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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 09607
CENTRUM INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 34-1654011
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6135 TRUST DRIVE, SUITE 104A, HOLLAND, OH 43528
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ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (419) 868-3441
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON CAPITAL STOCK, $.05 PAR VALUE
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation SK is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
Form 10K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant
at May 31, 1998. (for the sole purpose of making this calculation, the term
"non-affiliate" has been interpreted to exclude directors and executive officers
of the Company. Such interpretation is not intended to be, and should not be
construed to be, an admission of the Company that such directors and executive
officers of the Company are "affiliates" of Centrum Industries, Inc. as that
term is defined under the Securities Act of 1934.) (computed by reference to
actual trades in the over the counter market on the Bulletin Board on May 19,
1998): $ 13,410,906
Number of shares outstanding of common stock, $.05 par value, as of May 31,
1998: 8,403,501
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CENTRUM INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
TABLE OF CONTENTS
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PART I PAGE
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Item 1. Business........................................................................................... 3
Item 2. Properties......................................................................................... 9
Item 3. Legal Proceedings.................................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders................................................ 11
PART II
Item 5. Market for Centrum's Common Stock and Related Stockholder Matters.................................. 12
Item 6. Selected Financial Data............................................................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 15
Item 8. Financial Statements and Supplementary Data........................................................ 24
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............... 56
PART III
Item 10. Directors and Executive Officers of Centrum........................................................ 57
Item 11. Executive Compensation............................................................................. 59
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 63
Item 13. Certain Relationships and Related Transactions..................................................... 64
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 65
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES,
INCLUDING ITEM 1. "BUSINESS" ITEM 3. "LEGAL PROCEEDINGS" AND ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS". SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY", "ESTIMATES," "WILL,"
"SHOULD," "PLANS" "OPINION" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY.
READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THESE FACTORS
INCLUDE THE EFFECTIVENESS OF MANAGEMENT'S STRATEGIES AND DECISIONS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, DEVELOPMENTS IN TECHNOLOGY, NEW OR MODIFIED
STATUTORY OR REGULATORY REQUIREMENTS AND CHANGING PRICES AND MARKET CONDITIONS.
THIS REPORT IDENTIFIES OTHER FACTORS THAT COULD CAUSE SUCH DIFFERENCES. NO
ASSURANCE CAN BE GIVEN THAT THESE ARE ALL OF THE FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO VARY MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Centrum Industries, Inc., ("Centrum", the "Company" or the "Company and its
subsidiaries") is a Delaware holding corporation for quality manufacturing
companies in the metal forming, material handling, and motor production
industries. All of Centrum's operating segments have been acquired since 1993.
Centrum intends to focus on acquisitions in these sectors of industry, as they
represent areas where significant barriers to entry - both capital and
technology - already exist. The Company seeks to acquire or combine with
businesses operating in its existing segments whose profitability can be
improved by making fundamental operating changes. Leveraging complementary
acquisitions to increase the value of the Company, by focusing on increased
market penetration, reducing fixed costs and maximizing operational efficiencies
is the cornerstone of Centrum's long term strategy.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information relating to the amounts of revenue, operating profit or loss and
identifiable assets attributable to each of the Company's industry segments for
1996-1998 is included in Note 14
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to the Consolidated Financial Statements. (In this document, years reflect the
fiscal year ended March 31, unless otherwise noted.)
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
METAL FORMING OPERATIONS
The largest subsidiary of Centrum is McInnes Steel Company and it's
Subsidiaries (McInnes Steel). McInnes Steel was acquired in March 1996 and
comprises the metal forming operations. McInnes Steel operates four metal
forming facilities: McInnes Steel Company (MSC), McInnes Rolled Rings (MRR),
Taylor Forge Company (Taylor), acquired on June 4, 1997, and Erie Bronze &
Aluminum Company (EBA).
Products and Markets
The metal forming operations produce specialty steel forgings, steel seamless
rolled rings, and nonferrous castings.
MSC is located in Northwestern Pennsylvania and produces forged steel
components, primarily utilizing an open-die forging manufacturing process.
Open-die forging is the process of compressing heated metal into a desired
shape using a press or hammer without completely enclosing the metal within the
die. The forgings can range in sizes up to 45,000 lbs. MSC also has heat treat
capabilities which are used to manipulate the microstructures and mechanical
properties of the metal. The forgings are then semi-finish machined, tested
both destructively and non-destructively, and certified to customer
specifications. Specialty steel forgings are utilized in the power
generation, compressor and miscellaneous commercial industries. During 1998,
MSC increased its market penetration to include forgings for the aircraft and
oil and gas industries. Further growth in market share will be enhanced by the
addition of new CNC machine tooling at MSC during the second half of fiscal
1999. There are numerous domestic and foreign competitors in the specialty
steel forging industry, however, Patriot Forge and FOMAS S.p.A. are the main
competitors in the commercial power generation market. MSC has achieved the
International Standards Organization ("ISO") 9002 Certification and management
believes that its commitment to excellence in quality will help MSC maintain a
competitive edge in the market place.
MRR and Taylor produce steel seamless rolled rings from 4 inches to 160 inches,
in weights from 2 to 11,000 pounds. A seamless rolled ring is produced by
punching a hole in a heated pre-formed round of metal and then rolling the
pre-form on a radial-axial ring mill to customer specifications. The rings are
produced in various cross sections and steel grades, including carbon, alloy,
and stainless material, and can be provided in a rough forged or machined
condition. Rolled rings are sold to bearing, off-road construction equipment
manufacturers, oil and gas, mining and specialty machine manufacturers. There
are numerous domestic and foreign competitors in the rolled ring industry,
however, F.R.I.S.A., in Mexico, and Ovako-Ajax, Inc. and Scot Forge in the
United States are the main competitors in the industry. MRR is recognized as an
industry leader in quality, price and delivery. This is due to the design of the
MRR facility, which was constructed in 1992 as a state of the art, fully
automated seamless ring rolling mill. Taylor is competitive in the 70 to 160
inch rolled ring market. Taylor was purchased in June of
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1997 in order to complement the MRR facility in the larger end of the ring
market. The combined facilities have products which serve the needs of over 90%
of the target markets and represent one of the largest suppliers in the
industry.
Nonferrous castings are produced at EBA in Erie Pennsylvania. The castings range
in sizes from one ounce to 1,000 pounds in either bronze or aluminum materials.
EBA is one of two main suppliers to the domestic and Canadian glass bottle mold
producers. The other main supplier is Ross Mould. Sales are also made in the
international market. EBA sells its castings to the pump and valve industries
and other commercial manufacturers along with international glass customers.
Sales
The products of the metal forming operations are marketed primarily through an
internal sales force. The segment sells its products both domestically and
internationally, however, approximately 95% of the sales are made domestically.
The metal forming operations sales are subject to slight seasonal fluctuations
and quality, service, delivery and price are decisive competitive factors.
Sales during 1998 to the power generation industry accounted for approximately
9% of net sales on a consolidated basis and 13% of the metal forming operations
sales. Sales to the power generation industry have been adversely impacted by
the Asian economic crisis, and pending resolution of the crisis, is expected to
be a continuing factor. However, the expanded penetration of specialty steel
forgings into the aircraft, and oil and gas markets will soften the negative
impact of the Asian crisis. Sales during 1998 to General Electric Company (GE)
were 8% of net sales on a consolidated basis and 12% of the metal forming
operations sales. Loss of this customer could have a significant impact on the
results of operations. No other customer exceeds 10% of the consolidated or
metal forming operations segment sales. Approximately one-half to three quarters
of the metal forming operations segment customers provide repeat business and
customers are billed for the products upon shipment.
Backlog at the metal forming group was $17.3 million and $12.3 million as of May
31, 1998 and 1997, respectively. All of the backlog orders are expected to be
filled within the next year.
Raw Materials
The primary raw material of the metal forming operations is steel, which is
purchased from regional and national suppliers. There are no long-term contracts
for the purchase of steel. The raw material supplies have been and are expected
to remain sufficiently abundant to support operations. The metal forming
operations require maintaining a stock inventory of raw materials due to the
variety of its products and customer lead-time requirements.
Energy is a significant requirement in the metal forming operations segments'
production and energy is required to forge and heat treat the product. Natural
gas and electricity are the main sources of energy. Supplies of natural gas and
electricity have been sufficient and are expected to remain at adequate levels.
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Employees
At May 30, 1998, the metal forming operations had approximately 357 employees.
Approximately 127 employees at MSC are covered by a collective bargaining
agreement which expires on September 30, 2002. Approximately 47 employees at EBA
are represented by a collective bargaining agreement which expires on July 31,
2002. Seven other employees are represented by a collective bargaining
agreement which expires on September 6, 2002. Management believes that it has
good relations with its employees.
MATERIAL HANDLING SYSTEMS
The material handling systems segment contains American Handling, Inc. (AHI) and
Northern Steel Company (Northern) which was acquired on November 5, 1997.
Products and Markets
AHI in Cleveland, Ohio, offers material handling systems and components to
companies with warehouse and distribution facilities. Designing a material
handling system requires expertise in facilities planning and system design,
inventory analysis and determination of equipment needs, procurement and
installation of equipment, and coordinated relocation of the customer inventory.
Northern supplies shelving, racks, conveyors, and other storage and distribution
equipment as components of material handling systems. Northern's administrative
offices are located in Seattle, Washington, with satellite sales offices located
in California and Oregon. The acquisition of Northern strengthens the segment by
combining Northern's distribution capabilities with AHI's design and integration
capabilities, as well as expanding the geographic presence of the segment.
AHI's principal customers have historically been in the automotive after-market.
Automotive after-market sales were 30% of 1998 revenue. Carquest, a repeat
automotive after-market customer contributed 3% of the 1998 consolidated sales
and 11% of the 1998 material handling systems sales. Sales to this customer are
expected to decline in future years. However, the decline in sales to this
repeat customer is not expected to have a material adverse effect on the long
term consolidated or segment results, as management shifts the product mix at
AHI to lessen the dependence on any particular industry. During 1998, sales to
Sanford, an office products manufactor and distributor, accounted for 28% of the
segment revenues and 8% of the consolidated sales. Northern, as a full service
distributor of material handling equipment, serves a variety of markets. The
majority of Northern's sales are to customers in the western half of the United
States and sales by AHI are to customers located throughout the United States.
The material handling systems segment competes primarily on price, product,
performance guarantees and the extent of services which can be provided. There
are few direct competitors which provide the turnkey service provided by AHI;
however, Rapistan Systems and HK systems are the main competitors in the full
system design and implementation of material handling systems. Competition is
primarily in the individual phases of systems work. For example, a competitor
may provide construction and installation services or design services, but few
competitors provide the range of services offered by AHI. Northern is the
largest full service distribution company in terms of sales volume in the
western half of the United States. There
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are over 200 local and regional material handling distributors competing with
Northern. Price is a primary competitive factor.
Sales
The material handling systems segment markets its services and products in the
domestic market through an internal sales force. Sales, to a large extent, are
impacted by the construction industry, which historically experiences lower
sales levels from January through May. Material handling systems projects have
minimal working capital requirements due to goods that are primarily shipped
directly to the customers' job site. Generally, all goods drop-shipped are
special orders which permits the maintenance of minimal inventory levels. A
systems project typically lasts from six to eight months and is supported by a
progress payment schedule to conserve working capital. Terms for distribution
sales are generally net 30, with deposits on special orders.
Backlogs at AHI decreased by $7.4 million from the prior year level. The
previous year's backlog included a $6 million project that was completed during
the last quarter of the current fiscal year. Currently, there are no projects of
this size in the backlog. Management anticipates that material handling systems
sales for the first two quarters of 1999 will be reduced as a result of the
diminished backlog level at AHI. As of May 31, 1998, the backlog of firm orders
for the segment is approximately $4.4 million. All of the backlog orders are
expected to be filled within the next year.
Raw Materials
Raw materials are purchased to fabricate mezzanines structures, cart racks and
catwalks and consist mainly of raw steel. Other material handling products, such
as shelving, rack and conveyor equipment, are purchased from multiple suppliers.
Raw materials and material handling products are readily available from many
different suppliers.
Employees
At May 31, 1998, the material handling systems segment had approximately 112
employees, who are not covered by a collective bargaining agreement. Management
believes that relations with employees are good.
MOTOR PRODUCTION SYSTEMS
The motor production systems segment consists of Micafil, Inc. (Micafil) and its
50% equity interest in Micafil - Axis, L.L.C. (M-A Joint Venture).
Products and Markets
The motor production systems segment designs and manufactures armature and
stator winding machines and complete production systems for small fractional
horsepower electric motors used primarily in the automotive and consumer durable
goods markets. Micafil has a specific niche in both design of small armature
assembly lines and the manufacture of armature winders and is recognized within
the industry as a pioneer in this technology. In addition to the sale of
machines and machining lines, revenue is also generated from rebuilding and
retrofitting existing machines and selling replacement parts. This represents
approximately 35% of Micafil's total
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revenue and is viewed as a critical component to being recognized as a
full-service supplier in this industry.
Micafil is one of several major suppliers of small fractional horsepower motor
production equipment in the world. The largest competitors are Axis S.p.A.,
Globe and Odawara. Axis S.p.A. is the largest competitor. Competition is based
upon product performance, price, delivery time, and local plant preference.
Sales
The products of the motor production systems segment are marketed both
domestically and internationally primarily through an internal sales force. The
majority of the sales are made domestically. Sales during 1998 to industries
serving the automotive market accounted for 3% of consolidated sales and 50% of
the motor production systems sales. Sales during 1998 to Hoover and ITT and its
subsidiaries were approximately 2% each of consolidated sales and 30% and 25%,
respectively, of the motor production systems segment sales. Loss of either of
these customers would not have a material impact on the consolidated results,
however, it would adversely affect the motor production systems segment over
the long term, as customers typically place repeat orders over a 3 to 5 year
cycle.
Customers are billed 30% with order placement, 60% at time of shipment and the
balance is net 30 days. This is consistent with industry practice.
The M - A Joint Venture was formed during fiscal 1997, between Micafil and Axis
S.p.A. which offers complementary product lines. The purpose of this strategic
marketing alliance is to increase the marketing and distribution of machines and
systems within North America.
As of May 31, 1998, the backlog in firm orders was valued at approximately
$920,000, and all of the backlog orders are expected to be filled within the
next year. This backlog amount represents a decrease of $1.2 million from the
backlog as of May 31, 1997. The decrease in backlogs at the motor production
systems segment reflect the change in product mix experienced during 1998. The
1998 sales mix was composed of small dollar orders as opposed to the large line
orders produced in prior years.
Raw Materials
The material used in the production process generally consists of steel and
aluminum and purchased electrical and mechanical components such as valves,
cylinders and motors. Micafil has local sources for its production material and
there is ready availability for all components although some items require
longer lead time due to machining or special requirements.
Employees
At May 31, 1998, Micafil had approximately 46 employees, who are not covered by
a collective bargaining agreement. Management believes that the relations with
employees are good.
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(d) COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company is subject to federal, state and local provisions dealing with the
protection of the environment. The Company is involved in certain regulatory
proceedings involving environmental matters which are incorporated by reference
from Note 11 to the Consolidated Financial Statements contained in Item 8
hereof.
Expenditures related to the environmental regulatory matters were not material
for fiscal 1998 and are not anticipated to be material for 1999. Based upon
historical experience and information currently available, the Company does not
expect compliance with environmental regulations to have a material adverse
effect on the Company's operations, capital expenditures, earnings, competitive
position or liquidity.
ITEM 2. PROPERTIES
Centrum's principal facilities are set forth in the table below:
Location Use Leased/Owned
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CORPORATE OFFICES
Holland, Ohio Corporate Office Leased
Medina County, Ohio Oil & Gas Exploration Leased (1)
METAL FORMING OPERATIONS
Corry, Pennsylvania Administration/Sales Office
Production/Warehousing Owned
Fairview, Pennsylvania Administration/Sales Office
Production/Warehousing Owned
Erie, Pennsylvania Administration/Sales Office
Production/Warehousing Owned
Erie, Pennsylvania Production Leased
Memphis, Tennessee Administration/Sales Office
Production Owned
MATERIAL HANDLING SYSTEMS
Cleveland, Ohio Administration/Sales Office Leased (2)
Production/Warehousing
Cleveland, Ohio Warehousing Leased
La Mirada, California Sales Office / Warehouse Leased
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San Leandro, California Sales Office / Warehouse Leased
Portland, Oregon Sales Office / Warehouse Leased
Kent, Washington Sales Office / Warehouse Leased
Administration
MOTOR PRODUCTION SYSTEMS
Englewood, Ohio Administration/Sales Office Owned
Production/Warehousing
The owned properties located in Pennsylvania, Tennessee, and Ohio
secure bank debt and industrial development financing. Details of the
encumbrance are incorporated by reference from Note 7 and Note 8 to the
Consolidated Financial Statements contained in Item 8 hereof.
The manufacturing facilities are well maintained and are suitable for
the Company's current and anticipated needs. The facilities are
operating at capacities which range from approximately 50% to 80%.
(1) Represents mineral rights.
(2) AHI is in the process of negotiating a 10 year lease for new office and
manufacturing facilities as a result of the landlord's sale of their
existing building. AHI management anticipates that these negotiations
will be successful and that the company will relocate during the third
quarter of fiscal 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising out of the normal course of
business activities. None of these legal proceedings including the regulatory
proceedings discussed below are expected to have a material adverse effect on
the Company.
The Company is involved in certain regulatory proceedings involving
environmental matters. On October 16, 1989, the USEPA filed a federal court cost
recovery action in the United States District Court for the Western District of
Pennsylvania against various alleged owners and transporters relating to an
unpermitted landfill site in Millcreek Township, Erie County, Pennsylvania
("Millcreek site"). EBA was identified as one of various "potentially
responsible parties" ("PRP's") which allegedly caused "hazardous substances," as
defined in CERCLA, to be taken to the Millcreek site. With regard to this cost
recovery action, EBA has negotiated a settlement which has been approved in
federal court and has been concluded in May of 1996.
In addition to the above, on March 31, 1992, USEPA issued a CERCLA Section 106
unilateral administrative order ("Section 106 order") to EBA and most other
PRP's relating to the Millcreek site. The Section 106 order required the named
PRP's to perform soil cap remediation
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work at the Millcreek site. The PRP's have submitted their work plan, which has
been approved by the government and construction is expected to begin during
1998.
EBA is also involved in two other private party actions brought by landowners
relating to the Millcreek site. Management does not believe that these suits
have any merit and believes that any resolution would not be material.
Additional details involving environmental matters are incorporated by reference
from Note 11 to the Consolidated Financial Statements contained in Item 8
hereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This item is not applicable.
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PART II
ITEM 5. MARKET FOR CENTRUM'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Subsequent to September 1995, the Company's common stock is traded over the
counter on the Bulletin Board under the symbol CIII. Prior to September 1995,
trades were primarily made through Continental Capital, Inc.. See Item 10,
"Directors and Executive Officers of Centrum," and Item 12, "Security Ownership
of Certain Beneficial Owners and Management."
The following table presents the quarterly high and low selling price in the
over the counter market.
1998: High Low
Quarter ending June 30, 1997 $2.94 $1.75
Quarter ending September 30, 1997 2.00 1.75
Quarter ending December 31, 1997 2.25 1.88
Quarter ending March 31, 1998 2.19 1.50
1997:
Quarter ending June 30, 1996 $2.50 $1.50
Quarter ending September 30, 1996 2.75 1.25
Quarter ending December 31, 1996 3.25 1.75
Quarter ending March 31, 1997 3.00 2.00
As of May 31, 1998, there were approximately 1,000 shareholders of record.
Shareholders are entitled to receive dividends when and as declared by the Board
of Directors. However, Centrum has never paid a dividend, and intends to
conserve capital to finance future acquisitions and, accordingly, does not
anticipate payment of any dividends in the foreseeable future. Furthermore, any
proposed dividends must be approved, in advance, by both the holders of the 11%
convertible, unsecured notes payable, and Huntington National Bank, the
Company's principal lender.
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Item 6. SELECTED FINANCIAL DATA
The following five year selected financial data should be read in conjunction
with the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations that appear elsewhere
in this report.
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As of and for the Years Ended March 31,
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1998 (C) 1997 1996 (B) 1995 1994 (A)
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SUMMARY OF OPERATIONS:
Net sales $ 78,914,663 $ 71,154,726 $ 27,525,702 $ 18,292,696 $ 8,760,667
Other expense (2,149,160) (2,475,411) (402,520) (270,912) (483,599)
Income (loss) from continuing
operations before income taxes 1,944,801 1,676,603 1,063,054 386,927 (1,112,897)
Provision (benefit) for
income taxes 639,483 (773,675) 257,814 223,679
------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations $ 1,305,318 $ 2,450,278 $ 805,240 $ 163,248 $ (1,112,897)
============ ============ ============ ============ ============
PER SHARE DATA:
Income (loss) from continuing
operations - Basic $ .16 $ .33 $ .14 $ .03 $ (.26)
Income (loss) from continuing
operations - diluted $ .15 $ .31 $ .13 $ .03 $ (.26)
FINANCIAL POSITION:
Total assets $ 53,171,722 $ 43,000,647 $ 40,611,748 $ 9,547,336 $ 7,941,039
Long-term liabilities 11,180,914 11,021,938 12,173,408 3,609,487 1,035,499
Total Liabilities 43,047,422 34,258,009 37,028,756 8,041,588 6,845,532
Net Worth 10,124,300 8,742,638 3,582,992 1,505,748 1,095,507
</TABLE>
(A) On May 17, 1993, the Company acquired all of the outstanding common stock of
Micafil Inc. Micafil had net sales of $2,718,943 and a loss from continuing
operations of $339,983 for the ten month period ended March 31, 1994. On
September 2, 1993, the Company acquired the stock of American Handling, Inc.
American Handling had net sales of $6,041,724 and income from continuing
operations of $89,012 for the seven month period ended March 31, 1994. These
acquisitions have been accounted for as purchases and their results of
operations have been included in the consolidated financial statements since the
dates of acquisition.
(B) On March 8, 1996, McInnes Steel Company was purchased through a subsidiary
merger. This transaction was accounted for as a purchase and its operations have
been included in the consolidated financial statements since that date. McInnes
had net sales of $2,539,899 and income from continuing operations of $70,141 for
the period from March 8, 1996 to March 31, 1996.
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(C) On June 4, 1997, the Company acquired substantially all of the assets and
certain liabilities which comprise Taylor Forge. Taylor has net sales of
$7,114,015 and a loss from continuing operations of $114,594 for the ten month
period ended March 31, 1998. On November 5, 1997, the Company acquired
substantially all of the assets and certain liabilities which comprise Northern
Steel. Northern had net sales of $5,685,951 and a loss from continuing
operations before income tax of $28,232 for the five month period ended March
31, 1998. These acquisitions have been accounted for as purchases and their
results of operations have been included in the consolidated financial
statements since the dates of acquisition.
During the five year period ending March 31, 1998 no dividends were declared or
paid.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES,
INCLUDING ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS". SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY", "ESTIMATES,"
"WILL," "SHOULD," "PLANS" "OPINION" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR
OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF
STRATEGY. READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THESE FACTORS
INCLUDE THE EFFECTIVENESS OF MANAGEMENT'S STRATEGIES AND DECISIONS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, DEVELOPMENTS IN TECHNOLOGY, NEW OR MODIFIED
STATUTORY OR REGULATORY REQUIREMENTS AND CHANGING PRICES AND MARKET CONDITIONS.
THIS REPORT IDENTIFIES OTHER FACTORS THAT COULD CAUSE SUCH DIFFERENCES. NO
ASSURANCE CAN BE GIVEN THAT THESE ARE ALL OF THE FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO VARY MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.
The following is a discussion and analysis of the consolidated financial
condition and results of operations of Centrum Industries, Inc. The discussion
and analysis should be read in connection with the consolidated financial
statements and the related notes thereto of Centrum Industries, Inc as of March
31,1998 and 1997 and for each of the years in the three-year period ended March
31,1998.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
% Change from Prior Year
------------------------
Years Ended March 31 (Dollars in Thousands) 1998 1997 1996 1998 1997
================================================================================================================================
<S> <C> <C> <C> <C> <C>
NET SALES:
Metal Forming $ 52,025 $ 46,639 $ 2,540[1] 11.5% N/M [2]
Material Handling 21,811 16,183 19,451 34.8% -16.8%
Motor Production 5,075 8,326 5,535 -39.0% 50.4%
Corporate 3 7 N/M [2] -
- --------------------------------------------------------------------------------------------------------------------------------
$ 78,914 $ 71,155 $ 27,526
================================================================================================================================
GROSS MARGIN:
Metal Forming $ 12,689 $ 10,978 $ 720[1] 15.6% N/M [2]
Material Handling 4,904 3,744 5,117 31.0% -26.8%
Motor Production 1,253 1,648 1,382 -24.0% 19.2%
Corporate -3 2 N/M [2] -
- --------------------------------------------------------------------------------------------------------------------------------
$ 18,843 $ 16,372 $ 7,219
================================================================================================================================
OPERATING INCOME:
Metal Forming $ 4,717 $ 3,953 $ 230[1] 19.3% N/M [2]
Material Handling 229 444 1,410 -48.4% -68.5%
Motor Production 424 696 468 -39.1% 48.7%
Corporate -1,276 -940 -642 N/M [2] -
- --------------------------------------------------------------------------------------------------------------------------------
$ 4,094 $ 4,153 $ 1,466
================================================================================================================================
</TABLE>
INDUSTRY SEGMENTS
The percentage contributions of each industry segment to net sales and gross
margin during the last three years were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
=============================================================================================
<S> <C> <C> <C>
NET SALES:
Metal Forming 65.9% 65.6% 9.2% [1]
Material Handling 27.6% 22.7% 70.7%
Motor Production 6.5% 11.7% 20.1%
- ---------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
=============================================================================================
GROSS MARGIN: [3]
Metal Forming 87.8% 77.6% 10.9% [1]
Material Handling 4.3% 8.7% 66.9%
Motor Production 7.9% 13.7% 22.2%
- ---------------------------------------------------------------------------------------------
100.0% 100.0% 100.0%
=============================================================================================
</TABLE>
[1] For the period March 9,1996 through March 31,1996.
[2] Not meaningful (N/M)
[3] Gross Margin for the divisions was computed without the Corporate expenses.
OVERVIEW Centrum is a publicly traded holding company that acquires and
operates companies that have strong niche positions in their industries. Each
operating segment produces quality products and has both capital and technology
barriers to entry. The Company's long range goal is to enhance the overall value
of each of its core operating segments through a combination of increased market
penetration and complementary acquisitions or strategic business combinations.
All of the Company's present manufacturing subsidiaries were acquired subsequent
to April 1993.
RESULTS OF OPERATIONS The Company's operations have been classified into four
business segments: metal forming operations, material handling systems, motor
production systems, and corporate office. The metal forming operations segment
was established on March 8, 1996 with the acquisition of McInnes Steel Company
(McInnes), and consists of steel open die forging, nonferrous casting and
seamless rolled ring operations. Taylor Forge Company (Taylor) was acquired on
June 4, 1997 to expand this segment and is included in the results of
operations since the acquisition date. The material handling systems segment
was established with the acquisition of American Handling, Inc. (AHI) on
September 2, 1993, and consists of the design, procurement and installation of
material handling systems for warehouses and distribution facilities. Northern
Steel Company (Northern) was acquired on November 5, 1997 and sells shelving,
racks, conveyers, and other storage and distribution equipment to the material
handling industry. Northern's results of operations are included in the
material handling segment for fiscal 1998 from the date of acquisition. The
motor production system segment was established with the acquisition of
Micafil, Inc. (Micafil) on May 17, 1993, which manufactures armature winding
machines and complete production systems for numerous complex manufacturing
processes. The Corporate office functions to oversee the operating segments
and pursue future strategic opportunities for growth.
15
<PAGE> 16
YEAR ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
Consolidated results
Net sales increased by $7.8 million or 10.9% to $78.9 million for fiscal 1998 as
a result of the inclusion of Taylor and Northern in the results of operations.
Excluding current year acquisitions, consolidated revenues declined by $5
million to $66.1 million or (7.1%) during the current year. The majority of the
reduction in revenue, approximately $3.3 million, was the result of a shift in
product mix at the motor production segment. This segment's prior year revenue
stream was benefited by several larger orders while the current year product mix
has shifted to smaller production lines that generally have smaller dollar
orders and higher margins.
Gross margin on a consolidated basis increased to 23.9% in 1998 from 23.0% in
1997. Both the metal forming and motor production segments were the
beneficiaries of stronger margins due to improvement in product mix. Margins in
the material handling segment decreased to 22.5% in the current year and 20.7%
excluding the operations of Northern. The primary reason for this reduction in
gross margin is the underperformance of a $6 million installation project at
AHI which was completed during the current fiscal year. Consolidated selling,
general and administrative expense ("SG&A") increased from 17.2% to 18.7% of
sales in fiscal 1998. The increase is primarily due to the inclusion of
Northern in the current year results of operations. SG&A typically runs at a
higher rate of sales in the material handling segment as compared to the other
operating segments.
Operating income fell to 5.2% of sales in fiscal 1998 from 5.8% in fiscal 1997.
The main reason for this reduction was the inclusion of Taylor and Northern in
the results of operations. Excluding current year acquisitions, operating income
was comparable to the prior year at 5.6% of sales. Other income (expense) for
the year was strengthened by a $745,000 one-time gain at the material handling
segment. The gain was created by the relinquishment of a contractual right to
purchase the building leased by AHI, upon the sale of the property to a third
party. The realization of similar gains is not expected to be a continuing trend
in future years.
The current year provision for income taxes reflects an effective rate of 32.9%
as compared to a fiscal 1997 tax benefit rate of (46.1). During 1997,
management recorded a provision for income tax expense of $827,000 which was
offset by a $1.6 million credit to deferred income tax expense. The credit to
deferred income tax expense was to reduce existing valuation allowances and was
based upon new information evaluated during the year regarding the availability
of certain federal net operating loss carryforwards (NOLs) and the continued
improvements and operating profits throughout the Company.
Results for each of the individual segments are as follows.
METAL FORMING OPERATIONS
Sales at the metal forming operations were $52 million as compared to $46.6
million in the prior year or an increase of 11.5%. The increase is due entirely
to the inclusion of Taylor in the current year results of operations. Revenue
growth in this segment slowed during fiscal 1998 from the rate achieved during
fiscal 1997. Growth in the seamless rolled ring market coupled with the addition
of new forged product lines was offset by a reduction in demand for open die
forgings in the power generation market. Strong demand from both bearing and
gear producers has continued to fuel the revenue stream in the segments' rolled
ring operations. This was coincident with the addition of several new forged
product lines for the aircraft and oil
16
<PAGE> 17
and gas markets. However, overall sales growth was diminished, as orders for
open die forgings for the power generation markets slowed during the fourth
quarter with the continuation of the economic crisis in Asia. Management
believes demand trends in the power generation market will remain sluggish
during the first half of fiscal 1999 and then return to historic rates during
the second half of the fiscal year. During the first half of fiscal 1999, the
revenue stream is expected to realize the benefit of the new product lines
discussed above, offsetting shortages caused by the power generation
markets.
Gross margins for the segment increased to 24.4% in fiscal 1998 from 23.5% in
the prior year. Gross margin was 25.3% excluding the results of Taylor. Margins
have been positively impacted at this segment by the addition of the new
products for the aircraft and oil and gas markets. In addition, management's
emphasis on cost reductions continue to have a positive impact on manufacturing
costs. Operating income for the segment increased to 9.1% in the current year
and 9.6% excluding the results of Taylor as compared to 8.5% in fiscal 1997. The
majority of the improvement in gross margins was translated into a positive
impact on earnings as management held SG&A, as a percentage of sales, consistent
with prior year levels. As a result of this, operating income for the segment
grew by $764,000 or 19.3% during fiscal 1998 and $352,000 or 8.5% excluding the
results of Taylor.
MATERIAL HANDLING SYSTEMS
Revenues in the material handling segment increased by $5.6 million or 34.8% to
$21.8 million in fiscal 1998 from $16.2 million in fiscal 1997. The entire
increase was due to the inclusion of Northern in the results of operations.
Although the material handling industry has been growing between 3% - 5%
annually, the automotive after-market niche served by AHI did not experience
such a robust growth rate. Revenue growth is expected to begin during the second
half of fiscal 1999 at rates consistent with the overall industry as a result of
management's continued focus on the development of new sectors of the material
handling market. Until this time, however, the first half of fiscal 1999 will be
impacted by lower than historical volumes in this segment.
Gross margin for the material handling segment fell to 22.5% in fiscal 1998, and
20.7% excluding the results of Northern, from 23.1% in the prior year. The
primary reason for the reduction in gross margin is the underperformance of a $6
million installation project at AHI. The project represented an entry for the
company into a new market and was completed during the fiscal year. Margins on
the remainder of AHI products remain at traditional levels and management
anticipates that future orders will perform at margin levels consistent with
prior year results. Operating income decreased to 1.0% of sales in fiscal 1998
from 2.7% in fiscal 1997. Operating income was 1.4% of sales excluding the
results of Northern. The reduction in operating income is mainly attributable to
the underperformance in gross margin discussed above.
The Material Handling Segment recognized a one-time pretax gain of $745,000
during fiscal 1998 as a result of the relinquishment of a contractual right to
purchase the office and warehouse building leased by AHI. In December 1997, the
building was sold by the landlord to a third party and a cash payment was
received. This pretax gain was recorded as other income in the consolidated
financial statements. A one year lease has been obtained from the buyer which
should allow AHI adequate time to relocate. The recognition of similar gains is
not expected to be a continuing trend in future years.
17
<PAGE> 18
MOTOR PRODUCTION SYSTEMS
Sales decreased at the motor production system segment by 39% or $3.2 million
during fiscal 1998 to $5.1 million in the current year from $8.3 million the
prior year. This reduction is primarily the result of a shift in product mix at
the segment. The prior year revenue stream was benefited by several larger
orders received by the segment. The current shift in product mix is toward
smaller orders which generally have a higher gross margin. As a result of this,
gross margins increased to 24.7% this year as compared to 19.8% in the prior
year.
The improvement in gross margin was offset by increases in SG&A as a percentage
of sales to 16.3% in the current year from 11.4% in fiscal 1997. Although
management reduced SG&A in total by $124,000 or 13%, the reductions were still
not sufficient to offset the revenue decrease. Management believes that current
SG&A levels are necessary to support planned business volumes. As a result of
the above, operating margins as a percentage of sales in this segment remained
level as improvements in gross margins were offset by SG&A costs.
CORPORATE OFFICE
During fiscal 1998, general and administrative expenses at the corporate office
totaled $1,274,000 as opposed to $940,000 in the prior year. Increased costs in
this area are primarily attributable to higher professional fees and
compensation expenses associated with the overall growth in the business and
costs of marketing and publicizing Centrum stock.
Corporate interest expense for fiscal 1998 was $631,000 as compared to $810,000
in the prior year. The primary reason for the reduction in this area was the
retirement of certain bridge notes related to the McInnes acquisition during
fiscal 1997.
YEAR ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
Consolidated results
Net sales for 1997 increased by $43.6 million or 159% to $71.2 million. The
primary reason for the increase is due to the inclusion of the metal forming
operations for a full twelve months in 1997 as opposed to 1996 which only
included sales for the period from March 8, 1996 through March 31, 1996.
Consolidated gross margins decreased to 23% of sales as compared to 25.6% in the
prior year. The decreased gross margins are reflective of the change in the
composition of the operating segments since the acquisition of the metal forming
operations coupled with reduced margins experienced during 1997 at the other two
segments. Selling, general and administrative expenses increased by $6.6 million
in 1997 to $12.2 million, reflecting the inclusion of McInnes. Interest expense
increased by $2.2 million to $2.75 million primarily reflecting the increased
level of debt required to fund the McInnes acquisition. During 1997, management
recorded a provision for income tax expense of $827,000 which was offset by a
$1.6 million credit to deferred income tax expense. The credit to deferred
income tax expense was to reduce existing valuation allowances and was based
upon new information evaluated during the year regarding the availability of
certain federal net operating loss carryforwards (NOLs) and the continued
improvements and operating profits throughout the Company.
Results for each of the individual segments are as follows.
18
<PAGE> 19
Metal Forming Operations
Sales at the metal forming operations were $46.6 million during 1997 as compared
to the calendar year prior to Centrum's acquisition of $37.9 million. The
increase in revenues is primarily due to continued growth at the seamless rolled
ring operations and open-die forging operations. Gross margins were 23.5% of
sales for 1997 as compared to 22.1% in the fiscal year prior to the acquisition
date. The increase in gross margin is mainly attributable to higher margins in
the rolled ring products and emphasis by management on cost controls. Selling,
general and administrative expenses were 15.1% of sales for 1997 and 19.3% of
sales in the pre-acquisition period. The reduction is mainly due to increased
revenues and emphasis on controls over fixed costs.
Material Handling Systems
Revenues for 1997 were $16.2 million, which was a decrease of $3.3 million from
the prior year. The decrease is primarily due to customer requested delivery
reschedules from fiscal 1997 into 1998. Gross margins of 23.1% of sales for 1997
reflected a decrease over the prior year's margin of 26.3%. The decreased gross
profit margin is reflective of higher sales of warehouse management software
purchased from an outside vendor which has a gross margin of 15 - 18%. As a
percent of sales, the 1997 selling, general and administrative expenses
increased to 20.4% of sales from 19.1% in 1996. The increase for 1997 is due to
the decrease in sales revenue, which covered a lesser proportion of fixed
expenses.
Motor Production Systems
Revenues for 1997 were $8.3 million, which was an increase of $2.8 million from
the prior year. The primary reason for the increase is the continued penetration
into the appliance and power tool markets. Gross margins of 19.8% of sales
decreased as compared to the prior year's gross margin of 24.9%. The lower gross
margin is the result of competitive pressures, which necessitated accepting
lower margins to produce sales growth. Gross margins are expected to remain
lower than those experienced in prior years. Selling, general and administrative
expenses for 1997 as a percent of sales decreased to 11.4% in 1997 from 16.1% in
1996. The decrease for 1997 is due to the increase in sales revenue which
covered a greater proportion of fixed expenses.
Corporate Office
During 1997, the corporate office recorded general and administrative expenses
of $940,000, as compared to $600,000 in the prior year. The increase is due
primarily to increased professional fees for 1997 compared to 1996 and with
additional administrative expenses associated with the overall growth in the
business. Interest expense for 1997 was $810,000 as compared to $242,000 in
1996. The increase in interest expense was due to debt incurred primarily in
connection with the acquisition of McInnes. The oil and gas operations, which
are immaterial, have been included in Corporate Office.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES CASH FLOW
Cash provided by operating activities during fiscal 1998 was $3.7 million. The
primary source of cash other than net income, and depreciation, was a $1.5
million reduction in costs and estimated earnings in excess of billings on
uncompleted contracts. The reduction of this asset was primarily caused by the
reduction in revenue at the motor production segment as a result of the change
in product mix. The decrease in accrued expenses of $1.7 million was primarily
caused by a reduction in deposits at the material handling and motor production
19
<PAGE> 20
segments due to the completion of long term contracts during the fiscal year and
the payment of contingent liabilities associated with the acquisition of Taylor
and Northern. Cash used by operating activities for the year ended March 31,
1997 was $1.6 million. During 1997 the largest uses of cash were the reduction
of accounts payable by $2.8 million and the $1.1 million increase in costs and
estimated earnings in excess of billings due to the timing of certain vendor
payments and the timing of billings related to two large contracts which were in
process at year end. During 1996 the primary use of cash for operating
activities was a $2.2 million increase in accounts receivable due to an increase
in fourth quarter revenues at the material handling and motor productions
segments. The increase in accounts receivable were partially offset by an
increase in accounts payable of $1.7 million at March 31, 1996 which also
reflects the increased level of operations at the operating subsidiaries.
FINANCING AND INVESTING ACTIVITIES CASH FLOWS
To meet operating expenses, satisfy debt maturities, and finance acquisitions,
during 1998, 1997 and 1996, Centrum relied upon a combination of new capital,
debt and operating cash flow. During 1996, Centrum initiated a Private Placement
Offering ("Offering") for 2.4 million shares of its common stock. The offering
was completed in fiscal 1997 and total proceeds were $3.1 million, which is net
of $347,000 in issuance costs and expenses. During 1997, an additional $2.8
million was drawn on the revolving line of credit to support operations and
working capital requirements. Operating cashflow in fiscal 1998 was sufficient
to support the retirement of $2.5 million in term debt coupled with $1.1 million
reduction in the line of credit. Debt proceeds of $8 million were used to
finance acquisitions.
Acquisitions
On June 4, 1997, Centrum acquired substantially all of the assets of Taylor
Forge International, Inc. (TFI), through a subsidiary of McInnes which is now
known as Taylor Forge Company (Taylor). Taylor produces steel seamless rolled
rings for the oil, bearing and miscellaneous commercial industries. The purchase
price of approximately $6.8 million includes the repayment of $4.5 million of
debt existing at TFI. The acquisition was financed by debt agreements and the
issuance of 33,264 shares of the Company's common stock. . Financing for the
transaction was provided by an increase in McInnes' line of credit to $18.5
million with Huntington National Bank (Bank) and new term debt. McInnes drew
$2.2 million on the line of credit and obtained a $4 million, five year term
note, which bears interest at 1.25% above prime. Additionally, seller financed
notes with interest payable at prime plus 1.25% in the amount of $250,000 were
obtained.
Centrum acquired substantially all of the assets and certain liabilities of
Northern Steel, Inc., (NSI), on November 5, 1997, through an American Handling,
Inc. subsidiary, the subsidiary is now known as Northern Steel Company
(Northern). Northern supplies shelving, racks, conveyors, and other storage and
distribution equipment as components of material handling systems. The initial
purchase price of approximately $2.4 million was funded by a draw of $1.5
million on a newly instituted line of credit with Huntington National Bank
(Bank) at the material handling systems segment and $1.4 million in cash.
Subsequent to the closing, a purchase price adjustment of $466,000 was
reimbursed to the Company by the seller. The purchase price adjustment was
based upon changes in the closing net worth of NSI as determined by the
purchase agreement. The terms of the new line of credit at the material
handling systems segment are similar to the terms of the existing line of
credit with the Bank at the metal forming group.
Centrum acquired all the stock of McInnes through a subsidiary merger on March
8, 1996. The acquisition of McInnes was primarily financed in the form of debt
agreements and proceeds from the sale of the Company's
20
<PAGE> 21
common stock. The debt agreement consisted of a promissory note issued to the
Bank for $2.9 million payable in monthly installments at 1.25% above the prime
rate and a line-of-credit for the lesser of $15.5 million or "borrowing base,"
as defined in the agreement. As of March 31, 1998, approximately $18.5 million
in total loans and commitments was available of which the Company had borrowed
$11.5 million and had stand-by letters of credit issued of approximately $3
million. A Note and Warrant Purchase Agreement was entered into with three
investment funds which provides for $2.5 million aggregate principal amount of
11% convertible debt with warrants for the purchase of 1,250,000 shares of the
Company's common stock for $2 per share. Additional funds to finance the
acquisition were obtained through the Offering. The remaining funds were
provided by the issuance of $1.2 million aggregate principal amount of term
notes which bore interest at 2% per month to certain of the Company's
shareholders and directors and were repaid during 1997 from the proceeds of the
Offering.
The financing provided by the Bank for the acquisition of McInnes is secured by
substantially all the real and personal property of Centrum and its direct and
indirect subsidiaries and contains various financial, operational and reporting
covenants. Included among these covenants is a prohibition on the Company from
incurring new secured debt or new unsecured debt in excess of certain thresholds
or from making any business acquisitions, unless a waiver is first obtained from
the Bank. The financial covenants include the requirements that McInnes is to
maintain a fixed charge coverage ratio not less than 1.20 to 1, a ratio of total
liabilities to tangible net worth not to exceed 6.0 to 1, and tangible net worth
not less than $5.5 million. The Bank permits certain management fees and
advances to be paid by the Company's subsidiaries to Centrum, and Centrum will
use these advances primarily for payment of principal and interest expense and
for working capital purposes.
The 11% convertible subordinated debt (Notes) are convertible at any time at the
option of the holder (Holders) to shares of the Company's common stock at a
price of $2.00 per share. The warrants are exercisable at an initial exercise
price of $2.00 per share, subject to various anti-dilution adjustments affecting
the exercise price and/or the number of shares subject to the warrants. The
Notes are presently secured by the guarantees of two of the Company's
subsidiaries, American Handling, Inc. and Micafil, Inc., and the Notes have been
subordinated to the Bank Loan. The Note agreements contain various financial,
operational, and reporting covenants and requirements including a requirement
that each of the Holders must approve certain financial and operational
transactions of the Company, including the incurrence of new secured or
unsecured debt, with certain exceptions, and any business acquisitions. The
financial covenants include the requirements that the Company maintain a fixed
charge coverage ratio not less than 1 to 1, and a ratio of total liabilities to
net worth not to exceed 5.4, 3.5 and 2.4 to 1 for the years ending March 31,
1997, 1998 and 1999, respectively. However, due to the acquisition of Taylor and
Northern, the Company did not meet the total liabilities to net worth ratio at
March 31, 1998 and a waiver from the Holders was obtained. Net worth is not to
be less than $5.1, $7.4 and $9.8 million at March 31, 1997, 1998 and 1999,
respectively. Additionally, the Company may not pay dividends or issue
additional shares of common stock (with certain exceptions), without the prior
approval of the Holders. The Company has also entered into an Equity Holders
Agreement, in which the Company has agreed to use its best efforts to cause two
persons designated by the Holders to be nominated to the Company's Board of
Directors. Pursuant to which, the Company nominated, and the shareholders
elected, two designees, (Messrs. Schroder and Klaffky), to the Board during 1997
and returned for 1998.
21
<PAGE> 22
Capital expenditures
McInnes has a commitment to purchase 2 new MAZAK CNC machine tools, with an
aggregate value of approximately $1.9 million, to upgrade its machine shop. The
machine tools are scheduled for delivery in the second and third quarter of
fiscal 1999, and it is management's intention to finance these machine tools
pursuant to an operating lease currently being negotiated with a third party. In
addition, AHI is in the process of negotiating a 10 year lease for new office
and manufacturing facilities as a result of the landlord's sale of their
existing building. AHI management anticipates that these negotiations will be
successful and that the company will relocate during the third quarter of fiscal
1999. The annual lease commitment for the new facility is expected to be
approximately $300,000. Centrum has no other material commitments for capital
expenditures. During 1998 capital expenditures are expected to be approximately
$2 million, excluding the MAZAK CNC machine tools, which will be invested
primarily to enhance the metal forming facilities.
Future Funding
The primary sources of funds available to the Company in fiscal 1999 for
operations, planned capital expenditures and debt repayments include
available cash, operating income and funds available under the line of credit
agreement. However, the Company's Bank line of credit matures on March 8, 1999
and these funds will not be sufficient to satisfy this debt maturity. It is
management's intention to refinance the line of credit prior to March 8, 1999
and, although management anticipates that they will be successful in this
endeavor, at this point no assurances can be given because such negotiations
have not commenced. With the exception of the refinance discussed above,
management believes that sufficient funds for operations, debt repayments and
acquisitions can be raised through cash flows generated by the operating
subsidiaries, funds available under the line of credit agreement, and the
issuance of common stock. However, in light of the current number of shares of
common stock outstanding and reserved for issuance, the Company may need to
increase the number of authorized shares of common stock in order to have
shares available for future acquisitions.
Tax and other matters
At March 31, 1998, the Company has $8.7 million in net operating loss
carryforwards (NOLs) available which would reduce income tax payable in future
years. However, there are uncertainties related to both the amount and ultimate
realization of the NOLs. At March 31, 1998, a remaining valuation reserve of
$1.7 million has been maintained, primarily due to limitations on the usage of
certain pre-acquisition NOLs. The remaining valuation allowance could be
increased or reduced in the near term if estimates of future taxable income
during the carryforward period change substantially. During 1998, 1997, and
1996, the Company reduced its income taxes payable by $293,000, $534,000 and
$278,000, respectively, through the use of NOLs.
Centrum is aware of the Year 2000 computer issue, and has initiated an
evaluation of its existing computer hardware and software systems. The metal
forming operations segment has addressed the Year 2000 issue as part of the
ongoing implementation and normal upgrading of hardware and software. At the
material handling systems segment, AHI is exploring the possibility of utilizing
Northern's software which is Year 2000 compliant. The motor production systems
segment is still in the process of evaluating current hardware and software
needs. The Company presently believes that, with modifications to existing
software and conversions to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are not
completed timely, the Year 2000 problem may have a material impact on the
operations of the Company. In addition, there can be no assurance that the
systems of other companies on which Centrum relies will be corrected or that
such failure to correct this issue by another company would not have an adverse
effect on Centrum. Lastly, while
22
<PAGE> 23
many costs have been incurred as part of the routine upgrading of systems, the
ultimate costs of the Year 2000 issue are unknown.
The Company is involved in routine litigation and various legal efforts
incidental to the normal operations of its business. In management's opinion,
none of these matters will have material adverse effects on the Company's
liquidity or results of operations. See also "Environmental Matters," below.
ENVIRONMENTAL MATTERS
The Company's continuing compliance with existing federal, state and local
provisions dealing with the protection of the environment is not expected to
have a material effect upon the Company's capital expenditures, earnings,
competitive position or liquidity.
EBA is a direct defendant in two governmental cost recovery actions and other
related private party actions at a waste disposal site. With regard to the most
significant cost recovery action, EBA has negotiated a settlement which has been
approved in federal court. In addition, EBA and other parties are responsible
for performing certain cleanup work at the site pursuant to a government order.
Private party suits and actual cleanup costs in excess of governmental estimates
can affect the reliability of the Company's loss estimates. In addition,
unasserted claims are not reflected in the Company's cost estimates. Pursuant to
the environmental statutes, the Company may be found jointly and severally
liable to the government for cleanup costs; however, management believes that
the current status of government settlements and group cleanup participation at
the site indicates that the liability will be shared by responsible parties.
Currently, there are at least 17 parties participating in a pro rata cost
sharing arrangement with respect to the site cleanup work. The Company has
negotiated an insurance settlement which requires the carrier to reimburse the
Company for site expenses, subject to a ceiling. At March 31, 1998 and 1997, the
Company has recorded liabilities of $400,000 and $600,000, respectively, of
which $163,800 and $350,000 are recorded as current liabilities. At March 31,
1998 and 1997, the Company has recorded a receivable from its insurance carrier
which is included in current assets. Funds are expected to be paid over
approximately two years. The total anticipated site costs and private suits are
not expected to vary materially from the recorded amounts.
OUTLOOK
Revenues on a consolidated basis are expected to increase to approximately
$100 million in fiscal 1999 as a result of internal growth and the inclusion
of Taylor and Northern operating results for an entire fiscal year. Pretax
income is also expected to increase for the fiscal year realizing the benefit
of this revenue improvement. However, quarterly operating results during fiscal
1999 will feel the effect of such factors as the impact of the Asian economic
crisis on metal forming results and the length of time to develop new market
sectors at the material handling segment. During 1999, management will focus on
further improvements in operating margins at existing manufacturing segments
and seek potential acquisitions combinations or strategic alliances which will
complement the current operations and enhance future earnings. Management will
continue their long term emphasis on improving operating margins at the
manufacturing segments and attaining annual consolidated revenue growth of
20-30% fueled by both complementary acquisitions or business combinations and
increased market penetration by each operating segment.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedules
Financial Statements: Page
Report of Independent Accountants 26
Consolidated Balance Sheet at March 31, 1998 and 1997 27
Consolidated Statement of Income for the three
years ended March 31, 1998 28
Consolidated Statement of Changes in Shareholders' Equity
for the three years ended March 31, 1998 29
Consolidated Statement of Cash Flows for the
three years ended March 31, 1998 30
Notes to Consolidated Financial Statements 31
Financial Statement Schedule for the three years ended March 31, 1998
II Valuation and Qualifying Accounts 56
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
24
<PAGE> 25
CENTRUM INDUSTRIES, INC.
AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
25
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Centrum Industries, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Centrum Industries, Inc. and its subsidiaries at March 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Toledo, Ohio
June 3, 1998
26
<PAGE> 27
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,297,720 $ 2,758,219
Accounts receivable, less allowance for doubtful
accounts of $88,181 and $78,161, respectively 14,814,897 11,080,819
Cost and estimated earnings in excess of
billings on uncompleted contracts 26,018 1,513,808
Inventories, net 13,211,207 9,897,925
Prepaid expenses and other 1,044,294 517,656
----------- -----------
Total current assets 30,394,136 25,768,427
Property, plant and equipment, net 17,204,135 10,627,764
Other assets 5,573,451 6,604,456
----------- -----------
Total assets $53,171,722 $43,000,647
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $13,345,447 $10,644,724
Current portion of long-term debt 3,239,086 1,607,629
Accounts payable 11,278,808 6,640,781
Deferred income taxes 115,509 246,140
Accrued expenses and other 3,310,094 3,501,161
----------- -----------
Total current liabilities 31,288,944 22,640,435
----------- -----------
Long-term debt, less current portion 11,180,914 11,021,938
----------- -----------
Other liabilities 577,564 595,636
----------- -----------
Commitments and contingent liabilities (Note 10) - -
----------- -----------
Shareholders' equity:
Preferred stock - $.05 par value, 1,000,000 shares
authorized, 70,000 issued and outstanding (liquidation
preference of $10 per share) 3,500 3,500
Common stock - $.05 par value, 15,000,000 shares
authorized, 8,403,501 and 8,368,904 issued and
outstanding, respectively 420,175 418,445
Additional paid-in capital 7,992,847 7,918,233
Retained earnings 1,707,778 402,460
----------- -----------
Total shareholders' equity 10,124,300 8,742,638
----------- -----------
Total liabilities and shareholders' equity $53,171,722 $43,000,647
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE> 28
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
1998 1997 1996
<S> <C> <C> <C>
Net sales $78,914,663 $71,154,726 $27,525,702
----------- ----------- -----------
Cost and expenses:
Cost of goods sold 58,363,824 53,435,948 20,306,567
Depreciation 1,708,289 1,346,125 157,573
----------- ----------- -----------
Gross margin 18,842,550 16,372,653 7,061,562
Selling, general and administrative expenses 14,748,589 12,220,639 5,595,988
----------- ----------- -----------
Operating income 4,093,961 4,152,014 1,465,574
----------- ----------- -----------
Other income (expense):
Gain on sale of contractual right 744,736 - -
Interest income 68,570 199,250 18,206
Interest expense (3,028,194) (2,750,203) (515,538)
Miscellaneous, net 65,728 75,542 94,812
----------- ----------- -----------
Total other expense, net (2,149,160) (2,475,411) (402,520)
----------- ----------- -----------
Income before income taxes 1,944,801 1,676,603 1,063,054
----------- ----------- -----------
Provision (benefit) for income taxes:
Current 186,616 43,771 448,838
Deferred 452,867 (817,446) (191,024)
----------- ----------- -----------
Total provision (benefit) for income taxes 639,483 (773,675) 257,814
----------- ----------- -----------
Net income $ 1,305,318 $ 2,450,278 $ 805,240
=========== =========== ===========
Basic net income per common share $ .16 $ .33 $ .14
=========== =========== ===========
Diluted net income per share $ .15 $ .31 $ .13
=========== =========== ===========
Weighted average common shares-basic 8,412,642 7,481,617 5,738,725
=========== =========== ===========
Weighted average common shares-diluted 8,652,255 7,893,061 6,162,447
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE> 29
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Preferred Stock Common Stock Additional Earnings
-------------------------- ------------------------- Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 70,000 $ 3,500 5,745,360 $287,268 $4,068,038 $ (2,853,058)
Issuance of common stock - - 485,500 24,275 612,775 -
Purchase of common stock - - (60,000) (3,000) (57,000) -
Issuance of warrants - - - - 600,000 -
Issuance of options - - - - 94,954 -
Net income - - - - - 805,240
--------- ---------- ---------- -------- ---------- ------------
Balance at March 31, 1996 70,000 3,500 6,170,860 308,543 5,318,767 (2,047,818)
Issuance of common stock - - 1,954,523 97,726 2,494,676 -
Exercise of warrants and
options - - 243,521 12,176 104,790 -
Net income - - - - - 2,450,278
--------- ---------- ---------- -------- ---------- ------------
Balance at March 31, 1997 70,000 3,500 8,368,904 418,445 7,918,233 402,460
Issuance of common stock - - 33,264 1,663 73,181 -
Exercise of warrants - - 1,333 67 1,433 -
Net income - - - - - 1,305,318
--------- ---------- ---------- -------- ---------- ------------
Balance at March 31, 1998 70,000 $ 3,500 8,403,501 $420,175 $7,992,847 $ 1,707,778
========= ========== ========== ======== ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE> 30
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,305,318 $2,450,278 $ 805,240
Adjustments to reconcile net income to
net cash provided by (used for) operating activities:
Gain on sale of fixed assets (38,272) (55,683) -
Gain on sale of contractual right (744,736) - -
Depreciation 1,708,289 1,346,125 157,573
Amortization of intangible assets 150,250 143,143 156,711
Amortization of debt premium and issue costs 367,197 334,892 -
Deferred income taxes 452,867 (817,446) (191,024)
Reduction of goodwill for utilization of
preacquisition net operating loss - - 190,564
Changes in assets and liabilities that provided
(used) operating cash, net of acquisition:
Accounts receivable 460,965 (101,653) (2,216,194)
Costs and estimated earnings in excess
of billings on uncompleted contracts 1,487,790 (1,141,109) 109,345
Inventories (277,056) (502,681) (111,597)
Accounts payable 910,439 (2,865,241) 1,664,084
Prepaid expenses and other (355,612) 87,707 (213,923)
Accrued expenses and other (1,716,105) (457,643) 159,144
----------- ----------- ------------
Net cash provided by (used for)
operating activities 3,711,334 (1,579,311) 509,923
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of contractual right 776,965 - -
Purchase of McInnes, net of cash acquired - (12,306,627)
Purchase of Taylor, net of cash acquired (6,784,734) - -
Purchase of Northern, net of cash acquired (2,440,406) - -
Purchase of property and equipment (1,245,755) (815,215) (525,940)
Other 98,000 (86,343) 10,000
----------- ----------- ------------
Net cash used for investing activities (9,595,930) (901,558) (12,822,567)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of acquisition debt 8,028,531 525,000 13,759,565
Debt issue costs - - (884,501)
Net change in bank lines of credit (1,146,367) 2,758,239 228,056
Repayments of term debt (2,459,567) (2,854,267) (339,450)
Proceeds from the issuance of common stock
and exercise of warrants and options 1,500 2,709,367 1,237,050
Repurchase of common stock - - (60,000)
----------- ----------- ------------
Net cash provided by financing
activities 4,424,097 3,138,339 13,940,720
----------- ----------- ------------
Increase in cash and cash equivalents (1,460,499) 657,470 1,628,076
Cash and cash equivalents at beginning of year 2,758,219 2,100,749 472,673
----------- ----------- ------------
Cash and cash equivalents at end of year $ 1,297,720 $ 2,758,219 $ 2,100,749
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE> 31
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Centrum Industries, Inc. and its subsidiaries (the Company) consist of
the following operations:
Metal Forming Operations
McInnes Steel Company (McInnes), with operations in Northwestern
Pennsylvania and Tennessee, produces open die steel forgings for the
power generation, compressor and other industrial markets. McInnes also
produces seamless steel rolled rings for bearing and special machine
manufacturers and nonferrous castings for the glass container
manufacturers and pump and valve industries. Sales of McInnes' products
are made to both domestic and international customers. During 1998,
McInnes purchased Taylor Forge International, Inc. (Taylor) (see Note 2).
Material Handling Systems
American Handling, Inc. (AH), with operations in Ohio and Washington,
designs, manufactures and installs material handling equipment for
various domestic manufacturing companies. During 1998, AH purchased
Northern Steel Inc. (Northern) (see Note 2).
Motor Production Systems
Micafil, Inc. (Micafil), located in Dayton, Ohio, manufactures armature
winding machines and completed production systems primarily for domestic
customers in the appliance and automotive industries. During 1997,
Micafil entered into a joint venture with an unaffiliated company to
increase the marketing and distribution of machines and systems within
North America. The joint venture is accounted for under the equity
method. The Company's share of earnings from the joint venture since its
inception is not material.
CONSOLIDATION
The consolidated financial statements include the accounts of the holding
company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated.
31
<PAGE> 32
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Some of
the more significant estimates include depreciation and amortization of
long lived assets, deferred income tax and inventory valuations,
environmental accruals, postemployment and postretirement benefits and
allowances for doubtful accounts. Actual results could differ from those
estimates.
DEBT ISSUANCE COSTS
Debt issuance costs are deferred and amortized over the life of the
related note utilizing the interest method for debt with scheduled
principal payments, otherwise utilizing the straight-line method over the
life of the debt agreement.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no
current or future benefit is discernible. The Company determines its
liability on a site-by-site basis and records a liability at the time
when it is probable and can be reasonably estimated. Unasserted claims
are not included in the estimated liability. The Company's estimated
liability is reduced to reflect the anticipated participation of other
potentially responsible parties in those instances where it is probable
that such parties are legally responsible and financially capable of
paying their respective shares of the relevant costs. Where the cost
estimates result in a range of equally probable amounts, the lower end of
the range is accrued. The estimated liability of the Company is not
discounted or reduced for possible recoveries from insurance carriers.
Potential insurance recoveries are evaluated separately from the related
liability and are recorded only if they are probable of receipt.
INVENTORIES
Inventories are valued at the lower of cost or market. Inventory cost at
Micafil is principally determined by the specific identification method.
Inventory cost at all other operating subsidiaries is principally
determined by the last in, first out (LIFO) method. At March 31, 1998
and 1997, approximately 94% and 95%, respectively, of inventories are
valued using the LIFO method.
32
<PAGE> 33
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
GOODWILL
Goodwill is being amortized using the straight-line method over 20 years,
which is the period expected to be benefited.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
computed over the estimated useful lives using the straight-line method
for financial reporting purposes and accelerated methods for federal
income tax purposes. Management reviews long-lived assets for impairment
whenever events and circumstances indicate that recovery of the asset's
carrying value is unlikely. In performing the reviews for recoverability,
management compares the carrying value of the asset against the estimated
future cash flows expected to result from the use of the asset and its
eventual disposition. If the cash flows are less than the carrying
value, the asset is written down to its estimated fair market value.
REVENUE RECOGNITION
Sales of products and services, primarily made by McInnes, are recognized
as products are shipped and services are performed. The estimated sales
value of performance under significant contracts, supplied by Micafil and
AH, is recognized under the percentage-of-completion method of accounting
measured by the contract costs incurred to date as a percentage of total
estimated contract costs. Contracts executed by Micafil and AH generally
have terms of less than one year.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which include
cash and cash equivalents, accounts receivable, accounts payable and
debt, approximate their fair market values at March 31, 1998 and 1997.
33
<PAGE> 34
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company sells the majority of its products to
distributors and original equipment manufacturers in a variety of
industries including the power generation, compressor and other
industrial markets. The Company performs continuing credit evaluations
of its customers and, in certain circumstances, the Company may require
letters of credit from its customers. Historically, the Company has not
experienced significant losses related to receivables from individual
customers or groups of customers in any particular industry or geographic
area.
PENSION PLANS
Annual net periodic pension costs under the Company's defined benefit
pension plans are determined on an actuarial basis. Monthly benefits are
based upon a rate per year of service and vest upon the completion of
five years of service. The Company's funding policy is to contribute
amounts sufficient to satisfy ERISA funding requirements.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Annual net postretirement benefits liability and expenses are determined
on an actuarial basis. The Company's current policy is to pre-fund these
benefits to the extent allowable under current IRS guidelines. Benefits
are determined primarily based upon employees' length of service and
include applicable employee cost sharing.
WORKERS' COMPENSATION EXPENSE
The Company recognizes workers' compensation expense based upon the level
of premiums for each fiscal year and also evaluates the adequacy of the
workers' compensation accrual quarterly based upon actual and forcasted
experience. Changes in claims experience are recognized currently as
adjustments to workers' compensation expense.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," encourages, but does not require companies
to record compensation for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations.
34
<PAGE> 35
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Current tax liabilities and assets are recognized for the estimated taxes
payable or refundable on the tax returns for the current year. Deferred
tax liabilities or assets are recognized for the estimated future tax
effects attributable to temporary differences and carryforwards that
result from events that have been recognized in either the financial
statements or the tax returns, but not both. The measurement of deferred
tax liabilities and assets is based on provisions of enacted tax laws.
Deferred tax assets are reduced, if necessary, by the amount of any tax
benefits that are not expected to be realized.
NET INCOME PER COMMON SHARE
SFAS No. 128, "Earnings per Share," is effective for periods ending after
December 15, 1997. Accordingly, basic and diluted net income per share
have been computed in accordance with this statement. Prior periods have
been adjusted to conform with the provisions of this statement.
STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, the Company
considers all cash and highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
CHANGES IN ACCOUNTING ESTIMATES
During the fourth quarter of 1998, the Company changed the estimated
useful lives of certain equipment used in its metal forming operations.
This change was made to better reflect how the assets were expected to be
used over time and to provide a better matching of revenues and related
expenses. The impact of the change on fiscal 1998 net income was not
material.
35
<PAGE> 36
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. ACQUISITIONS
On November 5, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Northern. The purchase method of
accounting was used to account for this business combination and
Northern's operations have been included in the consolidated financial
statements as part of the material handling segment since acquisition
date. The inital purchase price of approximately $2.4 million was funded
by $1.5 million from a new line of credit and $1.4 million in cash.
Subsequent to closing, a purchase price adjustment of $466,000 was
reimbursed to the Company by the seller. The purchase price adjustment
was based on changes in the closing net worth of Northern as determined
by the purchase agreement.
On June 4, 1997, the Company purchased all of the assets of Taylor. The
purchase method of accounting was used to account for this business
combination. The operating results of Taylor have been included in the
consolidated financial statements as part of the metal forming operations
since the date of acquisition. The total purchase price of approximately
$6.8 million includes the repayment of $4.5 million in existing debt.
Taylor was financed by the proceeds of a new $4 million term debt
agreement, a draw of $2.2 million on the McInnes line of credit and the
issuance of 33,264 shares of the Company's common stock.
The following unaudited information presents the Company's results of
operations for the years ended March 31, 1998 and 1997 as if the
acquisitions of Northern and Taylor had occurred at the beginning of each
of the periods presented. The pro forma information is not necessarily
indicative of the results of operations which would have actually been
obtained during such periods.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MARCH 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
Sales $90,451,845 $101,131,501
Net income $ 899,454 $ 1,404,320
Net income per common share - basic $ .11 $ .19
Net income per common share - diluted $ .10 $ .18
Weighted average number of common
shares - basic 8,412,642 7,514,290
Weighted average number of common
shares - diluted 8,652,255 7,925,734
</TABLE>
36
<PAGE> 37
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. GAIN ON SALE OF CONTRACTUAL RIGHT
During the fourth quarter of 1998, the Company sold its contractual right
to purchase a building leased by the material handling segment. The
Company recognized a pre tax gain of $744,736 ($491,526 after income
tax).
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
<S> <C> <C>
Raw materials $ 6,812,856 $5,407,088
Work in process 5,670,581 4,055,079
Finished goods 762,010 656,300
----------- ----------
13,245,447 10,118,467
LIFO reserve 65,904 (120,442)
Reserve for excess of cost over market (100,144) (100,100)
----------- ----------
$13,211,207 $9,897,925
=========== ==========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
<S> <C> <C>
Land $ 467,510 $ 312,770
Buildings 4,808,240 3,056,991
Machinery and equipment 13,983,259 8,099,452
Furniture and fixtures 1,141,804 722,517
Vehicles 128,346 95,134
----------- -----------
Total 20,529,159 12,286,864
Accumulated depreciation (3,325,024) (1,659,100)
----------- -----------
$17,204,135 $10,627,764
=========== ===========
</TABLE>
37
<PAGE> 38
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. COMPOSITION OF OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
<S> <C> <C>
Deferred income tax benefits $2,016,576 $2,830,901
Goodwill, net of $686,042 and $545,268
in accumulated amortization, respectively 2,158,068 2,298,842
Debt issue costs, net of $845,607 and $520,822
in accumulated amortization, respectively 480,845 805,630
Other 917,962 669,083
---------- ----------
$5,573,451 $6,604,456
</TABLE>
7. BANK LINES OF CREDIT
A debt agreement with The Huntington National Bank (Huntington) permits
the Company to borrow up to $18,500,000 on a revolving basis, subject to
available collateral, which consists of eligible accounts receivable,
equipment and inventory. Interest accrues on the unpaid portion of the
borrowings at prime rate (8.50% at March 31, 1998) plus .75%. Borrowings
under the agreement and commitments for standby letters of credit are
secured by all of McInnes' cash, trade and other accounts receivable,
inventory and equipment. In addition, Huntington has either a first or
second secured interest in McInnes' real property. The total carrying
value of security at March 31, 1998, including second mortgages, was
$35,744,628. At March 31, 1998, approximately $18.5 million in total
loans and commitments was available of which $11,548,899, including
$3,000,000 in standby letters of credit, was outstanding.
The agreement places restrictions or limitations on, among other things,
McInnes' ability to pay dividends, to pay management fees to other
affiliates or Centrum, and to make capital expenditures and incur rent
expense exceeding certain specified levels in any year. The agreement
requires McInnes to maintain minimum specified tangible net worth levels,
maintain a specified fixed charge coverage ratio and not exceed a
specified ratio of total liabilities to tangible net worth. The Company
was in compliance with all covenants related to this agreement at March
31, 1998.
38
<PAGE> 39
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. BANK LINES OF CREDIT (CONTINUED)
The agreement also requires the Company to pay monthly collateral
administration and annual facility fees aggregating $76,667 per year and
contains early termination fees of up to $185,000. The agreement expires
on February 28, 1999.
In connection with the purchase of Northern, the Company entered into an
agreement with Huntington that permits AH and Northern to borrow
$4,000,000 on a revolving basis, subject to available collateral, which
consists of eligible accounts receivable and inventory with a carrying
value of $7,276,565 at March 31, 1998. Interest accrues on the unpaid
portion of the borrowings at prime rate plus .75%. Borrowings under the
agreement are secured by essentially all of the assets of Centrum and its
subsidiaries. At March 31, 1998, approximately $4 million in total loans
and commitments was available of which $1,796,548 was outstanding.
The agreement places restrictions or limitations on, among other things,
AH and Northern's ability to pay dividends, to pay management fees, to
make capital expenditures or incur rent expense exceeding certain
specified levels in any year. The agreement, among other things,
requires the Company to maintain a minimum specified tangible net worth
and to not exceed specified accounts payable, accounts receivable and
inventory turnover days. The agreement expires on October 31, 1999. The
Company was in compliance with all covenants related to this agreement at
March 31, 1998.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
<S> <C> <C>
Note payable to Huntington in monthly installments of
$66,666. The note bears interest at prime rate plus 1.25%. The
remaining outstanding principal and accrued interest are due in June
2002. The note is secured by the property specified by the Huntington
line of credit (see Note 7).
$ 3,333,340 -
</TABLE>
39
<PAGE> 40
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
<S> <C> <C>
Note payable to Huntington in monthly installments of
$39,584. The note bears interest at prime rate plus 1.25%. The
remaining outstanding principal and accrued interest are due in April
1999. This note is secured by the property specified by the Huntington
line of credit (see Note 7). $ 1,860,400 $ 2,336,209
$2.5 million aggregate principal amount of 11% convertible, unsecured
subordinated notes and warrants. The notes are convertible for up to
1,250,000 shares of Centrum's common stock and include warrants for the
purchase of 1,250,000 shares of Centrum's common stock at $2 per share.
The notes were originally recorded net of $600,000 allocated to the
warrants. The implicit interest rate on the notes is 14.5% and the
outstanding balance is due in March 2001. This agreement places certain
restrictions on the Company, including the requirement that the holders
of the notes approve, in advance, any dividends, the incurrence of new
debt (with certain exceptions), and acquisitions. 2,140,000 2,020,000
Industrial development revenue bonds payable in annual installments.
Interest is set at a daily variable rate (1998 weighted average rate
was 3.91%) and payable monthly. The bonds mature in November 2001.
McInnes pays an annual commitment fee of 3% on the amount committed
under a direct pay letter of credit issued by a bank as a credit
enhancement for the bonds. This note is secured by the property
specified by the Huntington line of credit (see Note 7). 3,000,000 3,800,000
Note payable to the former owner of Micafil, due in monthly
installments of $13,346, including interest at an implicit rate of
8.61% per annum, through June 2005. A balloon payment of $1,452,384
will be payable in June 2005. The note is secured by the land and
building at Micafil which has a carrying
value of $709,945 at March 31, 1998. 1,635,929 1,654,399
</TABLE>
40
<PAGE> 41
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
<S> <C> <C>
Unsecured notes payable to individuals, including
$275,000 and $520,000 at March 31, 1998 and 1997,
respectively, to certain shareholders of the
Company. The notes bear interest at 10% to 12% with
interest payable semi-annually. The notes are due in
March 1999. $ 345,000 $ 615,000
Unsecured notes payable to individuals, including $325,000 and $346,000
at March 31, 1998 and 1997, respectively, to certain shareholders of
the Company, with attached warrants. The notes are due in March 1999
with interest accruing at a rate of 10% per annum. The attached
warrants allow the note holders to purchase 1,000 shares of the
Company's common stock for each $10,000 of notes held at a purchase
price of $1 per share. 526,000 526,000
Unsecured five year term notes payable to individuals, including
$495,389 and $756,901 at March 31, 1998 and 1997, respectively, to
certain shareholders of the Company, with attached warrants. The notes
bear interest at prime plus 0.5% to 1.0%. Principal and interest
payments are due monthly. The attached warrants allow the note holders
to purchase 20,000 shares of the Company's common stock for each
$50,000 of notes held at a purchase price of $1 per share. 608,903 879,533
City of Erie Enterprise Development Zone term note payable in monthly
principal and interest installments of $4,625. The note bears interest
at 3% per annum and matures on November 2, 2002. The note is secured by
specific property with a carrying value of $856,399 at March 31, 1998. 241,134 288,510
</TABLE>
41
<PAGE> 42
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
1998 1997
<S> <C> <C>
Pennsylvania Industrial Development Authority note payable in monthly
principal and interest installments of $3,378. The note bears interest
at 2% per annum and matures on October 1, 2011. The note is secured by
specific property with a carrying value of $914,047 at March 31, 1998. $ 479,294 $ 509,916
Unsecured promissory note to a shareholder of the Company. The note
bears interest at prime rate plus 1.25%. The agreement requires
quarterly interest payments only until June 2000, when the principal
and remaining interest is due in full. 250,000 --
------------ ------------
14,420,000 12,629,567
Less current maturities 3,239,086 1,607,629
------------ ------------
Noncurrent portion of long-term debt $ 11,180,914 $ 11,021,938
============ ============
</TABLE>
The aggregate scheduled maturities of long-term debt for the fiscal
years subsequent to March 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 3,239,086
2000 3,358,250
2001 4,045,615
2002 1,712,704
2003 232,158
Thereafter 1,832,187
-------------
$ 14,420,000
=============
</TABLE>
At March 31, 1998, the Company was not in compliance with one of its
financial covenants related to the 11% convertible unsecured
subordinated notes. The creditors have waived compliance with respect
to this covenant.
Cash paid for interest was $2,766,228, $2,821,336 and $651,954 for the
years ended March 31, 1998, 1997 and 1996, respectively.
42
<PAGE> 43
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFITS
PENSION PLANS
McInnes has two noncontributory defined benefit pension plans covering
substantially all of its hourly employees.
Following is a summarization of the funded status and amounts recognized
for McInnes' defined benefit pension plans included in the consolidated
balance sheet:
At March 31, 1998:
------------------
<TABLE>
<CAPTION>
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
BENEFITS ASSETS TOTAL
<S> <C> <C> <C>
Projected benefits obligation $ 4,396,994 $ 482,972 $4,879,966
Plan assets at fair value, primarily
intermediate bonds and common stock 4,724,738 456,909 5,181,647
----------- ----------- ----------
Funded status 327,744 (26,063) 301,681
Unrecognized prior service cost 65,011 - 65,011
Unrecognized net (gain) loss (197,772) 11,327 (186,445)
----------- ----------- ----------
Prepaid (accrued) pension cost $ 194,983 $ (14,736) $ 180,247
=========== =========== ==========
</TABLE>
At March 31, 1997:
------------------
<TABLE>
<CAPTION>
ASSETS ACCUMULATED
EXCEED BENEFITS
ACCUMULATED EXCEED
BENEFITS ASSETS TOTAL
<S> <C> <C> <C>
Projected benefits obligation $ 4,285,986 $ 351,579 $4,637,565
Plan assets at fair value, primarily
intermediate bonds and common stock 4,292,663 329,980 4,622,643
----------- ----------- ----------
Funded status 6,677 (21,599) (14,922)
Unrecognized net (gain) loss 205,874 (30,510) 175,364
----------- ----------- ----------
Prepaid (accrued) pension cost $ 212,551 $ (52,109) $ 160,442
=========== =========== ==========
</TABLE>
At March 31, 1998 and 1997, $4,861,744 and $4,438,416, respectively, of
projected benefit obligations were vested.
43
<PAGE> 44
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFITS (CONTINUED)
PENSION PLANS (CONTINUED)
Net periodic pension costs consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
<S> <C> <C>
Service cost $150,623 $131,352
Interest cost 327,517 318,518
Actual return on plan assets (675,479) (541,179)
Prior service cost 4,630 -
Actuarial gain 314,963 213,845
-------- --------
Net periodic pension cost $122,254 $122,536
======== ========
</TABLE>
The assumptions used to determine pension costs and projected benefit
obligations are as follows:
<TABLE>
<CAPTION>
MARCH 31,
1998 1997 1996
<S> <C> <C> <C>
Expected long-term rate of
return on plan assets 8.00% 7.50% 8.00%
Discount rate 7.25% 7.50% 7.50%
</TABLE>
McInnes, Micafil, AH and Northern also sponsor individual 401(k) profit
sharing plans covering substantially all salaried employees. The
Company's contributions to these plans in 1998, 1997 and 1996 were
$177,000, $123,200, and $50,900, respectively.
OTHER POSTEMPLOYMENT BENEFITS
Certain of McInnes' employees are entitled to other postemployment
benefits, comprised primarily of health insurance benefits under the
terms of various agreements and based on a specified amount per month.
44
<PAGE> 45
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFITS (CONTINUED)
OTHER POSTEMPLOYMENT BENEFITS (CONTINUED)
The funded status of the plans at March 31 was as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Actuarial present value of:
Fully eligible active participants $ (19,000) $ (50,000)
Other active participants (51,000) (123,000)
Retired participants (484,000) (1,048,000)
----------- -----------
Accumulated benefit obligation (554,000) (1,221,000)
Plan assets at fair value 1,253,000 1,178,000
----------- -----------
Funded status 699,000 (43,000)
Unrecognized net (gain) loss (170,000) 70,000
Unrecognized prior service cost (382,000) -
----------- -----------
Net postretirement benefit asset $ 147,000 $ 27,000
=========== ===========
</TABLE>
Net periodic postemployment costs consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997
<S> <C> <C>
Service cost $ 30,000 $ 30,000
Interest cost 72,000 87,000
Actual return on plan assets (94,000) (101,000)
Amortization of unrecognized gain (1,000) -
---------- ----------
Net periodic postretirement benefit costs $ 7,000 $ 16,000
========== ==========
</TABLE>
Investments in these plans consist of investments in money market funds,
fixed income securities, investment contracts and equity mutual funds.
During 1998, the Company's postretirement benefit plan was amended to
change insurance providers for certain plan participants. The Company
reduced its unrecognized prior service cost by $382,000 as a result of
this amendment.
45
<PAGE> 46
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. EMPLOYEE BENEFITS (CONTINUED)
OTHER POSTEMPLOYMENT BENEFITS (CONTINUED)
As of March 31, 1998, 1997 and 1996 the discount rate was 7.25%, 7.50%
and 7.25% respectively. A medical costs trend rate of 6% per year is
assumed up to a maximum benefit of $3,120 per year pre age 65 and $924
post age 64. An increase in the assumed medical trend rate of 1% would
increase the accumulated postretirement benefit obligation as of March
31, 1998 by approximately $7,000. The increase to the aggregate of the
service and interest cost component of the net postretirement benefit
cost would not be material.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 30,743 $ 30,000 $ 448,838
State and local 155,873 13,771 -
--------- ---------- ---------
186,616 43,771 448,838
--------- ---------- ---------
Deferred:
Federal 763,675 (749,747) (191,024)
State and local (310,808) (67,699) -
--------- ---------- ---------
452,867 (817,446) (191,024)
--------- ---------- ---------
Total provision (benefit) $ 639,483 $ (773,675) $ 257,814
========= ========== =========
</TABLE>
46
<PAGE> 47
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
The difference between the total income tax provision (benefit) computed
using the federal statutory income tax rate and the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Amortization of intangibles 2.5 2.8 5.0
Utilization of fully reserved
preacquisition net operating losses - - 17.9
Utilization of state tax credit (11.9) - -
Change in valuation allowance - (96.7) (38.0)
State and local taxes 2.3 1.4 -
Other 6.0 12.4 5.4
---------- ---------- ------
Effective tax rate 32.9% (46.1)% 24.3%
========== ========== ======
</TABLE>
During 1997, management recorded a provision for income tax expense which
was offset by a $1,621,000 credit to deferred income tax expense. The
credit to deferred income tax expense was to reduce the existing
valuation allowance and was based on new information evaluated during the
year regarding the availability of certain federal net operating loss
carryforwards (NOLs) and the continued improvements in operating profits
and backlogs throughout the Company. These factors reduced the level of
uncertainties with respect to a portion of these NOLs whereby management
concluded that the Company would realize these tax benefits. At March
31, 1998 and 1997, a remaining valuation reserve of $1.7 million has been
maintained primarily due to limitations on the usage of certain
pre-acquisition NOLs. The remaining valuation allowance could be
increased or reduced in the near term if estimates of future taxable
income during the carryforward period change substantially or if new
information regarding the uncertainties is received.
During 1998, 1997 and 1996, the Company reduced its income taxes payable
by $293,000, $534,000 and $278,000, respectively, through the use of
NOLs. However, utilization of preacquisition NOLs of $191,564 for 1996,
which were fully reserved at the time of the acquisition, was recorded as
a reduction of goodwill and other intangibles, rather than as a reduction
of income tax expense.
47
<PAGE> 48
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities are comprised of the following
at March 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets:
Environmental liabilities $ 80,530 $ 179,050
Vacation 189,340 158,293
Bonus 154,020 283,897
Other employee-related accruals 32,641 85,213
Other 323,881 146,858
Net operating loss and alternative
minimum tax carryforwards 3,850,958 4,208,255
----------- -----------
Deferred tax assets before valuation allowance 4,631,370 5,061,566
Valuation allowance (1,664,790) (1,664,790)
----------- -----------
Deferred tax assets after valuation allowance 2,966,580 3,396,776
----------- -----------
Liabilities:
Inventory (650,236) (756,217)
Property, plant and equipment (534,503) (55,798)
----------- -----------
Deferred tax liabilities (1,184,739) (812,015)
----------- -----------
Net deferred tax asset $ 1,781,841 $ 2,584,761
=========== ===========
</TABLE>
At March 31, 1998 and 1997, the Company had approximately $8,732,000 and
$9,840,000, respectively, in federal NOLs available which expire in the
years 2003 through 2010, and alternative minimum tax credit carryforwards
of $830,000 and $862,500 at March 31, 1998 and 1997, respectively, which
do not expire. Under Section 382 of the United States Internal Revenue
Code of 1986, as amended (the Code), the NOLs may be subject to
limitations. If certain stock ownership changes described in the Code
occur in the future, these restrictions would further limit the Company's
future use of its NOLs.
11. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
The Company is involved in routine litigation and various legal efforts
incidental to the normal operations of its business. In management's
opinion, none of these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations.
48
<PAGE> 49
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
ENVIRONMENTAL
Erie Bronze (Erie), a subsidiary of McInnes, is a direct defendant in two
governmental cost recovery actions and other related private party
actions at a waste disposal site. With regard to the most significant
cost recovery action, Erie has negotiated a settlement which has been
approved in federal court. In addition, Erie and other parties are
responsible for performing certain cleanup work at the site pursuant to a
government order.
Private party suits and actual cleanup costs in excess of governmental
estimates can affect the reliability of the Company's loss estimates.
Pursuant to the environmental statutes, the Company may be found jointly
and severally liable to the government for cleanup costs; however,
management believes that the current status of government settlements and
group cleanup participation at the site indicates that the liability will
be shared by responsible parties. Currently, there are at least 17
parties participating in various settlements of the cost recovery
actions, including a pro rata cost sharing arrangement with respect to
the site cleanup work. The Company has negotiated an insurance
settlement which requires the carrier to reimburse the Company for site
expenses and certain legal fees subject to a ceiling. At March 31, 1998
and 1997, the Company has recorded liabilities of $400,000 and $600,000,
respectively, of which $163,800 and $350,000 was recorded as current
liabilities at March 31, 1998 and 1997, respectively. Funds are expected
to be paid over approximately two years. The total anticipated site
costs and private suits are not expected to materially exceed the
recorded liabilities.
LEASE COMMITMENTS
The Company leases certain equipment and vehicles under operating lease
agreements which expire at various dates through fiscal 2003. The
aggregate minimum commitments relating to these operating leases
following March 31, 1998 are set forth below:
<TABLE>
<S> <C>
1999 $ 716,655
2000 474,065
2001 216,562
2002 57,227
2003 45,375
----------
$1,509,884
==========
</TABLE>
The Company also leases office space and additional warehouse space on a
month to month basis. Total rental expense under these agreements was
$461,702, $326,563 and $336,652 for the years ended March 31, 1998, 1997
and 1996, respectively.
49
<PAGE> 50
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. CAPITAL STOCK
The Company is a Delaware corporation with two classes of stock, common
stock and serial preferred stock.
During 1998, the Company issued common stock valued at $74,844 in
connection with the purchase of Taylor (See Note 2). During 1997, the
Company issued common stock valued at $48,000 to pay director fees and
$72,251 for payment of a note payable. These transactions have been
excluded from the accompanying consolidated statement of cash flows since
they are non-cash transactions. In addition, options and warrants to
acquire 243,521 shares of common stock were exercised at option prices
ranging between $.372 and $1.00 per share.
During 1996 and 1997, the Company sold 2.3 million shares of common stock
for $3,120,000, which is net of $347,000 in issuance cost and expenses.
The shares were sold by Continental Capital, Inc. (Continental) (see Note
13). During 1996, the Company repurchased 60,000 shares of its common
stock for $60,000.
The difference between the weighted average number of common shares used
in the basic and diluted earnings per share computations for 1998, 1997
and 1996 is due to incremental shares from the assumed conversion of
warrants. Net income used in the basic and diluted earnings per share
calculations are the same for 1998, 1997 and 1996.
In addition, options and warrants to purchase 2,159,000, 871,000 and
594,000 shares of common stock were outstanding during 1998, 1997 and
1996, respectively, but were not included in the computation of diluted
earnings per share as the effects of converting the options and warrants
would be antidilutive.
The preferred stock is issuable in series and the Board of Directors, at
their discretion, may fix for each series (1) the rate of dividend, (2)
the price at and the terms and conditions on which shares may be
redeemed, (3) the amount payable per share in the event of voluntary or
involuntary liquidation, (4) sinking fund provisions, (5) the terms and
conditions on which shares may be converted, if a convertible series, and
(6) voting rights, if any.
50
<PAGE> 51
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. RELATED PARTIES
The Company has subordinated debt agreements with First New England
Capital, MorAmerica and the North Dakota Small Business Investment
Company. Two representatives of the lenders are also members of the
Company's board of directors. The Company recorded $289,000 in interest
expense related to these debt agreements during fiscal 1998 and 1997,
respectively.
Continental is a shareholder of the Company. Continental's Chairman and
Chief Executive Officer is a director of the Company. In 1997 and 1996,
the Company paid Continental $274,000 and $132,500, respectively, for
fees related to the issuance of stock and debt.
At March 31, 1998 and 1997, the Company had unsecured notes payable to
certain of its shareholders, as described in Note 8.
51
<PAGE> 52
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. BUSINESS SEGMENT INFORMATION
The Company's business segments are described in Note 1.
<TABLE>
Summarized financial information by business segment for fiscal 1998, 1997 and 1996 is
as follows:
METAL MATERIAL MOTOR CORPORATE
FORMING HANDLING PRODUCTION OFFICE AND
1998 OPERATIONS SYSTEMS SYSTEMS OTHER TOTAL
<S> <C> <C> <C> <C> <C>
Net sales to unaf-
filiated customers $ 52,025,186 $ 21,810,889 $ 5,075,241 $ 3,347 $ 78,914,663
Operating income (loss) 4,717,165 228,989 424,301 (1,276,494) 4,093,961
Identifiable assets 38,827,656 9,778,796 3,747,031 818,239 53,171,722
Depreciation 1,544,949 113,299 43,861 6,180 1,708,289
Amortization - 140,774 9,476 - 150,250
Capital expenditures 1,141,740 90,443 9,974 3,598 1,245,755
1997
Net sales to unaf-
filiated customers $ 46,638,620 $ 16,183,002 $ 8,325,861 $ 7,243 $ 71,154,726
Operating income (loss) 3,952,713 443,772 695,511 (939,982) 4,152,014
Identifiable assets 29,837,983 6,724,590 4,104,030 2,334,044 43,000,647
Depreciation 1,227,152 72,418 41,737 4,818 1,346,125
Amortization - 140,774 2,369 - 143,143
Capital expenditures 612,443 95,300 98,478 8,994 815,215
1996
Net sales to unaf-
filiated customers $ 2,539,899 $ 19,451,267 $ 5,534,536 $ - $ 27,525,702
Operating income (loss) 229,937 1,409,694 468,409 (642,466) 1,465,574
Identifiable assets 27,624,426 8,236,864 3,016,597 1,733,861 40,611,748
Depreciation 63,373 59,496 31,094 3,610 157,573
Amortization - 150,225 6,486 - 156,711
Capital expenditures 433,695 67,948 17,274 7,023 525,940
</TABLE>
15. STOCK OPTIONS AND WARRANTS
During 1998, non-employee directors of the Company's board of directors
received options to acquire 105,000 shares of the Company's common stock
with an exercise price of $2.00 per share.
Also during 1998, officers and employees of the Company received vested
options to acquire 392,500 shares and non-vested options to acquire
450,000 shares of the Company's common stock with an exercise price of
$2.00 per share. The non-vested options will vest upon the attainment of
certain sales levels and earnings before interest and taxes during future
fiscal years. These levels were not attained during 1998, and therefore,
none of the options are currently vested.
52
<PAGE> 53
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. STOCK OPTIONS AND WARRANTS (CONTINUED)
During 1997, non-employee directors of the Company's board of directors
received options to acquire 50,000 and 25,000 shares of the Company's
common stock with exercise prices of $1.50 and $2.00 per share,
respectively. Options and warrants to acquire 243,521 shares of common
stock were exercised at option prices ranging between $.372 and $1.00 per
share.
Also during 1997, officers and employees of the Company received options
to acquire 100,000 and 226,568 shares of the Company's common stock with
exercise prices of $1.50 and $2.00 per share, respectively.
In connection with the acquisition of McInnes, two officers of McInnes
received options to acquire 110,333 shares of common stock having an
exercise price of $.64 per share resulting in $94,954 in additional
paid-in capital. This transaction has been excluded from the
consolidated statement of cash flows since it is a non-cash transaction.
During 1996, officers and employees of the Company received options to
acquire 350,000 and 295,000 shares of the Company's common stock with
exercise prices of $1.00 and $1.50, per share, respectively.
During 1996, the Company issued 1,250,000 warrants to purchase its common
stock for $2 per share for a period of eight years. The warrants, which
were issued in connection with the 11% convertible subordinated notes,
have been valued at $600,000.
In addition, warrants to purchase 220,000 shares of the Company's common
stock for $1.00 per share were issued during 1996 in connection with
individual debt agreements with certain shareholders.
53
<PAGE> 54
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following summarizes the stock option and warrant transactions for the
three years ended March 31, 1998:
<TABLE>
<CAPTION>
NUMBER PRICE PER
OF SHARES SHARE
<S> <C> <C>
Outstanding at March 31, 1995 860,755 $.372 - 1.00
Granted 2,225,333 $ .64 - 2.00
--------- ------------
Outstanding at March 31, 1996 3,086,088 $.372 - 2.00
Granted 401,568 $1.50 - 2.00
Exercised (243,521) $.372 - 1.00
Cancelled (13,300)
--------- ------------
Outstanding at March 31, 1997 3,230,835 $ .64 - 2.00
Granted 963,992 $ 2.00
Exercised (1,000) $ 1.00
Cancelled (114,073) $1.00 - 2.00
--------- ------------
Outstanding at March 31, 1998 4,079,754 $ .64 - 2.00
========= ============
</TABLE>
No expense has been charged to income relating to stock options. If the
fair value method of accounting for stock options prescribed by SFAS No.
123 had been used, the expense relating to the stock options would have
been $215,000 in 1998, $97,500 in 1997 and $46,785 in 1996. Pro forma
net income would have been $1,163,440 in 1998, $2,385,913 in 1997, and
$774,362 in 1996. Pro forma basic earnings per share would have been
$.14, $.32 and $.13 in 1998, 1997 and 1996, respectively. The pro forma
effect on net income is not representative of the pro forma effect on net
income that will be disclosed in future years because it does not take
into consideration pro forma compensation expense relating to grants made
prior to 1996.
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<PAGE> 55
CENTRUM INDUSTRIES, INC. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. STOCK OPTIONS AND WARRANTS (CONTINUED)
The fair value of each option grant was estimated on the date of grant
using the Black Scholes model with the following assumptions.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Risk-free interest rate 6.6 - 6.7% 6.4% 6.4%
Expected average life 10 years 10 years 5 years
Stock price volatility 36.6% 35% 35%
</TABLE>
16. SALES TO MAJOR CUSTOMER
During fiscal 1997 and 1996, the Company's sales to its largest customer
totaled $10.3 million and $3.5 million or 14% and 13% of sales,
respectively. The 1997 sales were recorded by the metal forming segment
to a Company in the power generation market. The 1996 sales were
recorded by the material handling segment to a customer engaged in the
sale of automotive parts. During fiscal 1998, sales to the Company's
largest customer did not exceed 10% of total sales.
55
<PAGE> 56
Centrum Industries, Inc.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------- ---------- -------------------------------- ---------------------------------
Additions
Balance at Charged to Charged to
Beginning Costs and Other Accounts Deductions Balance at
Description of Period Expenses -Describe -Describe End of Period
- ---------------------------- ------------------------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998
Valuation allowance for
excess cost over market $ 100,100 $ 100,144
Valuation for LIFO reserve 120,442 $ (186,346) (65,904)
Valuation allowance
for accounts receivable 78,161 $ 10,020 88,181
Valuation allowance for
note receivable 24,733 24,733
Year ended March 31, 1997
Valuation allowance for
excess cost over market $ 450,767 $ (350,667) (A) $ 100,100
Valuation for LIFO reserve (172,720) $ 293,162 120,442
Valuation allowance
for accounts receivable 93,761 (15,600) (D) 78,161
Valuation allowance for
note receivable 24,733 24,733
Year ended March 31, 1996
Valuation allowance for
excess cost over market $ 107,585 $ 40,282 $ 316,202 (B) $ (13,302) (C) $ 450,767
Valuation allowance for
LIFO reserve (172,720) (B) (172,720)
Valuation allowance
for accounts receivable 60,658 19,491 56,403 (B) (42,791) (D) 93,761
Valuation allowance for
note receivable 24,733 24,733
Valuation allowance
for lease receivable 6,782 (6,782) (E)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This item is not applicable.
(A) - Disposal of inventory.
(B) - Valuation allowance was in the opening balance sheet of a company acquired
by Centrum.
(C) - Based on the physical inventory, the need for inventory obsolescence
allowance was reduced.
(D) - Allowance for doubtful accounts was reduced by the amount of accounts
written off.
(E) - Allowance for lease receivable was reduced by the amount of lease written
off.
56
<PAGE> 57
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF CENTRUM
The executive officers and directors of Centrum at March 31, 1998 were as
follows:
George H. Wells Chief Executive Officer since June 1995. President
since 1992. Chief Operating Officer from 1992 to May
1995. Director since 1992.
William C. Davis Director since 1988. Secretary from December 1995 to
December 1997. Vice President from May 1995 to
December 1997. Chief Executive Officer, from 1992 to
May 1995.
Timothy M. Hunter Chief Financial Officer and Treasurer of Centrum since
August 1996. Secretary of Centrum since December 1997.
Chief Financial Officer, McInnes Steel Company, since
March 1996. Executive Vice President, McInnes Steel
since March 1998. Vice President, McInnes Steel from
March 1996 to March 1998.
Anthony A. Montani President and Chief Operating Officer, McInnes Steel
Company and Subsidiaries, since March 1996.
Robert J. Fulton Director, since 1993.
David L. Hart Director, since 1989.
Richard C. Klaffky Director, since 1996.
Mervyn H. Manning Director, since 1996.
David R. Schroder Director, since 1996.
Thomas E. Seiple Director, since 1988.
Information concerning the backgrounds and occupations for directors and
executive officers is as follows:
George H. Wells, age 54, currently a director, is Chairman of the Board,
President and Chief Executive Officer of the Corporation. From 1990 to October
1991, he served as President and Chief Executive Officer of Doehler-Jarvis, a
Toledo, Ohio-based producer of die cast and semi-permanent mold aluminum
components utilized by the automotive industry and in general industrial
applications. From 1985-1989, he served as President and Chief Operating Officer
and as a Director of National Forge Company of Irvine, Pennsylvania, which
produced precision machined components. Mr. Wells has been a Director since
1992.
William C. Davis, age 52, currently a Director, is Chairman of the board of
Continental Capital Corporation. He graduated from Ohio Northern University in
1968 with a degree in Business Administration. He has more than 20 years of
experience in finance, marketing and business. Mr. Davis has been a Director
since 1988.
Robert J. Fulton, age 55, currently a Director, President and Chief Executive
Officer of Hoeganaes Steel Company, a major supplier of powder metals,
previously served Centrum as an officer and consultant. From
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<PAGE> 58
1990 until December 1992, he served as Executive Vice President and Chief
Operating Officer of Doehler-Jarvis, a Toledo-based producer of die cast and
semi-permanent mold aluminum components utilized by the automotive industry and
in general industrial applications. From 1986 through 1990, he served as a
Director and Executive Vice President in charge of marketing and manufacturing
of National Forge Company of Irvine, Pennsylvania, which produced precision
machined components. Mr. Fulton has been a Director since 1993.
David L. Hart, age 53, currently a Director, attended Colgate University. He has
worked as a manufacturer's representative in the automotive industry, and for
over five years has been the president of LeeHart Associates, in Toledo, Ohio.
Mr. Hart has been a Director since 1989.
Thomas E. Seiple, age 52, currently a Director, graduated from Bowling Green
State University in 1967, with a degree in Business Administration. For the past
six years he has been the President of United Roofing & Sheet Metal, Inc., a
regional fabricator and construction business located in Toledo, Ohio. Mr.
Seiple has been a Director since 1988.
David R. Schroder, age 55, currently a Director, is President of InvestAmerica
Investment Advisors, Inc. and InvestAmerica N.D. Management Inc. These two
companies manage MorAmerica Capital Corporation and the North Dakota Small
Business Investment Company respectively, both of whom are lenders to Centrum.
Mr. Schroder holds a BS degree from Georgetown University, as well as an MBA
from the University of Wisconsin. Mr. Schroder has been a Director since 1996.
Richard C. Klaffky, age 51, currently a Director, is President and Chief
Executive Officer of First New England Capital LP, a lender to Centrum. Mr.
Klaffky is a member of the Board of Governors of the National Association of
Small Business Investment Companies and serves on the boards of several
companies. Mr. Klaffky holds a BA from Brown University and an MBA from Columbia
University. Mr. Klaffky has been a Director since 1996.
Mervyn H. Manning, age 65, currently a Director, is a retired senior executive
of Ford Motor Company, where he had overall responsibility for Latin American
and Asian Automotive Operations. Mr. Manning is a Director of several companies
and has recently served as the Chairman of Sinai Hospital of Detroit. Mr.
Manning holds a BBA from the University of Michigan, as well as an MBA from
Harvard Business School. Mr. Manning has been a Director since 1996.
Timothy M. Hunter, age 35, was appointed Chief Financial Officer, Treasurer and
Assistant Secretary in August 1996 and Secretary in 1997. He has been Executive
Vice-President and Chief Financial Officer of McInnes Steel Company since March
1998 and formerly served as Vice President and Chief Financial Officer from
March 1996 to March 1998. He has been with McInnes Steel Company since 1986,
where he served as Treasurer, prior to March 1996. Mr. Hunter is a certified
public accountant.
Anthony A. Montani, age 59, has been President and Chief Operating Officer of
McInnes Steel Company since March 1996. He has been active in the forging
industry for over 30 years. He has been with McInnes Steel Company for over 25
years, serving in his most recent capacity as Vice-President of Sales and
Marketing.
Section 16(a) Beneficial Ownership Reporting Deficiencies
Under Section 16 of the Securities Exchange Act of 1934, the Company's
directors, certain of its officers, and beneficial owners of more than 10% of
the outstanding Common Stock are required to file reports with the Securities
and Exchange Commission concerning their ownership of and transactions in Common
Stock; such persons are also required to furnish the Company with copies of such
reports.
Based solely upon the reports and related information furnished to the Company,
the Company believes that all such filing requirements were complied with in a
timely manner during and with respect to 1998.
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<PAGE> 59
ITEM 11. EXECUTIVE COMPENSATION
The following table shows compensation paid or awarded by Centrum during the
fiscal years ended March 31, 1998, 1997, and 1996 to the current executive
officer of Centrum and the other executive officers of the Company for services
in all capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------- Long term
compensation
Name and Other annual ------------
principal position Year Salary Bonus compensation (1) Options (#)
<S> <C> <C> <C> <C> <C>
George H. Wells 1998 $ 210,000 $ 151,085 $ 7,697 450,000
Chief Executive Officer 1997 $ 189,600 $ 114,100 $ 6,860 100,000
1996 $ 175,000 $ 56,000 $ 6,860 150,000
Timothy M. Hunter 1998 $ 121,731 $ 36,899 $ 6,166 55,671
Chief Financial Officer 1997 $ 101,339 $ 33,385 $ 6,085 1,898
1996 $ 64,523 $ 6,044 169,133
Anthony A. Montani 1998 $ 151,769 $ 40,587 $ 6,379 55,671
Chief Operating Officer 1997 $ 141,185 $ 33,385 $ 6,389 1,898
McInnes Steel Company 1996 $ 106,769 $ 6,439 216,200
and Subisidiaries
</TABLE>
- -------------------
(1) Automobile Lease
OPTION GRANTS IN 1998
For Named Executive Officers
<TABLE>
<CAPTION>
Number of Percent of
securities total options
underlying granted to Exercise or
options employees in base price Expiration Grant date
granted fiscal year per share Date value (1)
-------------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
George H. Wells 450,000 53.4% $ 2.00 August 27, 2007 $ 558,000
Timothy M. Hunter 55,671 6.6% 2.00 July 21, 2007 68,921
Anthony A. Montani 55,671 6.6% 2.00 July 21, 2007 68,921
</TABLE>
- -----------------
1)Based on the Constant Elasticity Variance of the Black-Scholes model using the
following assumptions: (a) a ten year option term; (b) 36% volatility rate; and
(c) 0% dividend yield. Actual gain, if any, is dependent upon the actual
performance of the shares of common stock underlying these options. There is no
assurance that the amounts shown in this column will be achieved.
No options were exercised during the fiscal year ended March 31, 1998 by any of
the named executives included in the summary compensation table.
59
<PAGE> 60
EXECUTIVE COMPENSATION (INCLUDING TERMINATION OF EMPLOYMENT) AGREEMENTS
The following table sets forth information concerning the aggregate number of
options held and the value of unexercised "in-the-money" options held at March
31, 1998 (the difference between the aggregate exercise price of all such
options held and the market value of the shares covered by such options at March
31, 1998).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAREND OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
Fiscal Year end (#) Fiscal Year end($)
---------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
George H. Wells 416,667 450,000 $ 304,167 $ ----
Timothy M. Hunter 226,702 ----- $ 80,238 $ ----
Anthony A. Montani 273,769 ----- $ 110,982 $ ----
</TABLE>
Mr. George Wells has an employment agreement with the Company which provides for
an annual salary of $210,000. In addition to his salary, Mr. Wells is entitled
to receive a performance bonus of 5% of Centrum's consolidated before tax
profit. The agreement also calls for an annual stock or cash bonus to be awarded
at the discretion of the Board. The contract has an annual term, which renews
automatically unless terminated by either party in writing 60 days prior to the
expiration date.
During 1998, Mr. Wells was granted a stock option for 450,000 shares of common
stock. The options are exercisable and vested upon the attainment of certain
sales levels and earnings before interest and taxes during future fiscal years.
These levels were not attained during 1998 and, therefore, none of the options
vested.
The employment agreement with Mr. Wells provides for the termination of Mr.
Wells for cause. In the event that Mr. Wells is terminated for any reason other
than cause prior to expiration of the agreement, he is entitled to severance
compensation of nine months salary, any discretionary bonus awarded but not yet
paid, and the pro rata amount of the performance bonus earned prior to
termination.
Mr. William Davis resigned as Vice President and Secretary of the Company
effective December 3, 1997. Mr. Davis did not receive compensation for services
rendered in this capacity and was not involved in the daily operations of the
Corporation. See directors compensation with respect to Mr. Davis' compensation
as a director.
Messrs. Timothy Hunter and Anthony Montani entered into employment agreements
with McInnes Steel Company, a subsidiary of Centrum, dated February 29, 1996
which have a three year term. The agreements automatically renew from year to
year on the anniversary commencing on the expiration of the three year term
unless terminated by either party in writing 30 days prior to the expiration
date. Mr. Hunter's annual salary from McInnes is $106,000 and Mr. Montani's
annual salary is $160,000. Both salaries are to be increased annually by a
minimum of the greater of the change in the CPI or 4% per year. In addition to
their salaries,
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<PAGE> 61
Messrs. Hunter and Montani are entitled to cash bonuses. The aggregate bonus
amount paid to Messrs. Hunter and Montani is to be 3.125% of the McInnes pre-tax
income.
The contracts provide for the termination of Messrs. Hunter and Montani for
cause. In the event that either Mr. Hunter or Mr. Montani is terminated for any
reason other than cause prior to expiration of the agreement, he is entitled to
monthly severance compensation of his base monthly salary reduced by any salary
or consulting income received from any source for the remaining term of the
agreement for a minimum period of one year. In addition, to his employment
agreement with McInnes, Mr. Hunter is compensated $24,000 annually as an
employee of Centrum.
Messrs. Wells, Hunter and Montani are eligible to participate in the
Company's 401(K) plans. Substantially all salaried employees are eligible to
participate in the plans. The Company contributes to the plans and the
Company's contribution is allocated to the accounts of the plan participants
on a nondiscriminatory basis.
DIRECTORS' FEES AND COMPENSATION
Directors who are employees of the Company or any subsidiary do not receive any
fees for Board or committee service. The Company reimburses all directors for
travel, lodging, and related expenses that they may incur in attending Board and
committee meetings.
During 1998, the seven non-employee directors received $2,500 for each Board
meeting attended subsequent to April 1, 1996 and $1,000 for each committee
meeting attended subsequent to April 1, 1996. During 1998, the Company paid
aggregate fees of $132,500 to the current directors, and $5,000 for services
rendered in 1997 to a former director.
The following table sets forth the stock option grants received by Directors
during 1998 No options were exercised for the fiscal year ended March 31, 1998
by any of the Directors included in the option grant table.
OPTION GRANTS IN 1998
For Board of Directors
<TABLE>
<CAPTION>
Number of
securities Percentage of
underlying total options Exercise or
options granted in base price Expiration Grant date
granted fiscal year per share date value (1)
--------------------------------------------- ------------------ ---------
<S> <C> <C> <C> <C> <C>
William C. Davis 15,000 1.6% $2.00 September 1, 2007 $ 18,645
Robert J. Fulton 15,000 1.6% $2.00 September 1, 2007 $ 18,645
David L. Hart 15,000 1.6% $2.00 September 1, 2007 $ 18,645
Richard C. Klaffky 15,000 1.6% $2.00 September 1, 2007 $ 18,645
Mervyn H. Manning 15,000 1.6% $2.00 September 1, 2007 $ 18,645
David R. Schroder 15,000 1.6% $2.00 September 1, 2007 $ 18,645
Thomas E. Seiple 15,000 1.6% $2.00 September 1, 2007 $ 18,645
</TABLE>
- -----------------
61
<PAGE> 62
(1) Based on the Constant Elasticity Variance of the Black-Scholes model using
the following assumptions: (a) a ten year option term; (b) 36% volatility
rate; and (c) 0% dividend yield. Actual gain, if any, is dependent upon the
actual performance of the shares of common stock underlying these options.
There is no assurance that the amounts shown in this column will be
achieved.
62
<PAGE> 63
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of Common Stock beneficially
owned as of May 31, 1998 by each director and nominee, each of the executive
officers named in the Summary Compensation Table included elsewhere herein, all
directors and executive officers of the Company as a group, and each 5% holder.
Number of shares of Centrum
common stock
beneficially owned % of class
------------------ -----------
George H. Wells (a) 584,940 4.9
William C. Davis (b) 130,000 1.1
Timothy M. Hunter (c) 238,702 2.0
Anthony A. Montani (d) 273,769 2.3
Robert J. Fulton (e) 472,939 3.9
David L. Hart (f) 260,418 2.2
Mervyn Manning (g) 65,000 0.5
Thomas E. Seiple (h) 137,163 1.1
MorAmerica Capital Corp (i)(l) 646,480 5.4
North Dakota Small Business 255,064 2.1
Investment Company (j)(l)
First New England Capital Limited 394,948 3.3
Partnership (k)(l)
All current directors and executive
officers of the company as group 3,459,423 28.8
The beneficial owner has sole voting and investment power with respect to all
shares listed, unless otherwise noted.
(a) Includes 416,667 shares Mr. Wells currently has the right to acquire
pursuant to stock options; includes 1,606 shares with respect to Mr. Wells'
ownership of shares held by Seneca Sheet Metal.
(b) Includes 130,000 shares Mr. Davis currently has the right to acquire
pursuant to stock options.
(c) Includes 226,702 shares Mr. Hunter currently has the right to acquire
pursuant to stock options.
(d) Includes 273,769 shares Mr. Montani currently has the right to acquire
pursuant to stock options.
(e) Includes 296,667 shares Mr. Fulton currently has the right to acquire
pursuant to stock options; includes 1,605 shares with respect to Mr. Fulton's
ownership of shares held by Seneca Sheet Metal.
(f) Includes 30,000 shares Mr. Hart currently has the right to acquire pursuant
to stock options; includes 29,085 shares held by Mr. Hart's wife with respect to
which she has sole voting and dispositive power.
(g) Includes 15,000 shares Mr. Manning has the right to acquire pursuant to
stock options; includes 50,000 shares held by the Mervyn H. Manning Trust.
(h) Includes 30,000 shares Mr. Seiple currently has the right to acquire
pursuant to stock options.
(i) Includes 635,724 shares MorAmerica Capital Corporation currently has the
right to acquire pursuant to a note and warrant purchase agreement with the
holders of the 11% convertible subordinated debt; includes 10,756 shares,
MorAmerica Capital Corporation has the right to acquire pursuant to the
assignment of a stock option from David Schroder.
(j) Includes 250,820 shares The North Dakota Small Business Investment Company
currently has the right to acquire pursuant to a note and warrant purchase
agreement with the holders of the 11% convertible subordinated debt; includes
4,244 shares, North Dakota Small business has the right to acquire pursuant to
the assignment of a stock option from David Schroder.
63
<PAGE> 64
(k) Includes 379,948 shares First New England Capital, LP currently has the
right to acquire pursuant to a note and warrant purchase agreement with the
holders of the 11% convertible subordinated debt; includes 15,000 shares, First
New England Capital has the right to acquire pursuant to the assignment of a
stock option from Richard Klaffky.
(l) MorAmerica Capital Corporation, The North Dakota Small Business Investment
Company and First New England Capital, LP as group have beneficial ownership in
excess of 10% of the Company's common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Continental Capital, Inc. (Continental) is a shareholder of the Company and its
Chairman and Chief Executive Officer was, from 1988 to 1995, a Director and
Chief Executive Officer of the Company and has been a Director since June 1995.
Mr. Davis was Vice President and Secretary for the period of December 1995 to
December 1997. In 1996 and 1995, the Company paid $47,500 and $15,000,
respectively, to Continental for fees relating to the issuance of debt. In 1997
and 1996, the Company paid Continental $274,000 and $85,000 for fees relating to
the issuance of stock.
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<PAGE> 65
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) The following exhibits are filed as part of the report:
3.1 Certificate of Incorporation, as amended (filed as Exhibit 3.1 to
the Company's Report on Form 10-K for the fiscal year ended March
31, 1996, file number 0-9607, and incorporated herein by
reference).
3.2 Bylaws (filed as Exhibit 3.2 to the Company's Report on Form 10-K
for the fiscal year ended March 31, 1996, file number 0-9607, and
incorporated herein by reference).
3.3 Participating Preferred Agreement (filed as Exhibit 3.3 to the
Company's Report on Form 10-K for the fiscal year ended March 31,
1996, file number 0-9607, and incorporated herein by reference).
4.1 The instruments defining the rights of the holders of debentures
issued in calendar year 1995, with options at $1.00 per share are
not being filed herewith, as permitted by Regulation Section
229.601(b)(4)(iii), because such securities do not exceed 10
percent of the total assets of the Company and its consolidated
subsidiaries. The Company hereby agrees to furnish a copy of such
agreements to the Commission upon request.
4.2 The instruments defining the rights of the holders of certain
notes, styled as "Loans," issued in 1991-1993, are not being
filed herewith, as permitted by Regulation Section
229-601(b)(4)(iii), because such securities do not exceed 10
percent of the total assets of the Company and its consolidated
subsidiaries. The Company hereby agrees to furnish a copy of such
agreements to the Commission upon request.
4.3 The instruments defining the rights of the holders of certain
subordinated notes originally issued by American Handling, Inc.
in 1991 are not being filed herewith, as permitted by Regulation
Section 229-601(b)(4)(iii), because such securities do not exceed
10 percent of the total assets of the Company and its
consolidated subsidiaries. The Company hereby agrees to furnish a
copy of such agreements to the Commission upon request.
4.4 The instruments defining the rights of the holders of certain
notes, styled as "Loans with Warrants," issued in 1993-1995, are
not being filed herewith, as permitted by Regulation Section
229-601(b)(4)(iii), because such securities do not exceed 10
percent of the total assets of the Company and its consolidated
subsidiaries. The Company hereby agrees to furnish a copy of such
agreements to the Commission upon request.
4.5 The 11% Convertible Subordinated Notes issued in March 1996 in
the aggregate principal amount of $2,500,000 (issued together
with warrants for 1,250,000 shares of the Company's common stock)
are not being filed herewith, as permitted by Regulation Section
229-601(b)(4)(iii), because such securities do not exceed 10
percent of the total assets of the Company and its consolidated
subsidiaries. The Company hereby agrees to furnish a copy of such
agreements to the Commission upon request.
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<PAGE> 66
4.6 Certain subordination agreements executed in March 1996 by new
and existing noteholders of the Company are not being filed
herewith, as permitted by Regulation Section 229.601(b)(4)(iii),
because such securities do not exceed 10 percent of the total
assets of the Company and its consolidated subsidiaries. The
Company hereby agrees to furnish a copy of such agreements to the
Commission upon request.
4.7 The instrument defining the rights of the holders certain debt
incurred in the acquisition of substantially all the assets of
Taylor Forge International, Inc., issued in June 1997 in the
principal amount of $250,000, is not being filed herewith, as
permitted by Regulation Section 229.601(b)(4)(iii), because such
security does not exceed 10 percent of the total assets of the
Company and its consolidated subsidiaries. The Company hereby
agrees to furnish a copy of such to the Commission upon request.
4.8 The instruments defining the rights of the holders of certain
debt incurred in the acquisition of Micafil, Inc., in May 1993,
including the restatements of such original instruments, are not
being filed herewith, as permitted by Regulation Section
229.601(b)(4)(iii), because such securities do not exceed 10
percent of the total assets of the Company and its consolidated
subsidiaries. The Company hereby agrees to furnish a copy of such
agreements to the Commission upon request.
4.9 Reimbursement Agreement, dated as of February 29, 1996, with
respect to a letter of credit issued by The Huntington National
Bank, relating to $6,000,000 Erie County Industrial Development
Authority Variable Rate Demand Industrial Development Revenue
Bonds (McInnes Steel Company Project) (filed as Exhibit 4.9 to
the Company's Report on Form 10-K for the fiscal year ended March
31, 1996, file number 0-9607, and incorporated herein by
reference).
4.10 Installment Sales Agreement, dated as of November 1, 1991,
relating to the loan of proceeds from the sale of $6,000,000 Erie
County Industrial Development Authority Variable Rate Demand
Industrial Development Revenue Bonds (McInnes Steel Company
Project) (filed as Exhibit 4.10 to the Company's Report on Form
10-K for the fiscal year ended March 31, 1996, file number
0-9607, and incorporated herein by reference).
9.1 Equity Holders Agreement dated as of February 29, 1996, effective
as of March 8, 1996, by and among First New England Capital
Limited Partnership, MorAmerica Capital Corp., North Dakota Small
Business Investment Company, Centrum Industries, Inc. and certain
shareholders of Centrum Industries, Inc. (filed as Exhibit 9.1 to
the Company's Report on Form 10-K for the fiscal year ended March
31, 1996, file number 0-9607, and incorporated herein by
reference).
10.1 Asset Purchase Agreement by and among Centrum Industries, Inc.,
Centrum Acquisition Corporation, and Taylor Forge International,
Inc., dated as of April 29, 1997 as amended May 14, 1997 (filed
as Exhibit 10.1 to the Company's Report on Form 8-K, filed with
the
66
<PAGE> 67
Commission on June 19, 1997, file number 0-9607, and
incorporated herein by reference).
10.2 Registration Rights Agreement by and among Centrum Industries,
Inc. and Taylor Forge International, Inc., dated June 4, 1997
(filed as Exhibit 10.2 to the Company's Report on Form 8-K, filed
with the Commission on June 19, 1997, file number 0-9607, and
incorporated herein by reference).
10.3 Note and Warrant Purchase Agreement dated as of February 29, 1996
and effective as of March 8, 1996, by and among MorAmerica
Capital Corporation, First New England Capital Limited
Partnership, and North Dakota Small Business Investment Company
and Centrum Industries, Inc. with respect to 11% convertible,
subordinated notes and warrants for the purchase of 1,250,000
shares of the Company's common stock (filed as Exhibit 10.3 to
the Company's Report on Form 10-K for the fiscal year ended March
31, 1996, file number 0-9607, and incorporated herein by
reference).
10.4 Common Stock Warrant dated as of February 29, 1996 and effective
as of March 8, 1996, issued to MorAmerica Capital Corporation for
627,445 shares of common stock (filed as Exhibit 10.4 to the
Company's Report on Form 10-K for the fiscal year ended March 31,
1996, file number 0-9607, and incorporated herein by reference).
10.5 Common Stock Warrant dated as of February 29, 1996 and effective
as of March 8, 1996, issued to First New England Capital Limited
Partnership for 375,000 shares of common stock (filed as Exhibit
10.5 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.6 Common Stock Warrant dated as of February 29, 1996 and effective
as of March 8, 1996, issued to First New England Capital Limited
Partnership and North Dakota Small Business Investment Company
for 247,555 shares of common stock (filed as Exhibit 10.6 to the
Company's Report on Form 10-K for the fiscal year ended March 31,
1996, file number 0-9607, and incorporated herein by reference).
10.7 Put Agreement by and among MorAmerica Capital Corporation, First
New England Capital Limited Partnership, and North Dakota Small
Business Investment Company and Centrum Industries, Inc. (filed
as Exhibit 10.7 to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file number 0-9607, and
incorporated herein by reference).
10.8 Registration Rights Agreement dated as of February 29, 1996,
effective as of March 8, 1996, by and among MorAmerica Capital
Corporation, First New England Capital Limited Partnership and
North Dakota Small Business Investment Company and Centrum
Industries, Inc. (filed as Exhibit 10.8 to the Company's Report
on Form 10-K for the fiscal year ended March 31, 1996, file
number 0-9607, and incorporated herein by reference).
67
<PAGE> 68
10.9 Loan and Security Agreement dated as of February 29, 1996, by and
among The Huntington National Bank and McInnes Steel Company,
Eballoy Glass Products Company, Erie Bronze & Aluminum Company,
and McInnes International, Inc. as Borrowers, and Centrum
Industries, Inc. and McInnes Services, Inc. as Guarantors (filed
as Exhibit 10.9 to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996, file number 0-9607, and
incorporated herein by reference).
10.10 Amended and Restated Continuing Guaranty Unlimited of Centrum
dated June 4, 1997 (filed as Exhibit 10.6 to the Company's report
on Form 8-K, filed with the Commission on June 19, 1997, file
number 0-9607, and incorporated herein by reference).
10.11 Form of Common Stock Warrant, issued in connection with the debt
instruments referenced in Exhibits 4.5 above (filed as Exhibit
10.11 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.12 Loan Agreement by and between the City of Erie by and through the
Enterprise Development Zone Revolving Loan Fund and McInnes Steel
Company dated as of November 2, 1995 (filed as Exhibit 10.12 to
the Company's Report on Form 10-K for the fiscal year ended March
31, 1996, file number 0-9607, and incorporated herein by
reference).
10.13 Amended and Restated Employment Agreement with George H. Wells
executed November 18, 1996 (filed as Exhibit 10.13 to the
Company's Report on Form 10-K for the fiscal year ended March
31, 1997, file number 0-9607, and incorporated herein by
reference).
10.14 Employment Agreement with Anthony A. Montani (filed as Exhibit
10.14 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.15 Employment Agreement with Timothy M. Hunter (filed as Exhibit
10.15 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.16 Services Agreement with Stephen J. Mahoney (filed as Exhibit
10.16 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.17 Stock Option Agreement with Anthony A. Montani (filed as Exhibit
10.17 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.18 Stock Option Agreement with Anthony A. Montani (filed as Exhibit
10.18 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
68
<PAGE> 69
10.19 Stock Option Agreement with Timothy M. Hunter (filed as Exhibit
10.19 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.20 Stock Option Agreement with Timothy M. Hunter (filed as Exhibit
10.20 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.21 Bonus and Stock Option Plan of McInnes Steel Company and its
Subsidiaries (filed as Exhibit 10.21 to the Company's Report on
Form 10-K for the fiscal year ended March 31, 1996, file number
0-9607, and incorporated herein by reference).
10.22 Bonus and Stock Option Plan of Micafil, Inc. (filed as Exhibit
10.22 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1996, file number 0-9607, and incorporated herein
by reference).
10.23 Amendment No. 2 to Loan Agreement with Huntington National Bank
dated June 4, 1997 (filed as Exhibit 10.5 to the Company's report
on Form 8-K, filed with the Commission on June 19, 1997, file
number 0-9607, and incorporated herein by reference).
10.24 Model Board of Directors Stock Option Agreement (filed as Exhibit
10.24 to the Company's Report on Form 10-Q for the quarter ended
December 31, 1996, file number 0-9607, and incorporated herein by
reference).
10.25 Model Employee Stock Option Agreement (filed as Exhibit 10.25 to
the Company's Report on Form 10-Q for the quarter ended December
31, 1996, file number 0-9607, and incorporated herein by
reference).
10.26 Stock Option Agreement with George H. Wells dated December 2,
1996 (filed as Exhibit 10.26 to the Company's Report on Form 10-Q
for the quarter ended December 31, 1996, file number 0-9607, and
incorporated herein by reference).
10.27 Stock Option Agreement with Timothy M. Hunter dated December 2,
1996 (filed as Exhibit 10.27 to the Company's Report on Form 10-Q
for the quarter ended December 31, 1996, file number 0-9607, and
incorporated herein by reference).
10.28 Stock Option Agreement with Anthony A. Montani dated December 2,
1996 (filed as Exhibit 10.28 to the Company's Report on Form 10-Q
for the quarter ended December 31, 1996, file number 0-9607, and
incorporated herein by reference).
10.29 Amendment No. 1 to Loan Agreement with Huntington National Bank
dated January 1, 1997 (filed as Exhibit 10.29 to the Company's
Report on Form 10K in the fiscal year ended March 31, 1998, file
number 0-9607, and incorporated herein by reference.
69
<PAGE> 70
10.30 Model Employee Stock Option Agreement (filed as Exhibit 10.30 to
the Company's Report on Form 10-Q for the quarter ended June 30,
1997, file number 0-9607, and incorporated herein by reference).
10.31 Stock Option Agreement with Timothy M. Hunter dated July 21, 1997
(filed as Exhibit 10.31 to the Company's Report on Form 10-Q for
the quarter ended June 30, 1997, file number 0-9607, and
incorporated herein by reference).
10.32 Stock Option Agreement with Anthony A. Montani dated July 21,
1997 (filed as Exhibit 10.32 to the Company's Report on Form 10-Q
for the quarter ended June 30, 1997, file number 0-9607, and
incorporated herein by reference.
10.33 Amendment to Amended and Restated Employment Agreement with
George H. Wells executed June 27, 1997 (filed as Exhibit 10.33 to
the Company's Report on Form 10-Q for the quarter ended June 30,
1997, file number 0-9607, and incorporated herein by reference).
10.34 Stock Option Agreement with George H. Wells, dated August 26,
1997 (filed as Exhibit 4.8 to the Company's Registration
Statement under the Securities act of 1933 on Form S-8, filed
with the commission on September 3, 1997, number 0-9607, and
incorporated herein by reference.
10.35 Stock Option Agreement with William C. Davis, dated May 7, 1997,
memorializing options granted April 15, 1995 (filed as Exhibit
4.20 to the Company's Registration Statement under the Securities
act of 1933 on Form S-8, filed with the commission on September
3, 1997, file number 0-09607, and incorporated herein by
reference.
10.36 Stock Option Agreement with George H. Wells, dated May 7, 1997,
memorializing options granted April 15, 1995 (filed as Exhibit
4.21 to the Company's Registration Statement under the Securities
act of 1933 on Form S-8, filed with the commission on September
3, 1997, file number 0-09607, and incorporated herein by
reference.
10.37 Stock Option Agreement with George H. Wells, Dated August 15,
1995 (filed as Exhibit 4.22 to the Company's Registration
Statement under the Securities act of 1933 on Form S-8, filed
with the Commission on September 3, 1997, file number 0-9607, and
incorporated herein by reference).
70
<PAGE> 71
10.38 Stock Option Agreement with Robert J. Fulton, Dated August 15,
1995 (filed as Exhibit 4.23 to the Company's Registration
Statement under the Securities act of 1933 on Form S-8, filed
with the Commission on September 3, 1997, file number 0-9607, and
incorporated herein by reference).
10.39 Stock Option Agreement with Robert J. Fulton, Dated January 10,
1993 (filed as Exhibit 4.24 to the Company's Registration
Statement under the Securities act of 1933 on Form S-8, filed
with the Commission on September 3, 1997, file number 0-9607, and
incorporated herein by reference).
10.40 Model Directors Stock Option Agreement for options dated
September 1, 1997 (filed as Exhibit 4.25 to the Company's
Registration Statement under the Securities act of 1933 on Form
S-8, filed with the Commission on September 3, 1997, file number
0-9607, and incorporated herein by reference).
11 Computation of earnings per share (filed herewith).
21 List of Subsidiaries of Centrum Industries, Inc. (filed
herewith).
27 Financial Data Schedules (filed herewith).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal year
ended March 31, 1998.
71
<PAGE> 72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Centrum has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CENTRUM INDUSTRIES, INC.
By: /s/ Timothy M. Hunter
----------------------------
Timothy M. Hunter
Chief Financial Officer
June 9, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Centrum in
the capacities and on the dates indicated.
Signature Date
/s/ George H. Wells June 9, 1998
- ----------------------- Principal
George H. Wells Executive
Chief Executive Officer, Member - Officer
Board of Directors
/s/ Timothy M. Hunter June 9, 1998
- ----------------------- Principal
Timothy M. Hunter Financial
Chief Financial Officer Officer
/s/ William C. Davis June 9, 1998
- -----------------------
William C. Davis
Member Board of Directors
/s/ Robert J. Fulton June 9, 1998
- -----------------------
Robert J. Fulton
Member Board of Directors
/s/ David L. Hart June 9, 1998
- -----------------------
David L. Hart
Member Board of Directors
/s/ Richard C. Klaffky June 9, 1998
- -----------------------
Richard C. Klaffky
Member Board of Directors
/s/ Mervyn H. Manning June 9, 1998
- -----------------------
Mervyn H. Manning
Member Board of Directors
/s/ David R. Schroder June 9, 1998
- -----------------------
David R. Schroder
Member Board of Directors
/s/ Thomas E. Seiple June 9, 1998
- -----------------------
Thomas E. Seiple
Member Board of Directors
72
<PAGE> 73
Exhibit Index
Exhibit No. Description
11 Computation of earnings per share (filed herewith).
21 List of Subsidiaries of Centrum Industries, Inc. (filed herewith).
27 Financial Data Schedules (filed herewith).
73
<PAGE> 1
Centrum Industries, Inc. Exhibit - 11
Computation of Earnings per Share
March 31, 1998
<TABLE>
<CAPTION>
Net
Average Outstanding
Exercise Market Net Share Days Weighted
Number Price Proceeds Price Repurchase Increase Outstanding Average
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
49,600 1.00 49,600 1.96 25,326 24,274 365 24,274
440,000 1.00 440,000 1.96 224,662 215,338 365 215,338
-------
239,613
</TABLE> =======
<TABLE>
<S> <C>
Net Income after Tax $1,305,318
----------
Wtd Avg Shares O/S 8,412,642
BASIC EPS $0.16
Adj Net Income after Tax $1,305,318
----------
Wtd Avg Shares O/S w/dilution 8,652,255
DILUTED EPS $0.15
</TABLE>
<PAGE> 1
Centrum Industries, Inc.
Exhibit 21 - Subsidiaries of the Registrant
The direct and indirect subsidiaries of Centrum Industries, Inc. and their
state or territory of incorporation are as follows as of June 8, 1998:
<TABLE>
<CAPTION>
Name of Subsidiary State or Territory
<S> <C>
McInnes Steel Company Pennsylvania
McInnes Services, Inc. Delaware
Erie Bronze & Aluminum Company Pennsylvania
Eballoy Glass Products Company Pennsylvania
McInnes International, Inc. U.S. Virgin Island
Taylor Forge Company Tennessee
American Handling, Inc. Ohio
Northern Steel Company Washington
Micafil, Inc. Delaware
LaSalle Exploration, Inc. Ohio
Micafil - Axis, LLC (50% equity ownership) Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,297,720
<SECURITIES> 0
<RECEIVABLES> 14,903,078
<ALLOWANCES> 88,181
<INVENTORY> 13,211,207
<CURRENT-ASSETS> 30,394,136
<PP&E> 20,529,159
<DEPRECIATION> 3,325,024
<TOTAL-ASSETS> 53,171,722
<CURRENT-LIABILITIES> 31,288,944
<BONDS> 0
0
3,500
<COMMON> 420,175
<OTHER-SE> 9,700,625
<TOTAL-LIABILITY-AND-EQUITY> 53,171,722
<SALES> 78,914,663
<TOTAL-REVENUES> 79,793,697
<CGS> 60,072,113
<TOTAL-COSTS> 74,820,702
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,028,194
<INCOME-PRETAX> 1,944,801
<INCOME-TAX> 639,483
<INCOME-CONTINUING> 1,305,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,305,318
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
