</TABLE>
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment costs are summarized as follows:
<TABLE>
<CAPTION>
MAY 31,
------------------------------------
1999 1998
------- --------
<S> <C> <C>
(Thousands of Dollars)
Land and improvements $ 678 $ 656
Buildings and improvements 5,249 4,966
Furniture, fixtures and other equipment 23,070 20,231
Data processing equipment and software 10,456 11,972
------- -------
Total property, plant and equipment $39,453 $37,825
======= =======
</TABLE>
Maintenance and repairs are expensed as incurred. Gains and losses from
sales and retirements are recognized at the time of disposal. Depreciation
provided for in selling, general and administrative expenses was $2,788,000,
$3,312,000, and $2,974,000 for the years ended May 31, 1999, 1998 and 1997
respectively.
22
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
NOTE 4. LONG-TERM DEBT
Long-term debt is summarized as follows (Dollars in Thousands):
<TABLE>
<CAPTION>
MAY 31,
-----------------------------------------------
1999 1998
---------------------- ----------------------
<S> <C> <C>
Notes payable, bank (1) $13,000 $ 9,800
Variable rate, tax exempt, callable at par, industrial development
Bonds due March 1, 2020; interest rate resets weekly
(3.4% at May 31, 1999); secured by a letter of credit,
further secured by a manufacturing facility with a depreciated
cost of $2,066 at May 31, 1999 2,750 2,750
Demand loans from a Canadian Bank bearing interest at the prime rate
and at the prime rate plus .25% (effective borrowing cost was 6.25% and
6.5%, respectively as of May 31, 1999) secured by general assignment of
accounts receivable of Vallen Safety Supply Company, Limited 869 753
Other notes payable 171 328
------- -------
Total long-term debt 16,790 13,631
Less current maturities 961 898
------- -------
Long-term debt, less current maturities $15,829 $12,733
======= =======
</TABLE>
Debt maturities for the five years subsequent to May 31, 1999 are $961,
$1,379, $3,120, $3,341, and $5,239, respectively, and $2,750 thereafter.
(1) - On July 24, 1995, Vallen Safety entered into a working capital credit
facility with a major commercial bank. On July 17, 1998, the credit facility
was amended to $13.5 million. 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, 1999 was
5.81% for $6 million drawn under the facility, 5.75% for an additional $5.8
million outstanding and an additional $1.2 million at 7.75%. Vallen Safety is
required, under this agreement, to maintain financial ratios and maintain a
minimum tangible net worth of not less than $20 million at any time during the
period of the Credit Agreement plus 70% of the income added subsequent to
October 24, 1997. On August 25, 1999 due dates for payments under the terms
portion of the loan and final principal payment dates were extended by one year,
effectively reclassifying $1.3 million of the note balance at May 31, 1999 as
non-current.
23
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
NOTE 5. STOCK PLANS
The Company has a stock option plan for key employees, which was amended
September 10, 1998 to increase the number of options reserved by 400,000, (the
"Plan") and has reserved for issuance 1,525,000 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 266,000 shares as of May 31, 1999. 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. The Company
achieved basic earnings per share of $1.21 for the year ended May 31, 1997 and
$1.41 for the year ended May 31, 1998. These earnings levels resulted in
vesting of 1/3 of the options outstanding as of the end of fiscal years 1997 and
1998. Based upon outstanding options as of May 31, 1999, 177,422 of the options
are exercisable as of that date.
During fiscal year 1999, the Company granted an additional 86,000 options
to key executives under the plan. 66,000 of these options are exercisable in
increments of 33 1/3% on June 1, 2001, 2002 and 2003. The other 20,000 are
exercisable in increments of 33 1/3% should the Company achieve three specified
consolidated earnings per share targets, which were not met in 1999.
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 specified consolidated earnings per share targets, and should
All Supplies achieve certain sales and gross profit levels for the same fiscal
year. These levels were not achieved in any of the fiscal years ended May 31,
1999, 1998 or 1997.
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, 1997 408,000 $12.75 - $18.75
Granted -
Exercised (16,000) $12.75 - $18.75
Expired (26,000) $12.75 - $18.75
-------
Balance outstanding, at May 31, 1998 366,000 $12.75 - $18.75
Granted 86,000 $18.75
-------
Balance outstanding at May 31, 1999 452,000 $12.75 - $18.75
Options exercisable at May 31, 1999 177,422 $12.75 - $18.75
</TABLE>
During fiscal year 1999 there were 20,000 shares of restricted stock
granted with a fair market value of $18.75 per share. These shares are scheduled
to vest on June 1, 2003, although accelerated vesting is provided in certain
instances. Compensation expense related to the restricted stock awards is based
upon market price at the date of the grant and is charged to earnings on a
straight-line basis over the period of restriction. Total compensation expense
relating to restricted stock was $52,000 in 1999.
24
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
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 any of the
three anniversary dates.
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
$45,000, $34,000 and $35,000 for the years ended May 31, 1999, 1998 and 1997,
respectively.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based
Compensation" which established financial accounting and reporting standards for
stock-based employee compensation plans. Under this 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 Principle
Board Opinion No. 25. The Company elected to continue to measure compensation
cost in accordance with APB No. 25 and therefore must comply with the
disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost
has been recognized for stock option plans under SFAS No. 123. If the Company
had recognized compensation cost on its stock option plan based on the fair
value at the grant date for awards made after 1995, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below (Thousands of dollars except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, 1999 1998 1997
- --------------------------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
Net income - as reported $7,346 $10,235 $8,764
Net income - pro forma $7,205 $10,091 $8,602
Basic earnings per share - as reported $ 1.02 $ 1.41 $ 1.21
Basic earnings per share - pro forma $ 1.00 $ 1.39 $ 1.19
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes model with the following assumptions:
<TABLE>
<CAPTION>
1999 1997
-------------------- ------------------
<S> <C> <C>
Expected dividend yield None None
Expected stock price volatility 26% 30%
Risk-free interest rate 5.91% 5.86%
Weighted average expected life of options 5 years 5 years
</TABLE>
The weighted average fair value of stock options granted for 1999 and 1997
is $6.54 per share and $5.19 per share, respectively.
25
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(CONTINUED)
NOTE 6. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
(Thousands of Dollars)
Current:
Federal $1,399 $4,204 $4,464
State 262 1,220 562
Foreign (75) (66) -
------ ------ ------
1,586 5,358 5,026
Deferred:
Federal 389 (533) (230)
------ ------ ------
$1,975 $4,825 $4,796
====== ====== ======
</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 rates in effect in 1999, 1998 and 1997, to earnings before income taxes were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------
1999 1998 1997
-------- -------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
Tax expense at statutory rates $ 3,101 $ 5,230 $4,646
State tax expense, net of federal benefit 173 793 371
Non-includable foreign earnings (1,393) (1,219) (471)
Other, net 94 21 250
------- ------- ------
$ 1,975 $ 4,825 $4,796
======= ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at May 31, 1999 and 1998 are
presented below.
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C>
Deferred tax assets:
Inventories, principally due to additional costs
inventoried for tax purposes $ 515 $ 951
Other 44 136
----- ------
Total deferred tax assets 559 1,087
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation 474 497
Software development expensed for tax - 262
Undistributed foreign earnings due to tax rate differences 150 -
Accelerated property tax deduction 210 214
---- -----
Total deferred tax liability 834 973
---- -----
Net deferred tax liability $275 $(114)
==== =====
</TABLE>
There is no valuation allowance for the fiscal years ended May 31, 1999 or
May 31, 1998. 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.
26
<PAGE>
NOTE 7. 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 U.S, domestic operations, as defined by
the trust agreement. Total profit sharing expense for the years ended May 31,
1999, 1998 and 1997 was $566,000, $712,000 and $729,000, 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, 1999, 1998 and 1997 was $334,000, $341,000 and $320,000,
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 that measure achievement of individual and corporate objectives, among
other factors. Bonus incentive plan expense was $1,251,000, $1,115,000 and
$601,000, for the years ended May 31, 1999, 1998 and 1997, respectively.
NOTE 8. INVESTMENT IN FOREIGN AFFILIATES
The Company's investments in foreign affiliates includes a 50% ownership
interest in Proveedora de Seguridad Industrial del Golfo S.A. (Mexico), which
was acquired December 17, 1992; a 50% ownership interest in Century Sales and
Service Limited (Canada), which was acquired June 6, 1995; and a 50% ownership
in Vallen-Acetogen Safety Chile S.A. (Chile), which was formed December 21,
1998. A summary of investment in foreign affiliates is as follows (dollars in
thousands):
Amount of original investment $ 7,499
Translation adjustment (unrealized) adjusted
in equity section of balance sheet (773)
Equity earnings since acquisition, net
of goodwill amortization and foreign
currency translation amounts recognized in income 10,769
Dividends received since acquisition (493)
-------
Investment at May 31, 1999 $17,002
=======
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 9. 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. Where applicable, management generally intends to renew
leases that expire during the normal course of business. Rental expense for the
years ended May 31, 1999, 1998 and 1997 amounted to $4,650,000, $2,935,000 and
$2,367,000, respectively. Lease commitments for noncancellable operating leases
for the five years subsequent to May 31, 1999 are $4,089,000, $3,477,000,
$2,820,000, $2,426,000 and $2,132,000 respectively.
27
<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 10. CONCENTRATION OF CREDIT RISK
The Company has a broad customer base, representing many diverse
industries, doing business in most regions of the United States, Chile, 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, 1999, 1998 and 1997, 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 11. 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. 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,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
<S> <C> <C> <C>
(Thousands of Dollars)
Net sales:
Distribution $291,824 $281,185 $245,221
Manufacturing 20,893 19,925 19,066
-------- -------- --------
312,717 301,110 264,287
Intersegment sales (6,599) (6,247) (6,501)
-------- -------- --------
$306,118 $294,863 $257,786
Operating income: ======== ======== ========
Distribution $ 7,032 $ 11,503 $ 11,305
Manufacturing 3,414 3,797 4,026
-------- -------- --------
10,446 15,300 15,331
Corporate general and administrative expenses (5,291) (4,140) (3,313)
-------- -------- --------
Total $ 5,155 $ 11,160 $ 12,018
Identifiable assets: ======== ======== ========
Distribution $131,538 $125,224 $107,413
Manufacturing 11,442 11,345 9,989
-------- -------- --------
Total $142,980 $136,569 $117,402
Capital expenditures: ======== ======== ========
Distribution $ 2,575 $ 3,214 $ 1,808
Manufacturing 641 986 1,024
-------- -------- --------
Total $ 3,216 $ 4,200 $ 2,832
Depreciation and amortization: ======== ======== ========
Distribution $ 2,601 $ 3,182 $ 3,066
Manufacturing 637 562 355
-------- -------- --------
Total $ 3,238 $ 3,744 $ 3,421
======== ======== ========
</TABLE>
28
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
NOTE 11. BUSINESS SEGMENTS (CONTINUED)
Summarized financial information for significant unconsolidated
subsidiaries: The Company uses the equity method of accounting for investments
in unconsolidated subsidiaries in which it has 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%), Vallen-Acetogen Safety Chile, S.A.
(Chile)(50%) and Lion-Vallen Limited Partnership (LVI) (Texas) (50%). The
summarized financial information below includes 100% of the individual
companies' assets, liabilities, revenues, and expenses as of and for the years
ended May 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
FOREIGN DOMESTIC
------------------- -------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Current assets $34,817 $31,713 $ 1,912 $ 6,872
Non-current assets 8,208 5,270 21 377
------- ------- ------- -------
Total assets $43,025 $36,983 $ 1,933 $ 7,249
======= ======= ======= =======
Current liabilities $11,838 $14,668 $ 357 $ 1,376
Non-current liabilities 2,200 1,538 - 3,269
------- ------- ------- -------
Total liabilities $14,038 $16,206 $ 357 $ 4,645
======= ======= ======= =======
Net sales $82,552 $79,277 $14,555 $19,060
Gross profit $27,656 $21,981 $ 2,450 $ 3,358
Income from continuing operation $ 9,523 $ 9,553 $ 1,558 $ 1,467
Net income $ 8,336 $ 6,978 $ 1,560 $ 1,346
</TABLE>
29
<PAGE>
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly operating results for 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31
---------- ------------ ------------ ---------
(Thousands of Dollars, Except for Per Share Amounts)
<S> <C> <C> <C> <C>
1999
Net Sales $72,936 $79,449 $77,389 $76,344
======= ======= ======= =======
Gross profit $17,803 $19,000 $19,223 $18,491
======= ======= ======= =======
Net earnings $ 1,883 $ 2,723 $ 2,185 $ 555
======= ======= ======= =======
Net earnings per share - diluted $ .26 $ .37 $ .30 $ .08
======= ======= ======= =======
1998
Net sales $64,278 $75,138 $75,639 $79,808
======= ======= ======= =======
Gross profit $15,775 $18,326 $18,309 $20,428
======= ======= ======= =======
Net earnings $ 1,819 $ 2,524 $ 2,444 $ 3,448
======= ======= ======= =======
Net earnings per share - diluted $ .25 $ .34 $ .33 $ .47
======= ======= ======= =======
</TABLE>
30
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information as of August 1, 1999 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 79 Chairman of the Board and Director 1960
James W. Thompson 48 President, C.E.O. and Director 1994
Leighton J. Stephenson 51 Vice President - Finance, Secretary and Treasurer 1993
David G. Key 43 Vice President and General Manager,
Encon Safety Products, Inc. 1996
David H. Dewey 49 Vice President 1998
</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 50 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. 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. 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.
Mr. Dewey has been with the company since 1972. He has served Vallen in a
variety of sales and staff positions including Manager of the Southwest Region.
He was named Vice President in 1998.
PART III
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.
31
<PAGE>
PART IV
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 13 for
Index)
2. 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 through June 23, 1994.
Incorporated by reference is Exhibit 3ii to the Company's Form
10-Q for the quarterly period ended November 30, 1995 as filed
with the Securities and Exchange Commission on January 16, 1996.
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 1985
Form 10-K as filed with the Securities and Exchange Commission on
August 27, 1985. *
10c. Amendment to Vallen Corporation 1985 Stock Option Plan for Key
Employees, as amended. Incorporated by reference is Exhibit 10c to
the 1995 Form 10-K. *
10d. Vallen Corporation 1990 Employee Stock Purchase Plan.
Incorporated by reference is Exhibit 10d to the 1990 Form 10-K as
filed with the Securities and Exchange Commission on August 14,
1996. *
10e. Agreement dated June 6, 1994 between the Company and James W.
Thompson. Incorporated by reference is Exhibit 10f to the
Company's 1994 Form 10-K as filed with the Securities and Exchange
Commission on August 17, 1994. *
10f. Vallen Corporation Executive Incentive Compensation Plan.
Incorporated by reference is Exhibit 10f to the Company's 1996
Form 10-K as filed with the Securities and Exchange Commission on
August 9, 1996 (the "1996 Form 10-K"). *
10g. First amendment to the Employment Agreement between the Company
and James W. Thompson effective as of September 10, 1998.
Incorporated by reference is Exhibit 10-1 to the Company's
Form 10-Q for the quarterly period ended August 31, 1998, as filed
with the Securities and Exchange Commission on October 9, 1998. *
10h. Restricted Stock Agreement between the Company and James W.
Thompson effective as of September 10, 1998. Incorporated by
reference is Exhibit 10-2 to the Company's Form 10-Q for the
quarterly period ended August 31, 1998, as filed with the
Securities and Exchange Commission on October 9, 1998. *
21. Subsidiaries of the Company. Incorporated by reference is
Exhibit 21 to the Company's 1996 Form 10-K.
23. Consent of KPMG LLP - attached.
27. Financial Data Schedule - attached.
- ------
* Management compensation agreement
4. The Company hereby agrees to furnish to the Commission, on request, a
copy of any instrument that 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.
32
<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 26, 1999
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 DATES INDICATED.
<TABLE>
<CAPTION>
Name CAPACITY DATE
- ---------------------------------------------- ----------------------------------------- ---------------------------
<S> <C> <C>
/s/ JAMES W. THOMPSON President, Principal Executive August 26, 1999
- ---------------------------------------------- Officer and Director
James W. Thompson
/s/ LEIGHTON J. STEPHENSON Vice President - Finance August 26, 1999
- ---------------------------------------------- Principal Financial and
Leighton J. Stephenson Accounting Officer
/s/ KIRBY ATTWELL Director August 26, 1999
- ----------------------------------------------
Kirby Attwell
/s / LEONARD J. BRUCE Chairman of the Board August 26, 1999
- ---------------------------------------------- and Director
Leonard J. Bruce
/s/ DARVIN M. WINICK Director August 26, 1999
- ----------------------------------------------
Darvin M. Winick
/s/ JOHN MYSER Director August 26, 1999
- ----------------------------------------------
John Myser
/s/ ROBERT W. BRUCE Director August 26, 1999
- ----------------------------------------------
Robert W. Bruce
</TABLE>
33
<PAGE>
INDEX TO EXHIBITS
Exhibit numbers are in accordance with exhibit table in Item 601 of
Regulation S-K.
23. -- Consent of KPMG LLP.
27. -- Financial Data Schedule.
34
<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 23, 1999, relating to the consolidated balance sheets of
Vallen Corporation and subsidiaries as of May 31, 1999 and 1998, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years in the three-year period ended May 31, 1999, which report
appears in the May 31, 1999 annual report on Form 10-K of Vallen Corporation.
KPMG LLP
Houston, Texas
August 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> MAY-31-1999 MAY-31-1999
<PERIOD-START> MAR-01-1999 JUN-01-1998
<PERIOD-END> MAY-31-1999 MAY-31-1999
<CASH> 0 1,524
<SECURITIES> 0 3,000
<RECEIVABLES> 0 51,419
<ALLOWANCES> 0 541
<INVENTORY> 0 42,674
<CURRENT-ASSETS> 0 103,315
<PP&E> 0 39,453
<DEPRECIATION> 0 25,234
<TOTAL-ASSETS> 0 142,980
<CURRENT-LIABILITIES> 0 18,999
<BONDS> 0 0
0 4,879
0 0
<COMMON> 0 0
<OTHER-SE> 0 102,008
<TOTAL-LIABILITY-AND-EQUITY> 0 142,980
<SALES> 76,344 306,118
<TOTAL-REVENUES> 76,344 306,118
<CGS> 57,853 231,601
<TOTAL-COSTS> 57,853 231,601
<OTHER-EXPENSES> 19,757 69,362
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 224 891
<INCOME-PRETAX> (45) 9,122
<INCOME-TAX> (401) 1,975
<INCOME-CONTINUING> 555 7,346
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 555 7,346
<EPS-BASIC> .08 1.02
<EPS-DILUTED> .08 1.01
</TABLE>
