<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1996
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-8462
-------
GRAHAM CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-1194720
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 FLORENCE AVENUE, BATAVIA, NEW YORK 14020
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code - 716-343-2216
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK (Par Value $.10) American Stock Exchange
- --------------------------------- -----------------------------------
Title of Class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PURCHASE RIGHTS
----------------------------
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 (the
"Act") during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 20, 1997 was $23,417,911.
As of March 20, 1997, there were outstanding 1,587,655 shares of common stock,
$.10 par value. As of March 20, 1997, there were outstanding 1,587,655 common
stock purchase rights.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Notice of Meeting and Proxy Statement for the 1997 Annual
Meeting of Stockholders is incorporated by reference into Part
III of this filing.
An Exhibit Index is located at page 57 of this filing under the sequential
numbering system prescribed by Rule 0-3(b) of the Act.
A cross reference sheet appears as the final page of this filing setting forth
item numbers and captions of Form 10-K and the pages of the Registrant's Proxy
Statement for 1997 Annual Meeting of Stockholders where the corresponding
information appears.
Page 2 of 61
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PART I
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Item 1. Business
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(a) General Development of Business
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Registrant was organized in 1983 as a Delaware holding company
and is the successor to Graham Manufacturing Co., Inc., now a wholly owned
subsidiary of the Registrant. Graham Manufacturing Co., Inc. was organized in
1936 under the laws of the State of New York. The Registrant manages the
activities of various subsidiaries that are located in the United States and the
United Kingdom. It employs 11 people, which includes the Research and
Development Group that serves each of the Registrant's subsidiaries.
UNITED STATES OPERATIONS:
During 1996 the Registrant's U.S. operations consisted of
one independent subsidiary, namely, Graham Manufacturing Co., Inc. (GMC).
Graham Manufacturing Co., Inc. -- Batavia, New York
- ------------------------------
Graham Manufacturing Co., Inc. ("GMC") in Batavia, New York is
a well recognized supplier of steam jet ejector vacuum systems, surface
condensers for steam turbines, liquid ring vacuum pumps and compressors, and
various types of heat exchangers such as Heliflow, plate and frame, and special
types of nuclear shell and tube heat exchangers. GMC possesses expertise in
combining these various products into packaged systems for sale to its customers
in a variety of industrial markets, including oil refining, chemical,
petrochemical, power, pulp and paper, and shipbuilding.
1996 sales for GMC were $46.7 million, which was marginally
over budget for the year.
New orders in 1996 were $50 million, up 3.4% from 1995, with a
strong fourth quarter contributing to a year end backlog of $24.5 million up 16%
from the backlog at December 31, 1995. Significant growth was seen in the
condenser business, attributable to vitality in the petrochemical market. These
gains were only somewhat offset by lower orders in 1996 for ejectors and plate
heat exchangers. The chemical and refinery markets continued to be important,
accounting for half of the revenue for 1996. U.S. domestic power industry sales
declined and smaller markets such as fertilizer, HVAC and fibers maintained a
level consistent with the experience of recent years.
Margins were uniformly favorable across all products lines.
GMC export sales reached 50% in 1996, a new record.
Approximately half of these export sales went to Asia. Most of the growth in
GMC's exports since 1995 has been attributable to a significant increase in
shipments to South America and Asia. The Company expects exports to remain a
significant part of its business in 1997.
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<PAGE> 4
Employment at GMC as of December 31, 1996 was 307.
UNITED KINGDOM OPERATIONS:
During 1996, Graham Corporation owned one manufacturing
subsidiary in the United Kingdom, Graham Precision Pumps Limited (GPPL) in
Congleton, Cheshire. Ownership was through its U.K. holding company, Graham
Vacuum & Heat Transfer Limited. Graham Vacuum and Heat Transfer Limited (GVHT)
has no employees.
Graham Precision Pumps Limited - Congleton, Cheshire
- ------------------------------
GPPL manufactures liquid ring vacuum pumps, rotary piston
pumps, oil sealed rotary vane pumps, atmospheric air operated ejectors and
complete vacuum pump systems that are factory assembled with self-supporting
structure.
Sales for 1996 stood at $6,060,000, a result exceeding by 7%
the business plan for the year. This performance represented an improvement over
1995. This reflected an improving order intake through the year resulting in new
orders for the year at $6,482,000, 23% above 1995 with 42% to export markets.
Sales growth was achieved in the domestic U.K. market with all major product
lines.
Competitive pricing and delivery remained critical in 1996 to
achieving most orders. In manufacturing, GPPL continued to maintain a flexible
operation to support its customers' requirements.
The sales mix for 1996 resulted in an improved contribution
which, together with a tight control of overheads, yielded an improved profit
performance over 1995.
GPPL has forecasted some continued growth in selective markets
which will be offset in part by the continuing uncertainty of the economies of
specific countries. The Company will continue its marketing effort to further
improve its position and increase its market share, primarily in the U.K. and
the U.S. markets.
As of December 31, 1996 employment stood at 72.
Page 4 of 61
<PAGE> 5
Capital Expenditures
- --------------------
The Registrant's capital expenditures for 1996 amounted to
$1,291,000. Of this amount, $604,000 was for GMC and $687,000 was for GPPL.
(b) Financial Information About Industry Segments
---------------------------------------------
(1) Industry Segments and (2) Information as to Lines of
----------------------------------------------------
Business
--------
(The information called for under this Item is set forth in statements contained
in Notes 1 and 3 to Consolidated Financial Statements, on pages 21-23 and 25 of
this Annual Report on Form 10- K).
(c) Narrative Description of Business
---------------------------------
(1) Business Done and Intended to be Done
-------------------------------------
(i) Principal Products and Markets
------------------------------
The Registrant designs and manufactures vacuum and heat transfer equipment,
primarily custom built. The principal markets for this equipment are the
chemical, petrochemical, petroleum refining, and electric power generating
industries. The Registrant's equipment is sold by a combination of direct
company sales engineers and independent sales representatives located in over 40
major cities in the United States and abroad.
(ii) Status of Publicly Announced New Products or
--------------------------------------------
Segments
--------
The Registrant has no plans for new products or for entry into new industry
segments that would require the investment of a material amount of the
Registrant's assets or that otherwise is material.
(iii) Sources and Availability of Raw Materials
-----------------------------------------
Registrant experienced no serious material shortages in 1996.
(iv) Material Patents, Trademarks
----------------------------
Registrant holds no material patents, trademarks, licenses, franchises or
concessions the loss of which would have a materially adverse effect upon the
business of the Registrant.
(v) Seasonal Variations
-------------------
No material part of the Registrant's business is seasonal.
(vi) Working Capital Practices (Not Applicable)
-------------------------
(vii) Principal Customers
-------------------
Registrant's principal customers include the large chemical, petroleum and power
companies, which are end users of Registrant's equipment in their
manufacturing and refining processes, as well as large
Page 5 of 61
<PAGE> 6
engineering contractors who build installations for such companies and others.
No material part of Registrant's business is dependent upon a single customer or
on a few customers, the loss of any one or more of whom would have a materially
adverse effect on Registrant's business.
No customer of Registrant or group of related customers regularly accounts for
as much as 10% of Registrant's consolidated annual revenue.
(viii) Order Backlog
-------------
Backlog of unfilled orders at December 31, 1996 was $25,578,000, compared to
$21,837,000 in 1995 and $18,997,000 in 1994.
(ix) Government Contracts (Not Applicable)
--------------------
(x) Competition
-----------
Registrant's business is highly competitive and a substantial number of
companies having greater financial resources are engaged in manufacturing
similar products. Registrant is a relatively small factor in the product areas
in which it is engaged with the exception of steam jet ejectors. Registrant
believes it is one of the leading manufacturers of steam jet ejectors.
(xi) Research Activities
-------------------
During the fiscal years ended December 31, 1994, 1995, and 1996, Registrant
spent approximately $298,000, $277,000 and $375,000 respectively, on research
activities relating to the development of new products or the improvement of
existing products.
(xii) Environmental Matters
---------------------
Registrant does not anticipate that compliance with federal, state and local
provisions, which have been enacted or adopted regulating the discharge of
material in the environment or otherwise pertaining to the protection of the
environment, will have a material effect upon the capital expenditures, earnings
and competitive position of the Registrant and its subsidiaries.
(xiii) Number of Persons Employed
--------------------------
On December 31, 1996, Registrant and its subsidiaries employed 390 persons.
(d) Financial Information About Foreign and Domestic Operations
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and Export Sales
----------------
(The information called for under this Item is set forth in Note 3 to
Consolidated Financial Statements, on page 25 of this Annual Report on Form
10-K.)
Page 6 of 61
<PAGE> 7
Item 2. Properties
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UNITED STATES: Registrant's corporate headquarters is located at 20 Florence
Avenue, Batavia, New York.
Registrant's subsidiary, Graham Manufacturing Co., Inc., operates a plant on
approximately thirty-three acres in Batavia consisting of about 204,000 square
feet in several connected buildings built over a period of time to meet
increased space requirements, including 162,000 square feet in manufacturing
facilities, 48,000 square feet for warehousing and a 6,000 square-foot building
for product research and development. A 14,000 square foot extension to the
Heavy Fabrication Building was completed in 1991.
Graham Manufacturing Co., Inc.'s principal offices are in a 45,000 square-foot
building located in Batavia adjacent to its manufacturing facilities.
Graham Manufacturing Co., Inc. maintains U.S. sales offices in Clifton, New
Jersey, Los Angeles and Houston.
UNITED KINGDOM: Registrant's subsidiary, Graham Precision Pumps Limited, has a
41,000 square-foot manufacturing facility located on 15 acres owned by that
company in Congleton, Cheshire, England.
Assets of the Registrant with a book value of $22,898,000 have been pledged to
secure certain domestic long-term borrowings. Short and long-term borrowings of
Registrant's United Kingdom subsidiary are secured by assets of the subsidiary,
which have a book value of $637,000.
Item 3. Legal Proceedings
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The United States Environmental Protection Agency has notified the Company's
wholly-owned subsidiary, Graham Manufacturing Co., Inc. ("GMC"), that it is a
Potentially Responsible Party pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, in connection with the
Batavia Landfill Site in the Town of Batavia, New York. Total remediation
expenses for the site are currently estimated at $10.4 million. Based on facts
and circumstances currently known to GMC and the Company, GMC's contribution to
the site of material deemed hazardous was minor. In 1996, the Company recorded a
$260,000 provision for the estimated costs, including legal costs, in connection
with this matter based on the currently available information and assuming a
reasonable pro-rata allocation. The related liability at December 31, 1996 was
$257,000 and is included in the caption "Other Long- Term Liabilities" in the
Consolidated Balance Sheet.
Item 4. Submission of Matters to a Vote of Security Holders
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(Not applicable)
Page 7 of 61
<PAGE> 8
Item 4.1. Executive Officers of the Registrant
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The following information is given with respect to Registrant's executive
officers, as defined by Rule 3b-7 of the Act.
<TABLE>
<CAPTION>
Total
1/ Prior Years 2/
Name Age Office Office Served
- ---- --- ------ ------ ------
<S> <C> <C> <C> <C>
Frederick D. Berkeley 68 Chairman, Chairman and 46
President, President of
and Chief Graham Manu-
Executive facturing Co.,
Officer Inc. ("GMC")
Alvaro Cadena 53 President & Executive 27
Chief Vice
Operating President,
Officer, GMC
GMC
Vice President
of Registrant
J. Ronald Hansen 49 Vice President Chief Finan- 4
Finance & cial Officer
Administration and Vice
and Chief President-
Financial Finance of
Officer Al-Tech Specialty
Steel Corp.
Joseph P. Gorman 53 Vice President- 27
Sales of GMC
Stephen P. Northrup 45 Vice President- Vice Presi- 23
Engineering of dent-Operations
GMC
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<FN>
1 The term of office with Registrant for Mr. Berkeley began on August
1, 1983, the effective date of the reorganization of the Registrant and its
predecessor, Graham Manufacturing Co., Inc.. The term of office of each
executive officer extends to the first Meeting of Registrant's Board of
Directors following the 1994 Annual Meeting of Shareholders or until his
successor is chosen and shall have qualified. Mr. Hansen assumed his duties as
Vice President-Finance & Chief Financial Officer in June 1993. Prior to his
employment at Graham, Mr. Hansen was Chief Financial Officer and Vice President
of Al Tech Specialty Steel Corp. Mr. Cadena was elected President of Graham
Manufacturing Co., Inc. on March 11, 1991. Prior to his election to that office
he served as Executive Vice President of Graham Manufacturing Co., Inc.
2 Includes the number of years served with the Registrant, Registrant's
predecessor company, Graham Manufacturing Co., Inc., and any of the Registrant's
subsidiaries.
</TABLE>
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<PAGE> 9
PART II
Item 5. Market for Registrant's Common Stock and Related Security
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Holder Matters
--------------
(a) The information called for under this Item is set forth
under Item 8, "Financial Statements and Supplementary Data",
in the Statement of Quarterly Financial Data appearing on page
42 of this Annual Report on Form 10-K.
(b) On March 20, 1997, there were approximately 330 holders of
the Registrant's common stock. This figure includes
stockholders of record and individual participants in security
position listings who have not objected to the disclosure of
their names; it does not, however, include individual
participants in security position listings who have objected
to disclosure of their names. On March 20, 1997, the closing
price of the Registrant's common stock on the American Stock
Exchange was $14.75 per share.
(c) The Registrant has not paid a dividend since January 4,
1993, when it paid a dividend of $.07 per share. Restrictions
on dividends are described in Note 7 to the Consolidated
Financial Statements, to be found on pages 29 to 30 of this
Report.
Page 9 of 61
<PAGE> 10
ITEM 6. Selected Financial Data
<TABLE>
<CAPTION>
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GRAHAM CORPORATION - TEN YEAR REVIEW
Operations: 1996 1995(1) 1994(1) 1993
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<S> <C> <C> <C> <C>
Net Sales $51,394,000 $49,480,000 $47,351,000 $45,180,000
Gross Profit 15,401,000 12,979,000 12,345,000 11,945,000
Selling, General & Administrative 11,122,000 9,993,000 10,098,000 10,918,000
Interest Expense 355,000 616,000 525,000 537,000
Unusual Items 276,000 1,502,000 (397,000)
Income (Loss) Before Taxes 3,924,000 2,094,000 220,000 887,000
Income Taxes 863,000 778,000 208,000 215,000
Income (Loss) From Continuing
Operations 3,061,000 1,316,000 12,000 672,000
Income (Loss) From Discontinued
Operations (2,232,000) (264,000)
Loss From Disposal of
Discontinued Operations (182,000) (6,189,000)
Cumulative Effect of Changes in
Accounting Principles (6,000)
Net Income (Loss) 3,061,000 1,134,000 (8,415,000) 408,000
Dividends
Common Stock:
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Continuing
Operations 1.90 .83 .01 .64
Income (Loss) From Discontinued
Operations (1.41) (.25)
Loss From Disposal of
Discontinued Operations (.11) (3.93)
Cumulative Effect of Changes in
Accounting Principles (.01)
Net Income (Loss) Per Share 1.90 .72 (5.34) .39
Dividends Per Share
Shareholders' Equity Per Share 7.47 5.32 4.48 14.16
Market Price Per Share 9-12.58 6-10.67 6.42-9.92 10.13-16.88
Shares Outstanding (End of Year) 1,585,492 1,053,557 1,051,499 1,046,137
Financial Data:
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New Orders 55,041,000 52,319,000 49,527,000 40,156,000
Order Backlog 25,578,000 21,837,000 18,997,000 17,070,000
Working Capital 8,179,000 7,074,000 6,845,000 7,098,000
Current Ratio 1.76:1 1.60:1 1.59:1 1.52:1
Capital Expenditures 1,291,000 204,000 412,000 513,000
Depreciation 892,000 927,000 1,027,000 1,349,000
Total Assets 30,434,000 29,480,000 29,953,000 41,411,000
Long-Term Debt 1,442,000 3,303,000 5,161,000 6,102,000
Shareholders' Equity 11,855,000 8,407,000 7,071,000 14,816,000
Number of Employees (End of Year) 390 397 408 615
<FN>
(1) Per share data has been adjusted to reflect a three-for-two stock split on
July 25, 1996.
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
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GRAHAM CORPORATION - TEN YEAR REVIEW
1992 1991 1990 1989 1988 1987
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<S> <C> <C> <C> <C> <C>
$46,542,000 $70,698,000 $68,053,000 $62,340,000 $62,350,000 $54,288,000
8,864,000 18,967,000 16,749,000 16,664,000 16,769,000 12,965,000
11,823,000 14,543,000 13,899,000 12,005,000 12,961,000 11,261,000
572,000 950,000 959,000 1,074,000 1,485,000 1,366,000
(757,000)
(3,531,000) 3,474,000 1,891,000 4,342,000 2,323,000 338,000
(1,100,000) 943,000 690,000 356,000 481,000 101,000
(2,431,000) 2,531,000 1,201,000 3,986,000 1,842,000 237,000
3,732,000 (645,000) 74,000 218,000 (854,000) (1,272,000)
(1,067,000) (469,000)
161,000 347,000
1,462,000 819,000 1,275,000 4,204,000 866,000 (1,035,000)
293,000 289,000 283,000 97,000
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(2.32) 2.44 1.18 4.06 1.88 .24
3.56 (.62) .07 .22 (.88) (1.30)
(1.03) (.48)
.16 .36
1.40 .79 1.25 4.28 .88 (1.06)
.28 .28 .28 .10
13.76 14.43 13.94 13.19 9.55 8.91
12.50-27.75 10.63-23 10.38-34.38 7-41 5.25-8.38 4.38-10.75
1,046,137 1,040,737 1,026,987 980,010 978,573 978,573
- ------------------------------------------------------------------------------------------------------------------------------------
49,893,000 68,426,000 65,217,000 72,144,000 65,075,000 55,583,000
23,259,000 27,997,000 31,901,000 33,585,000 27,414,000 23,790,000
9,433,000 12,330,000 9,531,000 8,482,000 5,866,000 6,539,000
1.65:1 1.82:1 1.53:1 1.49:1 1.32:1 1.35:1
9,213,000 2,553,000 2,702,000 2,622,000 1,749,000 1,045,000
1,385,000 1,317,000 1,175,000 1,003,000 982,000 1,018,000
45,405,000 42,133,000 41,731,000 37,534,000 35,523,000 37,717,000
9,491,000 7,560,000 4,708,000 3,620,000 4,749,000 6,466,000
14,396,000 15,015,000 14,317,000 12,930,000 9,343,000 8,724,000
636 683 720 634 670 863
</TABLE>
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<PAGE> 12
ITEM 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations.
----------------------
Management's discussion and analysis reviews the Company's financial
operating results for each of the three years in the period ended December 31,
1996 and its financial condition at December 31, 1996. The focus of this review
is on the underlying business reasons for significant changes and trends
affecting sales, net earnings, and financial condition. This review should be
read in conjunction with the consolidated financial statements, the related
Notes to Consolidated Financial Statements, the Ten- Year Review and all filings
with the Securities and Exchange Commission.
Except for the historical information contained herein, the matters
discussed in this annual report are forward-looking statements as defined in the
Private Securities Litigation Reform Act (PSLRA) of 1995. The Company wishes to
take advantage of the "safe harbor" provisions of the PSLRA by cautioning that
numerous important factors which involve risks and uncertainties, including but
not limited to economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices, and
other factors discussed in the Company's filings with the Securities and
Exchange Commission, in the future, could affect the Company's actual results
and could cause its actual consolidated results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
Company.
ANALYSIS OF CONSOLIDATED OPERATIONS
Consolidated sales in 1996 were $51,394,000 as compared to $49,480,000
in 1995 and $47,351,000 in 1994. Graham Manufacturing 1996 sales were about 3%
more than 1995 shipments and 11% greater than 1994. Sales for export
constituted 50% of the U.S. operations in 1996 as compared to 41% in 1995 and
1994. Surface condenser sales in 1996 were up significantly over 1995.
Offsetting the increase in surface condenser sales was a reduction in ejector
sales. In 1995 as compared to 1994, ejector sales were up and condenser
shipments were down. Graham Precision Pumps sales increased 10% over the prior
year, but were down almost 9% from 1994. In 1996 the Company increased its
revenue through increased sales of pump packages. In 1995 sales were down 17%
below 1994 due to a lack of major project work. Oil exploration work was very
active in 1994 which lead to an active offshore pump market.
Consolidated gross profit margins were 30% in 1996 as compared to 26%
for 1995 and 1994. Gross profit margins from U.S. operations for 1996, 1995 and
1994 were 29%, 25% and 24%, respectively. Direct material and labor costs
declined in 1996, as a percent of sales, by 4.8% compared to 1995 and 5.5%
compared to 1994. The 1996 gross profit percent was improved approximately 1%
for workers compensation insurance refunds expensed in prior years. Indirect
production costs remained about 24% of sales over the past three years.
Precision Pumps gross profit margins increased to 30% in 1996, up
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<PAGE> 13
2% over 1995. Gross profit margins in 1994 were 36%. Direct costs decreased in
1996, as a percent of sales, by 2% compared to 1995 and approximately equalled
1994 costs. Indirect production costs, as a percent of sales, for 1996 were
about the same as 1995 and were about 7% more than in 1994.
Selling, general and administrative expenses increased 11% over 1995. In
1995 SG&A expenses dropped 1% compared to 1994. The current year's increase was
primarily attributed to incentive wage programs which vary subject to levels of
profits. Included in SG&A expenses are Research & Development costs.
Expenditures invested for product enhancements and new product development
increased 46% in 1996 over 1995. In 1995, expenses were 7% less than the amount
spent in 1994. SG&A U.K. expense represents 12%, 11% and 17% of consolidated
costs for the respective years 1996, 1995 and 1994.
Interest expense in 1996 decreased 42% from 1995 as a result of lower
bank debt and lower interest borrowing rates. Interest expense in 1995 increased
17% over 1994. Borrowings to finance unusually high fourth quarter 1994
work-in-process inventory and to settle an adverse litigation judgment increased
debt through the second quarter of 1995. Bank debt as a percent of equity as of
December 31, 1996, 1995 and 1994 was 9%, 45% and 77%, respectively.
The effective income tax rates for 1996, 1995 and 1994 were 22%, 37% and
95%, respectively. The current year's provision was less than the statutory
rates due to fuller utilization of U.K. corporate expenses and a decrease in the
valuation allowance required under SFAS 109. It is anticipated that future
effective tax rates will approximate statutory rates. The tax rate recognized in
1995 differs from the statutory rate mainly due to a reduction in state deferred
tax assets. The unusually high effective rate computed in 1994 resulted from the
disallowance of capital losses incurred with the disposal of Graham
Manufacturing Ltd.
Net income for 1996 was $3,061,000 or $1.90 per share, as compared to
$1,134,000 ($.72 per share) in 1995 and a loss of $8,415,000 in 1994. The 1994
loss was due to an unfavorable legal judgment, which together with legal costs,
equalled $1,502,000, and the divestiture of a subsidiary which resulted in a
1994 charge of $8,421,000.
SHAREHOLDERS' EQUITY
Substantially due to earnings, shareholders' equity increased 41% in
1996 and 19% in 1995.
Signaling renewed confidence in its financial prospects in 1996 Graham
declared a 3 for 2 stock split to increase liquidity of the stock. Earnings per
share data for 1995 and 1994, reported in the accompanying financials have been
restated to reflect the stock split.
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<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operations in 1996 was $4,726,000 as compared to
1995 of $1,644,000. Cash generation was improved as a result of greater profits
and a level quarterly sales pattern. Capital expenditures increased in 1996 over
recent prior years. Expenditures were evenly divided between U.S. and U.K.
operations. In addition, cash resources were used to retire U.S. long term debt
and invest in short term bonds and commercial paper. In 1995, cash was used to
finance higher amounts of inventory and to pay a legal judgment rendered against
Graham. Inventories were selectively increased to support customer requests for
shorter deliveries in certain "off the shelf" products. The net cash deficit
created from operations in 1994 of $906,000 was due to a troubled subsidiary
(now disposed of) and increased working capital needed because of significant
shipments transacted late in the fourth quarter.
Working capital available to finance current operations increased 16%
compared to 1995. Cash and marketable securities as of December 31, 1996
increased $1,597,000 over 1995. The time taken to collect sales decreased 16%.
The prior year's current assets, net of current liabilities increased 3%
compared to 1994.
In 1996, the United States subsidiary entered into a new revolving
credit facility agreement which provides a line of credit up to $13,000,000,
including letters of credit. The interest rate at which the Company can borrow
ranges from prime to prime less 1.5 percent. The agreement allows the Company at
anytime to convert borrowings greater than $2,000,000 and up to $9,000,000 into
a two year term loan. In 1995, the United Kingdom operation entered into a new
credit facility agreement which provides a line of credit of approximately
$1,129,000 (pounds sterling exchange rate assumed, $1.71) for working capital,
letters of credit and long term borrowing needs.
At December 31, 1996 the U.S. operation had an unused bank line of
credit available of $10,955,000. The U.K. operation had an unused line of credit
available of $686,000.
Management expects that cash flow from operations and lines of credit
will provide sufficient resources to fund the 1996 cash requirements. Capital
spending in 1997 is expected to be about 15% to 25% greater than 1996 with the
majority of the investments being directed toward machinery and computers.
CONTINGENCIES
Increases in material and labor costs experienced in recent years have
been offset by cost cutting measures and selling price increases. Obtaining
price increases are largely a factor of supply and demand for Graham's products,
whereas inflation factors can originate from influences outside of the Company's
direct global competition. Graham will continue to monitor the impact of
inflation in order to minimize its effects in future years through
Page 14 of 61
<PAGE> 15
sales growth, pricing, product mix strategies, productivity improvements, and
cost reductions.
Management's strategy for managing risks associated with interest rate
fluctuations is to hold interest bearing debt to the absolute minimum and
carefully assess the risks and rewards for incurring long term debt.
The Company enters into forward foreign exchange agreements to hedge its
exposure against unfavorable changes in foreign currency values on applicable
significant sales contracts. Graham uses derivatives for no other reason.
Decreased contribution margins, suffered as a result of U.S. and U.K.
strengthening currencies as compared to other global competitors, is a potential
threat. The Company will continue to explore the need for world sourcing of raw
materials and, in limited and special circumstances, fabricating overseas.
The Company's U.S. operations are governed by federal environmental
laws, principally the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), the Clean Air
Act, and the Clean Water Act, as well as state counterparts ("Environmental
Laws"). Environmental Laws require that certain parties fund remedial actions
regardless of fault, legality or original disposal or ownership of the site. The
Company is currently participating in an environmental assessment at one site
under these laws. Future remediation expenses at this site are subject to a
number of uncertainties, including the method and extent of remediation
(dependent, in part, on existing laws and technology), the percentage and type
of material attributable to the Company, the financial viability of site owners
and the other parties, and the availability of state and federal funds. See
Notes to Consolidated Financial Statements No. 13 for further information.
NEW ORDERS AND BACKLOG
Consolidated new orders in 1996 were $55,041,000 compared to $52,319,000
in 1995 and $49,527,000 in 1994. In 1996, Graham Manufacturing's bookings were
$50,008,000, up from $48,358,000 in 1995 and $43,991,000 in 1994. New orders for
export from the U.S. operation equalled about 46% of the total new orders. This
is compared to 50% of the orders received in 1995 and about 46% in 1994. The
increase in new orders in 1996 over 1995 was largely realized in surface
condensers while ejector orders decreased 10%. In 1995 surface condenser orders
dropped 5% as compared to 1994 whereas ejector orders climbed 30%. Orders
received in the U.K. operation in 1996 were $5,033,000. This is compared to
$3,961,000 in 1995 and $5,536,000 in 1994. New orders in 1996 for United Kingdom
customer pump packages accounted for the increase in new orders over 1995. New
orders for exports fell, in part, due to the strengthening of the pound sterling
relative to other world currencies. Orders in 1995 decreased relative to 1994
due to fewer orders for offshore pumps.
Page 15 of 61
<PAGE> 16
The consolidated backlog as of December 31, 1996 was $25,578,000, up
about 17% over 1995 and about 35% over 1994. The consolidated backlog as of
December 31, 1995 was $21,837,000 and $18,997,000 on December 31, 1994. Graham
Manufacturing Co., Inc.'s backlog equalled $24,514,000 for the current period as
compared to $21,136,000 and $18,127,000 for 1995 and 1994, respectively. Graham
Precision Pumps Limited's backlog was $1,064,000 as of December 31, 1996 and
$701,000 in 1995 and $870,000 in 1994. The backlog at December 31, 1996 will be
substantially shipped in 1997 and represents orders from traditional markets in
Graham's established product lines.
ACCOUNTING CHANGES AND CHANGE IN FISCAL YEAR
The Company reviewed Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation and decided not to change its historical
practice of accounting for stock options in accordance with APB No. 25. See
Notes to Consolidated Financial Statements No. 11 for additional information.
The essential assumption underlying probability-based models is that the price
of the underlying stock behaves in such a way that possible future prices can be
modeled by a probability distribution. Such assumptions do not wholly take into
account changes in management, company culture, subsidiary structures, changing
markets, products, or technology that impact future earnings and share values.
In 1995, the Company adopted Statement of Financial Accounting Standard
No. 107, Disclosure About Fair Value of Financial Instruments. See Notes to
Consolidated Financial Statements No. 8 for additional information.
Graham Corporation's accounting year will be April 1 to March 31,
commencing April 1, 1997. The adoption of a natural business year will provide
numerous operating advantages to Graham.
FORWARD LOOKING
The Company enters 1997 with a healthy consolidated backlog, a strong
consolidated balance sheet and a low risk longer range growth strategy which
concentrates on maximizing opportunities in its core businesses. Many of the
industries Graham serves worldwide are in business segments which are strong and
actively investing for their futures. Although the outlook could change as a
result of unforeseen events, the outlook for 1997 and beyond appears bright, not
withstanding periods of economic downturns along the way. It is anticipated that
the year ending March 31, 1998 will be a successful one for the Corporation and
the third consecutive year of growth in shareholders' value.
Page 16 of 61
<PAGE> 17
ITEM 8. Financial Statements and Supplementary Data
(Financial Statements, Notes to Financial Statements, Quarterly
Financial Data)
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales............................................................. $51,394,000 $49,480,000 $47,351,000
----------- ----------- -----------
Costs and expenses:
Cost of products sold.............................................. 35,993,000 36,501,000 35,006,000
Selling, general and administrative................................ 11,122,000 9,993,000 10,098,000
Interest expense................................................... 355,000 616,000 525,000
Litigation provision............................................... 276,000 1,502,000
----------- ----------- -----------
47,470,000 47,386,000 47,131,000
----------- ----------- -----------
Income from continuing operations
before income taxes................................................ 3,924,000 2,094,000 220,000
Provision for income taxes............................................ 863,000 778,000 208,000
----------- ----------- -----------
Income from continuing operations..................................... 3,061,000 1,316,000 12,000
Loss from discontinued operations..................................... (2,232,000)
Loss from disposal of discontinued
operations......................................................... (182,000) (6,189,000)
----------- ----------- -----------
Income(loss) before cumulative effect of
change in accounting principle..................................... 3,061,000 1,134,000 (8,409,000)
Cumulative effect of change in accounting
principle from continuing operations............................... (2,000)
Cumulative effect of change in accounting
principle from discontinued operations............................. (4,000)
----------- ----------- -----------
Net income(loss)...................................................... $ 3,061,000 $ 1,134,000 $(8,415,000)
=========== =========== ===========
PER SHARE DATA:
Income from continuing operations.................................. $1.90 $.83 $ 0.01
Loss from discontinued operations
and disposal of discontinued operations......................... (.11) (5.34)
Cumulative effect of change in accounting
principle....................................................... (.01)
----------- ----------- -----------
Net income(loss)...................................................... $1.90 $.72 $(5.34)
=========== =========== ===========
Average number of common and common
equivalent shares outstanding...................................... 1,608,000 1,579,000 1,576,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 17 of 61
<PAGE> 18
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and equivalents............................................................. $ 1,263,000 $ 411,000
Marketable securities............................................................ 745,000
Trade accounts receivable........................................................ 9,235,000 10,611,000
Inventories...................................................................... 6,343,000 6,621,000
Deferred tax asset............................................................... 820,000 698,000
Prepaid expenses and other current assets........................................ 530,000 589,000
----------- -----------
18,936,000 18,930,000
----------- -----------
Property, plant and equipment, net.................................................. 9,572,000 8,918,000
----------- -----------
Deferred tax asset.................................................................. 1,852,000 1,600,000
Other assets........................................................................ 74,000 32,000
----------- -----------
$30,434,000 $29,480,000
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt due banks........................................................ $ 206,000
Current portion of long-term debt................................................ $ 487,000 355,000
Accounts payable................................................................. 3,923,000 4,066,000
Accrued compensation............................................................. 4,081,000 4,305,000
Accrued expenses and other liabilities........................................... 1,091,000 1,367,000
Customer deposits................................................................ 382,000 966,000
Domestic and foreign income taxes payable........................................ 468,000 240,000
Estimated liabilities of discontinued operations................................. 325,000 351,000
----------- -----------
10,757,000 11,856,000
Long-term debt...................................................................... 1,442,000 3,303,000
Deferred compensation............................................................... 1,067,000 1,017,000
Deferred tax liability.............................................................. 33,000 111,000
Other long-term liabilities......................................................... 339,000 373,000
Deferred pension liability.......................................................... 1,729,000 1,252,000
Accrued postretirement benefits..................................................... 3,212,000 3,161,000
----------- -----------
Total liabilities................................................................ 18,579,000 21,073,000
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value -
Authorized, 500,000 shares
Common stock, $.10 par value -
Authorized, 6,000,000 shares
Issued, 1,586,155 shares in 1996 and
1,053,999 shares in 1995................................................. 159,000 106,000
Capital in excess of par value................................................... 3,210,000 3,219,000
Cumulative foreign currency translation adjustment............................... (1,748,000) (1,891,000)
Retained earnings................................................................ 10,915,000 7,854,000
----------- -----------
12,536,000 9,288,000
Less:
Treasury Stock................................................................ (6,000) (6,000)
Employee Stock Ownership Plan Loan Payable.................................... (675,000) (875,000)
----------- -----------
Total shareholders' equity....................................................... 11,855,000 8,407,000
----------- -----------
$30,434,000 $29,480,000
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 18 of 61
<PAGE> 19
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss)................................................ $ 3,061,000 $ 1,134,000 $(8,415,000)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization................................. 913,000 946,000 1,047,000
Gain on sale of property, plant and equipment................. (43,000) (24,000) (94,000)
Loss on disposal of discontinued operations................... 7,097,000
(Increase) Decrease in operating assets:
Accounts receivable........................................ 1,476,000 1,260,000 (4,973,000)
Inventories, net of customer deposits...................... (173,000) (1,395,000) 432,000
Prepaid expenses and other current and
non-current assets....................................... 9,000 (140,000) 56,000
Increase (Decrease) in operating liabilities:
Accounts payable, accrued compensation,
accrued expenses and other liabilities................... (487,000) 565,000 3,319,000
Litigation reserve......................................... (1,247,000)
Estimated liabilities of discontinued
operations............................................... (57,000) (35,000) 313,000
Deferred compensation, deferred pension
liability and accrued postretirement benefits............ 294,000 134,000 (344,000)
Domestic and foreign income taxes.......................... 230,000 (17,000) 380,000
Other long-term liabilities................................ (45,000) (119,000) 472,000
Deferred income taxes...................................... (452,000) 582,000 (196,000)
----------- ----------- -----------
Total adjustments........................................ 1,665,000 510,000 7,509,000
----------- ----------- -----------
Net cash provided (used) by operating actitivies................. 4,726,000 1,644,000 (906,000)
----------- ----------- -----------
Investing activities:
Purchase of property, plant and equipment........................ (1,291,000) (204,000) (412,000)
Proceeds from sale of property, plant and
equipment..................................................... 74,000 33,000 8,000
Purchase of marketable securities................................ (2,177,000)
Proceeds from maturity of marketable securities.................. 1,432,000
Proceeds from sale of L&A Engineering & Equipment,
Inc. ...................................................... 880,000
----------- ----------- -----------
Net cash provided (used) by investing activities.................... (1,962,000) (171,000) 476,000
----------- ----------- -----------
Financing activities:
Increase (Decrease) in short-term debt........................... (209,000) 14,000 (295,000)
Proceeds from issuance of long-term debt......................... 2,971,000 11,888,000 2,744,000
Principal repayments on long-term debt........................... (4,729,000) (13,418,000) (1,671,000)
Issuance of common stock......................................... 38,000 11,000
Purchase of treasury stock....................................... (6,000)
----------- ----------- -----------
Net cash provided (used) by financing activities................. (1,929,000) (1,511,000) 778,000
----------- ----------- -----------
Effect of exchange rate on cash.................................. 17,000 (5,000) 7,000
----------- ----------- -----------
Net increase (decrease) in cash and equivalents.................. 852,000 (43,000) 355,000
Cash and equivalents at beginning of year........................ 411,000 454,000 99,000
----------- ----------- -----------
Cash and equivalents at end of year.............................. $ 1,263,000 $ 411,000 $ 454,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 19 of 61
<PAGE> 20
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Foreign
Capital in Currency Employee Stock
Common Stock Excess of Translation Retained Treasury Ownership Plan Shareholders'
Shares Par Value Par Value Adjustment Earnings Stock Loan Payable Equity
------ --------- --------- ---------- -------- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 1,046,137 $105,000 $3,124,000 $(2,273,000) $15,135,000 $(1,275,000) $14,816,000
Issuance of shares.............. 5,362 73,000 73,000
Foreign currency translation
adjustment.................... 397,000 397,000
Net loss........................ (8,415,000) (8,415,000)
Payments on Employee Stock
Ownership Plan Loan Payable... 200,000 200,000
--------- -------- ---------- ------------ ----------- ----------- -----------
Balance at December 31, 1994 1,051,499 105,000 3,197,000 (1,876,000) 6,720,000 (1,075,000) 7,071,000
Issuance of shares.............. 2,500 1,000 22,000 23,000
Foreign currency translation
adjustment.................... (15,000) (15,000)
Net income...................... 1,134,000 1,134,000
Acquisition of treasury stock... (6,000) (6,000)
Payments on Employee Stock
Ownership Plan Loan Payable... 200,000 200,000
--------- -------- ---------- ----------- ----------- ------- ----------- -----------
Balance at December 31, 1995 1,053,999 106,000 3,219,000 (1,891,000) 7,854,000 (6,000) (875,000) 8,407,000
Issuance of shares.............. 3,473 38,000 38,000
Stock option tax benefit........ 6,000 6,000
Stock split..................... 528,683 53,000 (53,000)
Foreign currency translation
adjustment.................... 143,000 143,000
Net income...................... 3,061,000 3,061,000
Payments on Employee Stock
Ownership Plan Loan Payable... 200,000 200,000
--------- -------- ---------- ----------- ----------- ------- ----------- -----------
Balance at December 31, 1996 1,586,155 $159,000 $3,210,000 $(1,748,000) $10,915,000 $(6,000) $ (675,000) $11,855,000
========= ======== ========== =========== =========== ======= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 20 of 61
<PAGE> 21
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements
Note 1 - The Company and Its Accounting Policies:
- --------------------------------------------------------------------------------
Graham Corporation and its subsidiaries are primarily engaged in the
design and manufacture of vacuum and heat transfer equipment used in the
chemical, petrochemical, petroleum refining, and electric power generating
industries and sells to customers throughout the world. The Company's
significant accounting policies follow.
PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL
STATEMENTS
The consolidated financial statements include the accounts of the
Company and its majority-owned domestic and foreign subsidiaries. All
significant intercompany balances, transactions and profits are eliminated in
consolidation.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the related revenues and expenses during the reporting
period. Actual amounts could differ from those estimated.
Certain amounts in prior periods have been reclassified to conform to
the current presentation.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at currency exchange rates in effect at year end and revenues and
expenses are translated at average exchange rates in effect for the year. Gains
and losses resulting from foreign currency transactions are included in results
of operations. Gains and losses resulting from translation of foreign subsidiary
balance sheets are reflected as a separate component of shareholders' equity.
REVENUE RECOGNITION
Revenues and all related costs on short-term contracts are accounted for
on the completed contract method and included in income upon substantial
completion or shipment to the customer.
MARKETABLE SECURITIES
Marketable securities consist primarily of fixed-income debt
Page 21 of 61
<PAGE> 22
securities with maturities of beyond three months and less than twelve months.
All marketable securities are classified as held- to-maturity under the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115) as the Company
has the positive intent and ability to hold the securities to maturity. In
accordance with SFAS 115, the securities are stated at amortized cost.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method. Progress payments for orders are
netted against inventory to the extent the payment is less than the inventory
balance relating to the applicable contract. Progress payments that are in
excess of the corresponding inventory balance are presented as customer deposits
in the Consolidated Balance Sheet.
PROPERTY AND DEPRECIATION
Property, plant and equipment are stated at cost. Major additions and
improvements are capitalized, while maintenance and repairs are charged to
expense as incurred. Depreciation and amortization are provided based upon the
estimated useful lives under the straight line method. Upon sale or retirement
of assets, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in the results of
operations.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using currently enacted tax
rates.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) encourages, but does not require
companies to record compensation cost 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," (APB 25) and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock. Compensation cost for share equivalent units is
recorded based on the quoted market price of the Company's stock at the end of
the period.
PER SHARE DATA
Earnings per share is computed by dividing net income by the weighted
average number of common shares and, when applicable, common equivalent shares
outstanding during the period.
STOCK SPLIT
On July 25, 1996, the Board of Directors authorized a three-for-two
stock split distributed on August 23, 1996 to shareholders of record at the
close of business on August 9, 1996. The Company distributed cash in lieu of
fractional shares resulting from the stock split. The Company's par value of
$.10 per share remained unchanged and as a result $53,000 was transferred from
capital in excess of par value to common stock. All per share amounts have been
restated to reflect the stock split.
CASH FLOW STATEMENT
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Actual interest paid was $384,000 in 1996, $631,000 in 1995, and
$500,000 in 1994. In addition, actual income taxes paid were $1,084,000 in 1996,
$246,000 in 1995, and $39,000 in 1994.
During 1996, the Company recorded a liability for new capital lease
agreements of $134,000. Bonus amounts payable to officers of Graham Corporation
and its U.S. subsidiary were paid in Graham common stock valued at $12,000 and
$73,000 in 1995 and 1994, respectively.
Page 22 of 61
<PAGE> 23
Page 23 of 61
<PAGE> 24
- --------------------------------------------------------------------------------
Note 2 - Discontinued Operations:
- --------------------------------------------------------------------------------
In September 1994, the Company approved a formal plan to dispose of its
subsidiary, Graham Manufacturing Limited (GML), located in Gloucester, England,
and subsequently sold the operation on January 24, 1995. GML manufactured shell
and tube heat exchangers. In addition, GML manufactured air cooled exchangers
through a joint venture known as Graham Exchanger Services Limited of which GML
owned seventy-five percent of the issued and outstanding shares. This joint
venture was sold in November 1994. The disposal of GML has been presented in the
Consolidated Statement of Operations as a discontinued operation and
accordingly, the results of operations for the prior years have been restated to
reflect GML's operations separately from continuing operations.
Net sales for GML were $13,639,000 for the nine month operating period
in 1994.
During 1995, the Company incurred a loss of $182,000 for additional
expenses related to the disposal of GML. There were no tax attributes associated
with this loss. The 1994 loss from GML's discontinued operations is presented
net of related tax benefits of $8,000. The 1994 loss from disposal, which
includes operating losses of $1,909,000 during the phase-out period, is
presented net of related tax benefits of $160,000. The remaining accrued
liabilities for this disposal totalled $392,000 at December 31, 1996.
In December 1994, the Company sold the property and plant of L&A
Engineering & Equipment, Inc. (L&A), which was previously accounted for as a
discontinued operation. A gain, net of related expenses, of $51,000 was
recognized from the sale of the L&A property and plant. In addition, the
remaining reserve for estimated net liabilities of L&A totalling $38,000 was
reversed to income in 1994. The gain of $89,000, which is net of a $35,000
income tax provision, has been netted against the loss from disposal of
discontinued operations in the 1994 Consolidated Statement of Operations.
Page 24 of 61
<PAGE> 25
- --------------------------------------------------------------------------------
Note 3 - Operations by Geographic Area:
- --------------------------------------------------------------------------------
The Company has operations in the United States and the United Kingdom.
Inter-geographic sales represent intercompany sales made based upon a
competitive pricing structure. All intercompany profits in inventory are
eliminated in the consolidated accounts and are included in the eliminations
caption below. In computing operating profit, corporate and interest expense
have been excluded. Included in corporate expense are research and development
costs of $375,000, $277,000, and $298,000 in 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales including inter-geographic sales:
United States
Customers...................................... $46,628,000 $45,358,000 $41,892,000
Inter-geographic............................... 41,000 24,000 31,000
United Kingdom
Customers...................................... 4,766,000 4,122,000 5,459,000
Inter-geographic............................... 1,293,000 1,372,000 1,152,000
Inter-geographic sales............................ (1,334,000) (1,396,000) (1,183,000)
----------- ----------- -----------
Net sales......................................... $51,394,000 $49,480,000 $47,351,000
=========== =========== ===========
Operating profit:
United States.................................. $6,234,000 $ 4,106,000 $ 1,950,000
United Kingdom................................. 500,000 370,000 745,000
Eliminations................................... (95,000) 65,000 (70,000)
----------- ----------- -----------
Total operating profit............................ 6,639,000 4,541,000 2,625,000
Corporate expense................................. (2,360,000) (1,831,000) (1,880,000)
Interest expense.................................. (355,000) (616,000) (525,000)
----------- ----------- -----------
Income from continuing
operations before income taxes................. $ 3,924,000 $ 2,094,000 $ 220,000
=========== =========== ===========
Identifiable assets
United States.................................. $25,882,000 $25,414,000 $25,640,000
United Kingdom................................. 4,916,000 3,870,000 4,214,000
Eliminations................................... (1,028,000) (391,000) (284,000)
----------- ----------- -----------
29,770,000 28,893,000 29,570,000
Corporate assets.................................. 664,000 587,000 383,000
----------- ----------- -----------
Total assets...................................... $30,434,000 $29,480,000 $29,953,000
=========== =========== ===========
</TABLE>
The breakdown of total United States export sales by geographic area was:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Australia & New Zealand........................ $ 949,000 $ 259,000 $ 703,000
Asia........................................... 10,677,000 7,926,000 10,210,000
Canada......................................... 2,628,000 2,404,000 2,649,000
Middle East.................................... 3,781,000 3,718,000 1,080,000
South America.................................. 3,974,000 1,836,000 716,000
Mexico......................................... 371,000 1,578,000 555,000
Western Europe................................. 770,000 568,000 538,000
Other.......................................... 266,000 208,000 627,000
----------- ----------- -----------
Total domestic export sales....................... $23,416,000 $18,497,000 $17,078,000
=========== =========== ===========
</TABLE>
Page 25 of 61
<PAGE> 26
- --------------------------------------------------------------------------------
Note 4 - Inventories:
- --------------------------------------------------------------------------------
Major classifications of inventories are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials and supplies.................................... $ 2,411,000 $ 2,579,000
Work in process............................................... 4,538,000 3,286,000
Finished products............................................. 1,168,000 1,100,000
----------- -----------
8,117,000 6,965,000
Less - progress payments...................................... 1,774,000 344,000
----------- -----------
$ 6,343,000 $ 6,621,000
=========== ===========
</TABLE>
Page 26 of 61
<PAGE> 27
- --------------------------------------------------------------------------------
Note 5 - Property, Plant and Equipment:
- --------------------------------------------------------------------------------
Major classifications of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land.............................................................. $ 252,000 $ 244,000
Leasehold improvements............................................ 177,000 165,000
Buildings and improvements........................................ 10,430,000 10,245,000
Machinery and equipment........................................... 13,982,000 12,748,000
Construction in progress.......................................... 25,000 10,000
----------- -----------
24,866,000 23,412,000
Less - accumulated depreciation and
amortization..................................................... 15,294,000 14,494,000
----------- -----------
$ 9,572,000 $ 8,918,000
=========== ===========
</TABLE>
Page 27 of 61
<PAGE> 28
- --------------------------------------------------------------------------------
Note 6 - Leases:
- --------------------------------------------------------------------------------
The Company leases equipment and office space under various operating
leases. Rent expense applicable to operating leases was $148,000, $184,000 and
$180,000 for years 1996, 1995 and 1994, respectively.
Property, plant and equipment include the following amounts for leases
which have been capitalized.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Machinery and equipment........................................... $1,644,000 $ 779,000
Less accumulated amortization..................................... 605,000 494,000
---------- ----------
$1,039,000 $ 285,000
========== ==========
</TABLE>
Amortization of property, plant and equipment under capital lease
amounted to $59,000, $98,000 and $72,000 for years 1996, 1995 and 1994,
respectively, and is included in depreciation expense.
As of December 31, 1996, future minimum payments required under
non-cancelable leases are:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------ ------
<S> <C> <C>
1997.............................................................. $ 144,000 $ 229,000
1998.............................................................. 104,000 226,000
1999.............................................................. 79,000 210,000
2000.............................................................. 54,000 196,000
2001.............................................................. 23,000 121,000
Thereafter........................................................ 13,000
---------- ----------
Total minimum lease payments...................................... $ 417,000 $ 982,000
==========
Less - amount representing
interest......................................................... 140,000
----------
Present value of net minimum
lease payments................................................... $ 842,000
==========
</TABLE>
Page 28 of 61
<PAGE> 29
- --------------------------------------------------------------------------------
Note 7 - Debt:
- --------------------------------------------------------------------------------
Short-Term Debt Due Banks
- -------------------------
The Company and its subsidiaries had short-term borrowings outstanding
as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Borrowings of United Kingdom
Subsidiary under line of credit
at bank's rate plus 1 1/2% in
1996 and 1995 $ $ 206,000
========== ==========
</TABLE>
The United Kingdom subsidiary has a revolving credit facility agreement
which provides a line of credit of 660,000 pounds sterling ($1,129,000 at the
December 31, 1996 exchange rate) including letters of credit and long-term
borrowings. The interest rate is the bank's rate plus 1 1/2%. The bank's base
rate was 6% and 6 1/2% at December 31, 1996 and 1995, respectively. The United
Kingdom operations had available unused lines of credit of $686,000 at December
31, 1996. The weighted average interest rate on short-term borrowings at
December 31, 1996 and 1995 was 0% and 8%, respectively.
Long-term Debt
- --------------
The Company and its subsidiaries had long-term borrowings outstanding as
follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Employee Stock Ownership Plan
Loan Payable................................................... $ 675,000 $ 875,000
United Kingdom term loan due in 2000.............................. 412,000 387,000
United States revolving credit
facility....................................................... 2,282,000
Capital lease obligations (Note 6)................................ 842,000 114,000
---------- ----------
1,929,000 3,658,000
Less: current amounts, including amounts
for capital leases of $192,000 in 1996
and $36,000 in 1995............................................ 487,000 355,000
---------- ----------
$1,442,000 $3,303,000
========== ==========
</TABLE>
In October 1996, the United States subsidiary entered into a new
revolving credit facility agreement which provides a line of credit of up to
$13,000,000, including letters of credit, through October 31, 1999. The
agreement allows the Company to borrow at prime minus a variable percentage
based upon certain financial ratios. At December 31, 1996 the Company was able
to borrow at a rate of prime minus 75 basis points. Prior to the commencement of
the new agreement, the Company was borrowing at prime plus 1% in 1996 and prime
plus 1/2% in 1995.
Page 29 of 61
<PAGE> 30
The agreement allows the Company at any time to convert balances
outstanding not less than $2,000,000 and up to $9,000,000 into a two-year term
loan. This conversion feature is available through October 1999, at which time
the Company may convert the principal outstanding on the revolving line of
credit to a two-year term loan. The Company had $0 and $2,282,000 outstanding on
its revolving credit facility, excluding letters of credit, at December 31, 1996
and 1995, respectively. As the Company has the intent and ability to maintain
this balance on a long-term basis, the borrowings have been classified as
long-term debt. The bank's prime rate was 8.25% and 8.5% at December 31, 1996
and 1995, respectively. The United States subsidiary had available unused lines
of credit of $10,955,000 at year end.
The Employee Stock Ownership Plan Loan Payable requires quarterly
payments of $50,000 through 2000. (See Note 10 for a description of the Plan.)
In 1995, the United Kingdom subsidiary entered into a term loan at a
fixed rate of 9%. This term loan is due in 2000 and is repayable in equal
monthly installments.
Long-term debt requirements over the next five years, excluding capital
leases, are: 1997 - $295,000, 1998 - $303,000, 1999 - $313,000, 2000 - $177,000
and 2001 - $0.
The Company is required to pay commitment fees of 1/4% on the unused
portion of the domestic revolving credit facility. No other financing
arrangements require compensating balances or commitment fees. Assets with a
book value of $22,898,000 have been pledged to secure certain domestic long-term
borrowings.
The United Kingdom short-term and long-term borrowings are secured by
assets of the United Kingdom subsidiary which have a book value of $637,000.
Several of the loan agreements contain provisions pertaining to the
maintenance of minimum working capital balances, tangible net worth, capital
expenditures and financial ratios as well as restrictions on the payment of cash
dividends to the parent company and shareholders and incurrence of additional
long-term debt. The most restrictive dividend provision limits the payment of
dividends to shareholders to the greater of $400,000 or 25% of consolidated net
income. In addition, the United States subsidiary cannot make any loans or
advances exceeding $500,000 to any affiliates without prior consent of the bank.
The United States subsidiary may pay dividends to the parent company as long as
the subsidiary remains in compliance with all financial covenants after payment
of the dividends. Under the agreement, restricted net assets of the subsidiary
may not be reduced below $5,000,000 at December 31, 1996.
Page 30 of 61
<PAGE> 31
- --------------------------------------------------------------------------------
Note 8 - Financial Instruments and Derivative Financial
Instruments:
- --------------------------------------------------------------------------------
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit quality financial institutions and actively evaluates the credit
worthiness of these financial institutions. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base and their geographic dispersion. At
December 31, 1996 and 1995, the Company had no significant concentrations of
credit risk.
Letters of Credit:
The Company has entered into standby letter of credit agreements with
financial institutions relating to the guarantee of future performance on
certain contracts. At December 31, 1996 and 1995, the Company was contingently
liable on outstanding standby letters of credit aggregating $2,076,000 and
$2,127,000, respectively.
Foreign Exchange Risk Management:
The Company, as a result of its global operating and financial
activities, is exposed to market risks from changes in foreign exchange rates.
In seeking to minimize the risks and/or costs associated with such activities,
the Company utilizes foreign exchange forward contracts with fixed dates of
maturity and exchange rates. The Company does not hold or issue financial
instruments for trading or other speculative purposes and only contracts with
high quality financial institutions. If the counterparties to the exchange
contracts do not fulfill their obligations to deliver the contracted foreign
currencies, the Company could be at risk for fluctuations, if any, required to
settle the obligation.
There were no foreign exchange forward contracts held by the Company at
December 31, 1996. The table below summarizes the notional amounts of the
foreign exchange forward contracts held by the Company at December 31, 1995. The
amounts represent the U.S. dollar equivalent of commitments to sell foreign
currencies.
<TABLE>
<CAPTION>
December 31, 1995
----
<S> <C>
Canadian dollars $391,000
--------
$391,000
Fair Value $398,000
</TABLE>
Page 31 of 61
<PAGE> 32
The Company entered into these foreign exchange forward contracts to
hedge a sales commitment denominated in the currency of the sales contract. The
term of the derivatives is less than one year.
At December 31, 1996 and 1995, the Company had deferred unrealized gains
and (losses) of $0 and $(7,000), respectively, which are recognized in income as
part of the hedged transaction. These amounts represent the gain or loss that
would have been recognized had these contracts been liquidated at market value
in their respective years. The fair values of the foreign exchange forward
contracts are estimated based on dealer quotes.
Fair Value of Financial Instruments:
The differences between the carrying amounts and estimated fair values
of the Company's marketable securities and short- and long-term debt are
insignificant.
The methods and assumptions used to estimate the fair value of financial
instruments are summarized as follows:
MARKETABLE SECURITIES - The fair value of investments in marketable
securities is based on quoted market prices.
SHORT-TERM DEBT DUE BANKS - The carrying value of short-term debt
approximates fair value due to the short-term maturity of this
instrument.
LONG-TERM DEBT - The carrying value of long-term debt excludes $842,000
and $114,000 of obligations under capital leases at December 31, 1996
and 1995, respectively. The carrying values of credit facilities with
variable rates of interest approximates fair values. The fair value of
fixed rate debt was estimated by discounting cash flows using rates
currently available for debt of similar terms and remaining maturities.
Page 32 of 61
<PAGE> 33
- --------------------------------------------------------------------------------
Note 9 - Income Taxes:
- --------------------------------------------------------------------------------
An analysis of the components of pre-tax income from continuing
operations is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States........................................ $ 3,746,000 $ 1,890,000 $ 59,000
United Kingdom....................................... 178,000 204,000 161,000
----------- ----------- -----------
$ 3,924,000 $ 2,094,000 $ 220,000
=========== =========== ===========
The provision for income taxes on
continuing operations consists of:
Current -
Federal........................................... $ 1,279,000 $ 97,000 $ 208,000
State............................................. 77,000 16,000 56,000
United Kingdom.................................... (41,000) 84,000
----------- ----------- -----------
1,315,000 197,000 264,000
----------- ----------- -----------
Deferred -
Federal........................................... (25,000) 489,000 (161,000)
State............................................. 64,000 236,000 (22,000)
United Kingdom.................................... (210,000) (1,000) 228,000
Change in valuation allowance..................... (281,000) (143,000) (101,000)
----------- ----------- -----------
(452,000) 581,000 (56,000)
----------- ----------- -----------
Total provision for income taxes $ 863,000 $ 778,000 $ 208,000
=========== =========== ===========
</TABLE>
The reconciliation of the provision calculated using the United States
Federal tax rate with the provision for income taxes presented in the financial
statements, excluding discontinued operations, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes at
Federal rate...................................... $ 1,334,000 $ 712,000 $ 75,000
Recognition of tax benefit of prior
year losses....................................... (102,000)
Difference between foreign and U.S.
tax rates......................................... (9,000) (2,000) (2,000)
State taxes.......................................... 114,000 247,000 15,000
Charges not deductible for
income tax purposes............................... 59,000 61,000 131,000
Recognition of tax benefit generated
by foreign sales corporation...................... (70,000) (67,000) (46,000)
Tax credits.......................................... (8,000) (18,000)
Net operating losses for which no
tax benefit was provided.......................... 92,000
Adjustments to prior years'
tax liabilities................................... (169,000)
Change in valuation allowance........................ (281,000) (143,000) (101,000)
Other................................................ (5,000) (12,000) 44,000
----------- ----------- -----------
Provision for income taxes $ 863,000 $ 778,000 $ 208,000
=========== =========== ===========
</TABLE>
Page 33 of 61
<PAGE> 34
The deferred income tax asset (liability) recorded in the Consolidated
Balance Sheet results from differences between financial statement and tax
reporting of income and deductions. A summary of the composition of the
deferred income tax asset (liability) follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
United United United United
States Kingdom States Kingdom
------ ------- ------ -------
<S> <C> <C> <C> <C>
Depreciation............................... $ (428,000) $ (127,000) $ (435,000) $(118,000)
Deferred compensation...................... 446,000 425,000
Deferred pension
liability............................... 454,000 94,000 379,000
Accrued postretirement
benefits................................ 1,299,000 1,281,000
Compensated absences....................... 527,000 519,000
Inventories................................ 117,000 85,000
Warranty liability......................... 78,000 98,000
State and foreign loss
carryforwards........................... 662,000 46,000 573,000
New York State
investment tax credit................... 154,000 195,000
Alternative minimum tax
credit.................................. 120,000
Contingent liabilities..................... 100,000
Other...................................... 71,000 9,000 144,000 (84,000)
---------- ---------- ---------- -----------
2,818,000 638,000 2,857,000 371,000
Less: Valuation
allowance............................... 200,000 617,000 559,000 482,000
---------- ---------- ---------- -----------
Deferred tax
asset (liability) $2,618,000 $ 21,000 $2,298,000 $ (111,000)
========== ========== ========== ===========
</TABLE>
Deferred income taxes include the impact of foreign net operating loss
carryforwards which may be carried forward indefinitely and investment tax
credits which expire from 2000 to 2004. In accordance with the provisions of
SFAS 109, a valuation allowance of $817,000 at December 31, 1996 is deemed
adequate to reserve for these and other items which are not considered probable
of realization.
The Company does not provide for additional U.S. income taxes on
undistributed earnings considered permanently invested in its United Kingdom
subsidiary. At December 31, 1996, such undistributed earnings totaled
$1,301,000. It is not practicable to determine the amount of income taxes that
would be payable upon the remittance of assets that represent those earnings.
Page 34 of 61
<PAGE> 35
- --------------------------------------------------------------------------------
Note 10 - Employee Benefit Plans:
- --------------------------------------------------------------------------------
Retirement Plans
- ----------------
The Company has defined benefit plans covering substantially all
employees. The Company's plan covering employees in the United States is
non-contributory. Benefits are based on the employee's years of service and
average earnings for the five highest consecutive calendar years of compensation
for the ten year period preceding retirement. The plan for employees in the
United Kingdom is contributory with the employer's share being actuarially
determined. Benefits are based on the employee's years of service and average
earnings for the three highest years for the ten year period preceding
retirement. The Company's funding policy for the United States plan is to
contribute the amount required by the Employee Retirement Income Security Act of
1974. The pension obligations to employees covered by the Company's former
domestic plan, terminated in 1986, were settled through the purchase of annuity
contracts for each participant which guaranteed these future benefit payments.
The components of pension cost are:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
U. S. PLAN U. K. PLAN U. S. PLAN U. K. PLAN U. S. PLAN U. K. PLAN
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned
during the period................ $ 307,000 $ 104,000 $ 261,000 $ 175,000 $ 350,000 $ 524,000
Interest cost on projected
benefit obligation............... 459,000 315,000 475,000 295,000 505,000 453,000
Actual return on assets............. (477,000) 146,000 (1,600,000) (501,000) (38,000) (345,000)
Net amortization and deferral....... (135,000) (474,000) 1,168,000) 109,000 (338,000) (196,000)
---------- ---------- ---------- ----------- ----------- ----------
Net pension cost.................... $ 154,000 $ 91,000 $ 304,000 $ 78,000 $ 479,000 $ 436,000
========== ========== ========== ========== ========== ==========
</TABLE>
The service cost for 1996, 1995 and 1994 is net of employee contributions to
the United Kingdom plan of $93,000, $49,000 and $22,000, respectively.
The actuarial assumptions are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Discount rate used to determine
projected benefit obligation........ 7% 9% 7% 9% 8 3/4% 9 1/2%
Rate of increase in compensation
levels.............................. 3% 5 1/2% 3% 5 1/2% 4% 5 1/2%
Expected rate of return on plan
assets.............................. 8% 10% 8% 10% 8% 10%
</TABLE>
The funded status of the pension plans is presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
U. S. PLAN U. K. PLAN U. S. PLAN U. K. PLAN
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Vested benefit obligation...................... $ 4,776,000 $1,019,000 $ 4,262,000 $ 831,000
=========== ========== =========== ==========
Accumulated benefit obligation................. $ 5,196,000 $1,031,000 $ 4,636,000 $ 831,000
=========== ========== =========== ==========
Plan assets at fair value...................... $ 7,499,000 $3,933,000 $ 6,258,000 $3,709,000
Projected benefit obligation for
services rendered to date................... 7,275,000 3,389,000 7,539,000 3,461,000
----------- ---------- ----------- ----------
Projected benefit obligation less than
or (in excess of) plan assets............... 224,000 544,000 (1,281,000) 248,000
Unrecognized net loss from past
experience different from that assumed
and effect of changes in assumptions........ (1,290,000) (1,057,000) (528,000) (752,000)
Unrecognized prior service cost................ (3,000) 265,000 (3,000) 265,000
Unrecognized net asset at
transition.................................. (335,000) (38,000) (379,000) (38,000)
----------- ---------- ----------- ----------
Pension liability.............................. $(1,404,000) $ (286,000) $(2,191,000) $ (277,000)
=========== ========== =========== ==========
</TABLE>
The current portion of the pension liability as of December 31, 1995 is
included in the caption "Accrued Compensation" and the long-term portion is
separately presented in the Consolidated Balance Sheets. As of December 31,
1996, the entire liability was long-term.
Assets of the United States plan consist primarily of equity securities
at December 31, 1996 and 1995. At December 31, 1995, the plan assets included
70,425 shares of the Company's common stock. Assets of the United Kingdom plan
consist of an investment contract with an insurance company which is primarily
invested in equity securities. The vested benefit obligation of the United
Kingdom plan is the actuarial present value of the vested benefits to which the
employee is currently entitled but based on the employee's expected date of
separation or retirement. The unrecognized net asset at transition is being
amortized over the remaining service lives of the participants which
approximates 19 years for the domestic plan and 13 years for the United Kingdom
plan.
In 1996, the Company adopted a Supplemental Executive Retirement Plan
for certain key executives. This unfunded plan provides retirement benefits
associated with wages in excess of the legislated qualified plan maximums.
Pension expense recorded in 1996 related to this plan was $39,000. At December
31, 1996, the related liability was $39,000 and is included in the caption
"Deferred Pension Liability" in the Consolidated Balance Sheet.
The Company has a defined contribution plan covering substantially all
domestic employees. Company contributions to this plan are based on the
profitability of the Company and amounted to $651,000, $320,000 and $0 in 1996,
1995 and 1994, respectively. The Company also maintains a supplemental defined
contribution plan which covers selected employees in the United Kingdom. The
expense associated with this plan was $0, $4,000 and $13,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company has a deferred compensation plan that allows certain key
employees to defer a portion of their compensation. The principal and interest
earned on the deferred balances are payable upon retirement. The deferred
compensation liability under this plan was $1,104,000 and $1,089,000 at December
31, 1996 and 1995, respectively.
Page 35 of 61
<PAGE> 36
Employee Stock Ownership Plan
- -----------------------------
The Company has a noncontributory Employee Stock Ownership Plan (ESOP)
that covers substantially all employees in the United States. The Company
borrowed $2,000,000 under loan and pledge agreements. The proceeds of the loans
were used to purchase 87,454 shares of the Company's common stock. The purchased
shares are pledged as security for the payment of principal and interest as
provided in the loan and pledge agreements. It is anticipated that funds for
servicing the debt payments will essentially be provided from contributions paid
by the Company to the ESOP, from earnings attributable to such contributions,
and from cash dividends paid to the ESOP on shares of the Company stock which it
owns. During 1996, 1995, and 1994 the Company recognized expense associated with
the ESOP using the shares allocated method. This method recognizes interest
expense as incurred on all outstanding debt of the ESOP and compensation expense
related to principal reductions based on shares allocated for the period.
Dividends received on unallocated shares that are used to service the ESOP debt
reduce the amount of expense recognized each period. The compensation expense
associated with the ESOP was $200,000 for each of the years ended December 31,
1996, 1995 and 1994. The ESOP received no dividends on unallocated shares in
1996, 1995 and 1994. Interest expense in the amount of $72,000, $97,000, and
$96,000 was incurred in 1996, 1995 and 1994, respectively. Dividends paid on
allocated shares accumulate for the benefit of the employees.
Other Postretirement Benefits
- -----------------------------
In addition to providing pension benefits, the Company has a United
States plan which provides health care benefits for eligible retirees and
eligible survivors of retirees. The Company recognizes the cost of these
benefits on the accrual basis as employees render service to earn the benefits.
Early retirees who are eligible to receive benefits under the plan are required
to share in twenty percent of the medical premium cost. In addition, the
Company's share of the premium costs has been capped.
Page 36 of 61
<PAGE> 37
The components of postretirement benefit cost are:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the period........................... $ 62,000 $ 45,000 $ 56,000
Interest cost on accumulated benefit obligation............................ 173,000 156,000 165,000
Net amortization........................................................... (79,000) (87,000) (87,000)
-------- -------- --------
Net postretirement benefit cost............................................ $156,000 $114,000 $134,000
======== ======== ========
</TABLE>
The assumptions used to develop the accrued postretirement benefit
obligation were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................................. 7% 7% 8 3/4%
Medical care cost trend rate............................................... 9% 9 1/2% 10%
</TABLE>
The medical care cost trend rate used in the actuarial computation
ultimately reduces to 5% in 2004 and subsequent years. This was accomplished
using 1/2% decrements for the years 1997 through 2004.
The table of actuarially computed benefit obligations is presented
below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................ $ 958,000 $1,064,000
Fully eligible active plan participants................................. 532,000 486,000
Other active plan participants.......................................... 1,151,000 988,000
---------- ----------
Unfunded accumulated postretirement
benefit obligation...................................................... 2,641,000 2,538,000
Unrecognized net loss from past
experience different from that assumed
and effects of changes in assumptions................................... (374,000) (403,000)
Unrecognized prior service cost............................................ 1,064,000 1,151,000
---------- ----------
Accrued postretirement benefit obligation.................................. $3,331,000 $3,286,000
========== ==========
</TABLE>
The effect of a one percentage point increase in each future year's
assumed medical care cost trend rate, holding all other assumptions constant,
would not have a material effect on the net postretirement benefit cost or the
accrued postretirement benefit obligation.
The current portion of the postretirement benefit obligation is included
in the caption "Accrued Compensation" and the long-term portion is separately
presented in the Consolidated Balance Sheets.
Postemployment Benefits
- -----------------------
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for
Postemployment Benefits." SFAS 112 requires that projected future costs of
providing postemployment benefits be recognized as an expense as employees
render service rather than when the benefits are paid. The adjustment to adopt
SFAS 112 of $9,000, net of the related tax benefit of $3,000, or $.01 per share,
is presented in the Consolidated Statement of Operations as the cumulative
effect of changes in accounting principles from continuing and discontinued
operations. The incremental costs of adopting this statement are insignificant
on an ongoing basis.
Page 37 of 61
<PAGE> 38
- --------------------------------------------------------------------------------
Note 11 - Stock Compensation Plans:
- --------------------------------------------------------------------------------
The 1995 Graham Corporation Incentive Plan to Increase Shareholder Value
provides for the issuance of up to 192,000 shares of common stock in connection
with grants of incentive stock options and non-qualified stock options to
officers, key employees and outside directors. The options may be granted at
prices not less than the fair market value at the date of grant and expire no
later than ten years after the date of grant.
The 1989 Stock Option and Appreciation Rights Plan provides for the
issuance of up to 188,700 shares of common stock in connection with grants of
non-qualified stock options and tandem stock appreciation rights to officers,
key employees and certain outside directors. The options may be granted at
prices not less than the fair market value at the date of grant, and expire no
later than ten years after the date of grant.
In 1996 the Company adopted a Long-Term Incentive Plan which provides
for awards of share equivalent units for outside directors based upon the
Company's performance. Each unit is equivalent to one share of the Company's
common stock. Share equivalent units are payable in cash or stock upon
retirement. In 1996, $40,000 was charged to pre-tax income for the cost of
performance units earned under this Plan.
The Company applies APB 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation expense has been recognized for its
stock option plans. Had compensation cost for the Company's two stock option
plans been determined based on the fair value at the grant date for awards under
those plans in accordance with the optional methodology prescribed under SFAS
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net income - As reported $3,061,000 $1,134,000
- Pro forma $3,003,000 $1,020,000
Earnings per share - As reported $1.90 $.72
- Pro forma $1.87 $.64
</TABLE>
The weighted average fair value of the options granted during 1996 and
1995 is estimated as $4.62, and $3.59, respectively, using the Black Scholes
option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected life 5 years 5 years
Volatility 34.74% 44.28%
Risk-free interest rate 6.35% 6.21%
Dividend yield 0% 0%
</TABLE>
Page 38 of 61
<PAGE> 39
Information on options and rights under the Company's plans is as
follows:
<TABLE>
<CAPTION>
Weighted
Option Shares Average
price under Exercise
range option Price
----- ------ -----
<S> <C> <C> <C>
Outstanding at December 31, 1993............................ $5.00-13.17 142,650
Granted..................................................... $8.00 6,900
Cancelled................................................... $13.17 (3,000)
-------
Outstanding at December 31, 1994............................ $5.00-13.17 146,550 11.49
Exercised................................................... $5.00 (2,250) 5.00
Granted..................................................... $6.58-8.00 50,550 7.59
Cancelled................................................... $7.67-13.17 (7,200) 12.25
-------
Outstanding at December 31, 1995............................ $6.58-13.17 187,650 10.49
Exercised................................................... $6.58-8.00 (5,210) 7.28
Granted..................................................... $10.42-11.33 21,600 11.07
Cancelled................................................... $7.67-13.17 (14,700) 12.72
-------
Outstanding at December 31, 1996............................ $6.58-13.17 189,340 10.47
=======
</TABLE>
At December 31, 1996, the options outstanding had a weighted average
remaining contractual life of 5.97 years. There were 171,340 options exercisable
at December 31, 1996 which had a weighted average exercise price of $10.60. The
remaining options are exercisable at a rate of 20 percent per year from the date
of grant. The outstanding options expire December 1999 to October 2006. The
number of options available for future grants were 178,050 at December 31, 1996
and 184,950 at December 31, 1995.
Page 39 of 61
<PAGE> 40
- --------------------------------------------------------------------------------
Note 12 - Shareholder Rights Plan:
- --------------------------------------------------------------------------------
On February 23, 1990 the Company adopted a Shareholder Rights Plan.
Under the Plan, as of March 7, 1990, one share Purchase Right ("Right") is
attached to each outstanding share of Common Stock. When and if the Rights
become exercisable, each Right would entitle the holder of a share of Common
Stock to purchase from the Company an additional share of Common Stock for
$46.67 per share, subject to adjustment. The Rights become exercisable upon
certain events: (i) if a person or group of persons acquires 20% or more of the
Company's outstanding Common Stock; or (ii) if a person or group commences a
tender offer for 30% or more of the Company's outstanding Common Stock.
The Company may redeem the Rights for $.01 per Right at any time prior
to the close of business on the date when the Rights become exercisable.
After the Rights become exercisable, if the Company is acquired in a
business combination transaction, or if at least half of the Company's assets or
earning power are sold, then each Right would entitle its holder to purchase
stock of the acquirer (or Graham, if it were the surviving company) at a
discount of 50%. The number of shares that each Right would entitle its holder
to acquire at discount would be the number of shares having a market value equal
to twice the exercise price of the Right.
Page 40 of 61
<PAGE> 41
- --------------------------------------------------------------------------------
Note 13 - Contingencies:
- --------------------------------------------------------------------------------
The United States Environmental Protection Agency has notified the
Company's wholly-owned subsidiary, Graham Manufacturing Co., Inc. ("GMC"), that
it is a Potentially Responsible Party pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, in
connection with the Batavia Landfill Site in the Town of Batavia, New York.
Total remediation expenses for the site are currently estimated at $10.4
million. Based on facts and circumstances currently known to GMC and the
Company, GMC's contribution to the site of material deemed hazardous was minor.
In 1996, the Company recorded a $260,000 provision for the estimated costs,
including legal costs, in connection with this matter based on the currently
available information and assuming a reasonable pro-rata allocation. The related
liability at December 31, 1996 was $257,000 and is included in the caption
"Other Long- Term Liabilities" in the Consolidated Balance Sheet.
Following an adverse jury verdict relating to a lawsuit filed against
GMC in 1992, the Company charged $1,502,000 to pre-tax income in 1994 for the
judgment amount and related defense costs. Following trial in 1995, the Company
reached a settlement with the plaintiff and an additional $276,000 was expensed.
Page 41 of 61
<PAGE> 42
- --------------------------------------------------------------------------------
Quarterly Financial Data:
- --------------------------------------------------------------------------------
A capsule summary of the Company's unaudited quarterly sales and
earnings per share data for 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
First Second Third Fourth Total
1996(1) Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Net sales............................... $11,671,000 $13,409,000 $12,705,000 $13,609,000 $51,394,000
Gross Profit............................ 3,247,000 3,837,000 3,845,000 4,472,000 15,401,000
Net income.............................. 364,000 472,000 557,000 1,668,000 3,061,000
Per share:
Net income........................... .23 .29 .35 1.03 1.90
=========== =========== =========== =========== ===========
Market price range...................... 9.42-12.17 9.17-12.25 9.25-12.58 9-11.38 9-12.58
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth Total
1995(1) Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 9,305,000 $12,007,000 $10,651,000 $17,517,000 $49,480,000
Gross Profit............................ 2,500,000 2,666,000 3,068,000 4,745,000 12,979,000
Income from continuing operations....... 19,000 (137,000) 254,000 1,180,000 1,316,000
Loss from discontinued operations....... (182,000) (182,000)
Net income (loss)....................... 19,000 (137,000) 254,000 998,000 1,134,000
Per share:
Income from continuing
operations......................... .01 (.09) .16 .75 .83
Loss from discontinued
operations......................... (.11) (.11)
Net income (loss).................... .01 (.09) .16 .64 .72
=========== =========== =========== =========== ===========
Market price range...................... 9.25-11.38 9-11.88 10.13-13.88 11.50-16 9-16
Quarterly Financial Data Notes:
<FN>
(1) Per share data has been adjusted to reflect a three-for-two stock split on
July 25, 1996.
</TABLE>
Page 42 of 61
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Graham Corporation
Batavia, New York
We have audited the accompanying consolidated balance sheets of Graham
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Graham Corporation and subsidiaries
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Rochester, New York
February 24, 1997
Page 43 of 61
<PAGE> 44
Item 9. Changes in and Disagreements with Accountants on Accounting
------- -----------------------------------------------------------
and Financial Disclosure
------------------------
(Not Applicable)
PART III
--------
Item 10. Directors and Executive Officers
-------- --------------------------------
(The information called for under this Item pursuant to Item 401
of the Commission's Regulation S-K is set forth in statements
under "Election of Directors" on pages 3 to 6 of the Registrant's
Proxy Statement for its 1997 Annual Meeting of Stockholders,
which statements are hereby incorporated herein by reference:
except that the information regarding executive officers called
for hereunder pursuant to Item 401(b) of Regulation S-K is
furnished under a separate item captioned Executive Officers of
the Registrant included in PART I of this annual report on Form
10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K
and paragraph 3 of General Instruction G of Form 10-K.
Item 11. Executive Compensation
-------- ----------------------
(The information called for under this Item is set forth in
statements under "Compensation of Executive Officers" on pages 8
to 11 of Registrant's Proxy Statement for its 1997 Annual Meeting
of Stockholders, which statements are hereby incorporated herein
by reference.)
Item 12. Security Ownership of Certain Beneficial Owners and
-------- ---------------------------------------------------
Management
----------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
(The information called for under this Item is set forth in
statements under "Principal Stockholders" on page 2 of
Registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which statements are hereby incorporated herein by
reference.)
(b) Security Ownership of Management
--------------------------------
(The information called for under this Item is set forth in
statements under "Principal Stockholders" on page 2, "Election of
Directors" on pages 3 to 6 and "Executive Officers" on page 7 of
Registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, which statements are hereby incorporated herein by
reference.)
(c) Changes in Control (Not Applicable)
------------------
Page 44 of 61
<PAGE> 45
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
(The information called for under this Item is set forth in
statements under "Principal Stockholders" on page 2 and "Election
of Directors" on pages 3 to 6 of Registrant's Proxy Statement for
its 1997 Annual Meeting of Stockholders, which statements are
hereby incorporated herein by reference.)
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
-------- -----------------------------------------------------------
8-K
---
(a) (1) The following are Financial Statements and related
information filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Sequential
Page Number
-----------
<S> <C>
(A) Consolidated Statements of Operations for
the Years ended December 31, 1996, 1995,
and 1994; 17
(B) Consolidated Balance Sheets as of
December 31, 1996 and 1995; 18
(C) Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996, 1995
and 1994; 19
(D) Consolidated Statements of Changes in
Shareholders' Equity for the Years ended
December 31, 1996, 1995 and 1994; 20
(E) Notes to Consolidated Financial Statements;
and 21-41
(F) Report of Independent Auditors 43
(a) (2) The following are Financial Statement Schedules and related
information required to be filed as part of this Annual
Report on Form 10-K by Items 8 and 14(d) of Form 10-K:
(A) The items set forth in Items 14(a)(1)(A)
through (E) above; and 17-41
</TABLE>
Page 45 of 61
<PAGE> 46
<TABLE>
<CAPTION>
Sequential
Page Number
-----------
<S> <C>
(B) Independent Auditors' Report on
Financial Statement Schedules 47
Financial Statement schedules for the years 1996, 1995 and 1994
as follows:
(i) Condensed Financial Information of
Registrant (Schedule I) 48-50
(ii) Valuation and Qualifying Accounts
(Schedule II) 51
</TABLE>
Other financial statement schedules not included in this Annual
Report on Form 10-K have been omitted because they are not applicable or because
the required information is shown in the financial statements or notes thereto.
Page 46 of 61
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Graham Corporation
Batavia, New York
We have audited the consolidated financial statements of Graham Corporation and
subsidiaries as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, and have issued our report thereon dated
February 24, 1997; such report is included elsewhere in this Annual Report on
Form 10-K. Our audits also included the consolidated financial statement
schedules of Graham Corporation and subsidiaries, listed in Item 14 (a) 2. These
financial statement schedules are the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Rochester, New York
February 24, 1997
Page 47 of 61
<PAGE> 48
GRAHAM CORPORATION AND SUBSIDIARIES*
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Costs and expenses:
General and administrative $1,703,000 $1,423,000 $ 1,117,000
Interest expense 72,000 98,000 97,000
---------- ---------- -----------
Parent company operating loss before
income tax benefit 1,775,000 1,521,000 1,214,000
Benefit for income taxes (491,000) (580,000) (449,000)
---------- ---------- -----------
Net parent company operating loss 1,284,000 941,000 765,000
---------- ---------- -----------
Equity in earnings of
continuing subsidiaries 6,073,000 3,891,000 1,719,000
Less expenses directly allocable to
continuing subsidiaries:
Research and development 375,000 276,000 285,000
Provision for income taxes 1,353,000 1,358,000 657,000
---------- ---------- -----------
Equity in net earnings of
subsidiaries 4,345,000 2,257,000 777,000
---------- ---------- -----------
Income from continuing operations 3,061,000 1,316,000 12,000
---------- ---------- -----------
Equity in losses of
discontinued subsidiaries (182,000) (8,554,000)
Less expenses directly allocable to
discontinued subsidiaries:
Benefit for income taxes (133,000)
---------- ---------- -----------
Equity in net losses of
discontinued subsidiaries (182,000) (8,421,000)
---------- ---------- -----------
Income before cumulative effect of
change in accounting principle 3,061,000 1,134,000 (8,409,000)
Cumulative effect of change in
accounting principle for
continuing subsidiary (2,000)
Cumulative effect of change in
accounting principle for discontinued
subsidiaries (4,000)
---------- ---------- -----------
Net income (loss) $3,061,000 $1,134,000 $(8,415,000)
========== ========== ===========
<FN>
The Notes to Consolidated Financial Statements in Part II are an integral part
of this schedule.
* Information is presented for the parent company only.
** Cash dividends paid to the parent company by consolidated subsidiarires
were $3,650,000, $1,750,000 and $1,968,000 in 1996, 1995 and 1994,
respectively.
</TABLE>
Page 48 of 61
<PAGE> 49
GRAHAM CORPORATION AND SUBSIDIARIES*
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Prepaid expenses $ 86,000 $ 92,000
Due from subsidiaries 353,000 188,000
----------- -----------
Total current assets 439,000 280,000
Property, plant & equipment, net 339,000 275,000
Investment in subsidiaries 12,397,000 9,142,000
Other assets 21,000 28,000
----------- -----------
$13,196,000 $ 9,725,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt $ 200,000 $ 208,000
Accounts payable 148,000 216,000
Other current liabilities 478,000 219,000
----------- -----------
Total current liabilities 826,000 643,000
Long-term debt 475,000 675,000
Deferred compensation 40,000
----------- -----------
1,341,000 1,318,000
----------- -----------
Shareholders' equity:
Preferred stock, $1 par value -
authorized, 500,000 shares
Common stock, $.10 par value -
authorized, 6,000,000 shares
issued, 1,586,155 shares in 1996 and
1,053,999 shares in 1995 159,000 106,000
Capital in excess of par value 3,210,000 3,219,000
Cumulative foreign currency translation
adjustment (1,748,000) (1,891,000)
Retained earnings 10,915,000 7,854,000
----------- -----------
12,536,000 9,288,000
Less:
Treasury stock (6,000) (6,000)
Employee Stock Ownership Plan Loan Payable (675,000) (875,000)
----------- -----------
Total shareholders' equity 11,855,000 8,407,000
----------- -----------
$13,196,000 $ 9,725,000
=========== ===========
<FN>
The Notes to Consolidated Financial Statements in Part II are an integral part
of this Schedule.
* Information is presented for the parent company only.
</TABLE>
Page 49 of 61
<PAGE> 50
GRAHAM CORPORATION AND SUBSIDIARIES*
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net cash provided by operating
activities $ 76,000 $ 3,000 $ 19,000
---------- ---------- ----------
Investing activities:
Purchase of property, plant and
equipment (112,000) (13,000)
Proceeds from sale of property, plant
and equipment 6,000
---------- ---------- ----------
Net cash (used) by investing activities (106,000) (13,000)
---------- ---------- ----------
Financing activities:
Principal repayments of long-term
debt (8,000) (8,000) (6,000)
Issuance of common stock 38,000 11,000
Purchase of treasury stock (6,000)
---------- ---------- ----------
Net cash provided (used) by
financing activities 30,000 (3,000) (6,000)
---------- ---------- ----------
Net increase in cash and equivalents 0 0 0
Cash and equivalents at beginning of
year 0 0 0
---------- ---------- ----------
Cash and equivalents at end of year $ 0 $ 0 $ 0
========== ========== ==========
<FN>
The Notes to Consolidated Financial Statements in Part II are an integral part
of this schedule.
* Information is presented for the parent company only.
</TABLE>
Page 50 of 61
<PAGE> 51
GRAHAM CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning costs and Charged to end of
Description of period expenses other accounts Deductions period
----------- --------- -------- -------------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 81,000 $ 26,000 $ 11,000 (b) $ (78,000) $ 40,000
Reserve for inventory
obsolescence 222,000 91,000 11,000 (b) (221,000) 103,000
Reserves included in the
balance sheet caption Other
long-term liabilities:
Reserve for contingencies 260,000 (3,000) 257,000
Reserve for discontinued
operations 711,000 64,000 41,000 (b) (424,000) (a) 392,000
---------- ---------- -------- ----------- ----------
$1,014,000 $ 441,000 $ 63,000 $ (726,000) $ 792,000
========== ========== ======== =========== ==========
Year ended December 31, 1995
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 119,000 $ 42,000 $ (80,000) $ 81,000
Reserve for inventory
obsolescence 236,000 1,000 $ (3,000) (b) (12,000) 222,000
Reserves included in the
balance sheet caption Accrued
expenses and other liabilities:
Reserve for contingencies 1,247,000 101,000 (1,348,000)
Reserve for discontinued
operations 883,000 182,000 (9,000) (b) (345,000) (a) 711,000
---------- ---------- -------- ----------- ----------
$2,485,000 $ 326,000 $(12,000) $(1,785,000) $1,014,000
========== ========== ======== =========== ==========
Year ended December 31, 1994
Reserves deducted from the asset
to which they apply:
Reserve for doubtful accounts $ 80,000 $ 51,000 $ 2,000 (b) $ (14,000) $ 119,000
Reserve for inventory
obsolescence 38,000 192,000 6,000 (b) 236,000
Reserves included in the
balance sheet caption Accrued
expenses and other liabilities:
Reserve for penalties 223,000 (61,000) (62,000) (c) (100,000)
Reserve for contingencies 384,000 946,000 (83,000) 1,247,000
Reserve for discontinued
operations 80,000 847,000 16,000 (b) (60,000) (a) 883,000
---------- ---------- -------- ----------- ----------
$ 805,000 $1,975,000 $(38,000) $ (257,000) $2,485,000
========== ========== ======== =========== ==========
<FN>
Notes: (a) Represents costs charged against the reserve associated with the
discontinued operation.
(b) Represents foreign currency translation adjustment.
(c) Represents a reversal of the reserve and a foreign currency
translation adjustment.
</TABLE>
Page 51 of 61
<PAGE> 52
(a) (3) The following exhibits are required to be filed by Item
14(c) of Form 10-K:
Exhibit No.
-----------
*3 (i) Articles of Incorporation of
Graham Corporation
*****3 (ii) By-laws of Graham Corporation
*4 (a) Certificate of Incorporation of
Graham Corporation (included as
Exhibit 3.1)
**4 (b) Shareholder Rights Plan of Graham
Corporation
***10 1989 Stock Option and
Appreciation Rights Plan of
Graham Corporation
****10 1995 Graham Corporation Incentive
Plan to Increase Shareholder
Value
11 Statement regarding computation
of per share earnings
21 Subsidiaries of the registrant
23 Consent of Experts and Counsel
27 Financial Data Schedule
- ---------------------------
* Incorporated herein by reference from the Annual Report of Registrant
on Form 10-K for the year ended December 31, 1989.
** Incorporated herein by reference from the Registrant's Current Report
on Form 8-K dated February 26, 1991, as amended by Registrant's
Amendment No. 1 on Form 8 dated June 8, 1991.
*** Incorporated herein by reference from the Registrant's Proxy Statement
for its 1991 Annual Meeting of Shareholders.
**** Incorporated herein by reference from the Registrant's Proxy Statement
for its 1996 Annual Meeting of Shareholders.
***** Incorporated herein by reference from the Annual Report of Registrant
on Form 10-K for the year ended December 31, 1995.
Page 52 of 61
<PAGE> 53
(b) The Registrant filed no reports on Form 8-K during the last
quarter of the fiscal year covered by this Annual Report on Form
10-K.
Page 53 of 61
<PAGE> 54
Cross Reference Sheet for Annual Report on Form 10-K for the year ended December
31, 1996, setting forth item numbers and captions of Form 10-K (and related
Items of Regulation S-K referred to therein) under which information is
incorporated by reference and the pages in the Registrant's Proxy Statement for
the 1997 Annual Meeting of Stockholders where that information appears.
<TABLE>
<CAPTION>
FORM 10-K: PART No. Regulation S-K Proxy Statement for 1997
Item No. and Caption Item No. and Caption Annual Meeting of Stockholders
- -------------------- -------------------- ------------------------------
Caption: Page:
<S> <C> <C> <C>
Item 10. Directors Item 401. Directors and Election of Directors 3-6
and Executive Executive Officers
Officers of
Registrant Item 405. Directors and Disclosure Pursuant to
Executive Officers Item 405 of SEC
Regulation S-K 7
Item 11. Executive Item 402. Executive Compensation of
Compensation Compensation Executive Officers 8-11
Item 12. Security Item 403(a). Security Principal Stockholders 2
Ownership of Certain Ownership of Certain
Beneficial Owners Beneficial Owners
and Management
Item 403(b). Security Principal Stockholders 2
Ownership of Management Election of Directors 3-6
Executive Officers 7
Item 13. Certain Item 404(a). Transactions Principal Stockholders 2
Relationships and with Management and Election of Directors 3-6
Related Others
Transactions
Item 404(b). Certain Principal Stockholders 2
Business Relations Election of Directors 3-6
</TABLE>
Page 54 of 61
<PAGE> 55
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GRAHAM CORPORATION
----------------------------------------
(Registrant)
DATE: March 27, 1997 By s\ J. Ronald Hansen
-------------------------------------
J. Ronald Hansen
Vice President-Finance &
Administration and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature
<S> <C> <C>
s\ Frederick D. Berkeley Chairman and Chief
- -------------------------------- Executive Officer;
Frederick D. Berkeley Director March 27, 1997
Vice President-Finance &
s\ J. Ronald Hansen Administration and Chief
- -------------------------------- Financial Officer
J. Ronald Hansen March 27, 1997
s\ Philip S. Hill
- --------------------------------
Philip S. Hill Director March 27, 1997
s\ Cornelius S. Van Rees
- --------------------------------
Cornelius S. Van Rees Director March 27, 1997
s\ Jerald D. Bidlack
- --------------------------------
Jerald D. Bidlack Director March 27, 1997
s\ Robert L. Tarnow
- --------------------------------
Robert L. Tarnow Director March 27, 1997
s\ A. Cadena
- --------------------------------
A. Cadena Director March 27, 1997
s\ H. Russel Lemcke
- --------------------------------
H. Russel Lemcke Director March 27, 1997
</TABLE>
Page 55 of 61
<PAGE> 56
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
EXHIBITS
filed with
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
of
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
-----------------------------------
GRAHAM CORPORATION
================================================================================
Page 56 of 61
<PAGE> 57
GRAHAM CORPORATION
FORM 10-K
DECEMBER 31, 1996
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT PAGE NUMBER
- ------ ----------------------- -----------
<S> <C> <C>
11 Statement Regarding Computation
of Per-Share Earnings 58
21 Subsidiaries of the Registrant 59
23 Consent of Deloitte & Touche LLP 60
27 Financial Data Schedule 61
</TABLE>
Page 57 of 61
<PAGE> 1
EXHIBIT 11
GRAHAM CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Calculation of common and common equivalent shares:
Shares outstanding at beginning
of the year 1,580,283 1,577,196 1,569,153
Weighted average number of shares issued during the year:
Issuance of shares 681 6,435
Exercise of stock options 4,194 638
---------- ---------- -----------
Weighted average shares outstanding 1,584,477 1,578,515 1,575,588
Common equivalent shares if stock
options were exercised 23,742 944
---------- ---------- -----------
Average number of common and common
equivalent shares outstanding 1,608,219 1,579,459 1,575,588
========== =========== ===========
Calculation of earnings per share:
Net income (loss) $3,061,000 $1,134,000 $(8,415,000)
Average number of common and common
equivalent shares outstanding 1,608,219 1,579,459 1,575,588
---------- ---------- -----------
Earnings (loss) per common and common
equivalent share $1.90 $.72 $(5.34)
========== ========== ===========
</TABLE>
Fully diluted earnings per share is equivalent to primary earnings per
share as the year-end market price of common stock does not result in greater
dilution.
Page 58 of 61
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT IN 1996
--------------------------------------
United States
- -------------
Graham Manufacturing Co., Inc.
20 Florence Avenue
Batavia, New York 14020
United Kingdom
- --------------
Graham Vacuum and Heat Transfer Limited
The Forge
Congleton, Cheshire SW12 4HQ, England
Graham Precision Pumps Limited
The Forge
Congleton, Cheshire SW12 4HQ, England
Page 59 of 61
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Graham Corporation
We consent to the incorporation by reference in Registration Statement No.'s
2-83432, 2-82275, 33-82432, 333-00401 and Post- Effective Amendment No. 1 to
Registration Statement No. 33-82432 of Graham Corporation and subsidiaries on
Forms S-3 and S-8 of our reports dated February 24, 1997, appearing in this
Annual Report on Form 10-K of Graham Corporation and subsidiaries for the year
ended December 31, 1996.
Deloitte & Touche LLP
Rochester, New York
March 26, 1997
Page 60 of 61
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GRAHAM
CORPORATION CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,263
<SECURITIES> 745
<RECEIVABLES> 9,235
<ALLOWANCES> 40
<INVENTORY> 6,343
<CURRENT-ASSETS> 18,936
<PP&E> 24,866
<DEPRECIATION> 15,294
<TOTAL-ASSETS> 30,434
<CURRENT-LIABILITIES> 10,757
<BONDS> 1,442
<COMMON> 159
0
0
<OTHER-SE> 11,696
<TOTAL-LIABILITY-AND-EQUITY> 30,434
<SALES> 51,394
<TOTAL-REVENUES> 51,394
<CGS> 35,993
<TOTAL-COSTS> 35,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 26
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<INCOME-TAX> 863
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<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
</TABLE>
