<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from November 1, 1998 to December 31, 1998
Commission File number 1-5985
NEWCOR, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 38-0865770
- ------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
1825 S. Woodward Ave., Suite 240
Bloomfield Hills, MI 48302 (248) 253-2400
- --------------------------------------- -------------------------------
(Address of principal executive office) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 8, 1999, the Registrant has 4,942,034 outstanding shares of
common stock, $1.00 par value, the Registrant's only class of common stock.
<PAGE> 2
PART I. FINANCIAL INFORMATION
NEWCOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Two Months Ended
----------------------
12/31/98 12/31/97
-------- --------
<S> <C> <C>
Sales $36,895 $17,828
Cost of sales 30,685 15,751
------- -------
Gross margin 6,210 2,077
Selling, general and administrative expenses 4,143 2,739
Amortization expense 763 154
------- -------
Operating income (loss) 1,304 (816)
Other income (expense):
Interest expense (2,342) (436)
Other, net 37 (90)
------- -------
Loss before income taxes (1,001) (1,342)
Provision (benefit) for income taxes (340) (484)
------- -------
Net loss $ (661) $ (858)
======= =======
Net loss per share of common
stock - basic and diluted $ (0.13) $ (0.17)
Weighted average common shares outstanding 4,942 4,942
</TABLE>
The accompanying notes are an integral part of
the condensed consolidated financial statements
<PAGE> 3
NEWCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
12/31/98 10/31/98
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,368 $ 3,539
Accounts receivable 29,364 35,175
Inventories 16,239 14,014
Other current assets 7,395 9,454
-------- --------
Total current assets 58,366 62,182
Property, plant and equipment, net of
accumulated depreciation of $20,345
at 12/31/98 and $19,288 at 10/31/98 53,866 53,837
Cost in excess of assigned value of
acquired companies, net of amortization 85,098 85,861
Debt issuance costs and other non-current assets 10,408 10,657
-------- --------
Total assets $207,738 $212,537
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,000 $ 2,000
Accounts payable 16,590 21,072
Other accrued liabilities 11,399 10,068
-------- --------
Total current liabilities 29,989 33,140
Long-term debt 140,533 141,467
Other non-current liabilities 12,348 12,401
-------- --------
Total liabilities 182,870 187,008
-------- --------
Shareholders' equity:
Common stock 4,942 4,942
Capital in excess of par 2,258 2,258
Accumulated other comprehensive income (580) (580)
Retained earnings 18,248 18,909
-------- --------
Total shareholders' equity 24,868 25,529
-------- --------
Total liabilities & shareholders' equity $207,738 $212,537
======== ========
</TABLE>
The accompanying notes are an integral part of
the condensed consolidated financial statements
<PAGE> 4
NEWCOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Two Months Ended
----------------
12/31/98 12/31/97
-------- --------
<S> <C> <C>
Operating Activities:
Net loss $ (661) $ (858)
Depreciation 1,114 591
Amortization 763 154
Other, net 189 89
Changes in operating assets
and liabilities, net 3,110 (153)
-------- --------
Net cash provided by (used in) operations 4,515 (177)
-------- --------
Investing Activities:
Capital expenditures (2,429) (660)
Proceeds from sale of capital assets 677
Acquisitions, net of cash acquired (13,070)
-------- --------
Net cash used in investing activities (1,752) (13,730)
-------- --------
Financing Activities:
Net (repayments) borrowings on revolving credit line (600) 17,300
Repayment of term note (334)
-------- --------
Net cash (used in) provided by financing activities (934) 17,300
-------- --------
Increase in cash 1,829 3,393
Cash and cash equivalents, beginning of period 3,539 34
-------- --------
Cash and cash equivalents, end of period $ 5,368 $ 3,427
======== ========
</TABLE>
The accompanying notes are an integral part of
the condensed consolidated financial statements
<PAGE> 5
NEWCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. On December 21, 1998, the Company filed a current report on
Form 8-K announcing that the Board of Directors approved
changing the Company's annual reporting period from a fiscal
year ending October 31 to a calendar year ending December 31.
This Report on Form 10-Q reports the two month transition
period for the period from November 1, 1998 to December 31,
1998.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been
included, and such adjustments are of a normal recurring
nature. Results for interim periods should not be considered
indicative of results for a full year. The year-end condensed
balance sheet data was derived from audited financial
statements, but does not include all disclosures required by
generally accepted accounting principles. For further
information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report
on Form 10-K for the year ended October 31, 1998.
Note 2. On March 4, 1998, the Company purchased the common stock of
Grand Machining Company, Deco Technologies, Inc. and Deco
International, Inc. (collectively, "Deco") for approximately
$55.0 million in cash. Deco manufactures high volume,
precision machined components and assemblies for the medium
and heavy duty truck and automotive industries. Deco's
products include rocker arm components and assemblies,
transmission shafts, axle shafts and thrust plates. The
Company made a $5.0 million deposit to the Deco shareholders
in December 1997. The balance of the purchase price was paid
in March 1998, with the proceeds from the Company's issuance
of $125 million of 9.875% Senior Subordinated Notes due 2008
(the "Notes") as described in Note 3. The acquisition was
recorded using the purchase method of accounting. The cost in
excess of net assets acquired of approximately $40 million is
being amortized on a straight-line basis over twenty years.
On March 4, 1998, the Company purchased the stock of
Turn-Matic, Inc. ("Turn-Matic") for approximately $17.0
million in cash. Contingent consideration of up to $3.5
million may be paid if profitability achieves certain levels
over the next five years. Turn-Matic manufactures high volume
precision machined components and assemblies for the
automotive industry. Turn-Matic's products include oil filter
adapters, main bearing caps and intake and exhaust manifolds.
The purchase was financed with the proceeds from the Notes.
The acquisition was recorded using the purchase method of
accounting. The cost in excess of net assets acquired of
approximately $9 million is being amortized on a straight-line
basis over twenty years. Any contingent purchase price
payments, if required, will be recognized as additional cost
in excess of the net assets acquired and amortized over the
remaining twenty years.
On December 23, 1997, the Company purchased the assets and
business of Machine Tool & Gear, Inc. ("MT&G") for
approximately $27.25 million plus the assumption of
approximately $5.8 million of debt, which was subsequently
retired. MT&G manufactures differential pinion and side gears,
output shafts and rear axle shafts for the automotive
industry. For this acquisition, the Company paid cash of $2.5
million in October 1997 and $3.1 million in December 1997 and
issued a promissory note for $21.65 million, paying interest
at 8%, for the balance of the purchase price which was
subsequently paid off on March 11, 1998 using the proceeds
from the Notes. The acquisition was recorded using the
purchase method of accounting. The cost in excess of net
assets acquired of approximately $24 million is being
amortized on a straight-line basis over twenty years.
The 1998 and 1997 unaudited pro-forma results of operations as
if Deco, Turn-Matic and MT&G had been acquired at the
beginning of fiscal 1997 would have been as follows:
<PAGE> 6
<TABLE>
<CAPTION>
Two Months Ended
----------------
12/31/98 12/31/97
-------- --------
<S> <C> <C>
Sales $36,900 $34,500
======= =======
Net income (loss) $ (700) $ (800)
======= =======
Net income (loss) per share - basic and diluted $ (0.13) $ (0.16)
======= =======
</TABLE>
These pro-forma results do not purport to be indicative of the
results that would actually have occurred had the acquisitions
been made at the beginning of fiscal 1997 or which may occur
in the future.
Note 3. The Company completed the issuance of the Notes on March 4,
1998 as described in Note 2. Interest on the Notes is payable
semi-annually on March 1 and September 1 of each year. The
Notes will mature on March 1, 2008. The Notes are unsecured
and will be redeemable, in whole or in part, at the option of
the Company, on or after March 1, 2003. Proceeds from the
Notes were used to finance the Deco and Turn-Matic
acquisitions, pay off the promissory note issued in connection
with the MT&G acquisition and pay down the Company's line of
credit facility.
In conjunction with the Notes offering, the Company's
revolving credit agreement was amended to allow the Company to
increase total availability to $50.0 million. The revolving
credit agreement is collateralized by substantially all of the
Company's non-real estate assets and by Rochester Gear, Inc.
real estate. The current expiration date for the revolving
credit agreement is February 28, 2001.
The revolving credit agreement, the Company's $10 million term
note and the Notes require the Company to comply with certain
financial covenants including net worth, debt service coverage
and total debt. The Company was in compliance with these
covenants at December 31, 1998. In addition, the terms of the
Notes required the Company to suspend its cash dividend.
The Company's domestic subsidiaries; Plastronics, Rochester
Gear, Deco, and Turn-Matic, are full and unconditional
guarantors of obligations issued under the Notes. The
following summarized financial information is derived from the
consolidating financial statements of the Company for the
periods presented. No intercompany balances or transactions
occurred among the subsidiaries during the periods presented.
<TABLE>
<CAPTION>
12/31/98 10/31/98
-------- --------
<S> <C> <C>
Current assets $ 21,100 $ 24,700
======== ========
Total assets $103,500 $107,500
======== ========
Current liabilities $ 11,900 $ 15,300
======== ========
Long-term debt $ 6,100 $ 6,100
======== ========
<CAPTION>
Two Months Ended
----------------
12/31/98 12/31/97
-------- --------
Sales $ 21,800 $ 4,600
======== ========
Operating income (loss) $ 3,500 $ (300)
======== ========
</TABLE>
<PAGE> 7
Note 4. Inventories are summarized as follows:
<TABLE>
<CAPTION>
12/31/98 10/31/98
-------- --------
<S> <C> <C>
Cost and estimated earnings of uncompleted
contracts in excess of related billings of $866
at 12/31/98 and $1,679 at 10/31/98 $ 3,763 $ 3,244
Raw materials 3,468 4,903
Work in process and finished goods 9,008 5,867
------- -------
$16,239 $14,014
======= =======
</TABLE>
Costs and estimated earnings of uncompleted contracts in
excess of related billings represents revenue recognized under
the percentage of completion method in excess of amounts
billed.
Note 5. The Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," in 1998.
Other comprehensive income for the two months ended December
31, 1998 and 1997 was zero, as the only component of other
comprehensive income for these periods was the minimum pension
liability adjustment which is determined on an annual basis at
the end of each fiscal year.
Note 6. The Company manages and reports its operating activities under
three industry segments: Precision Machined Products, Rubber
and Plastic, and Special Machines. The Precision Machined
Products segment consists of automotive components and
agricultural equipment parts machined in dedicated
manufacturing cells. The Rubber and Plastic segment consists
of molded rubber and plastic parts primarily for the
automotive industry. The Special Machines segment consists of
standard individual machines, as well as custom designed
machines, all manufactured on a made-to-order basis. Other is
primarily composed of corporate activities. Comparability of
the information for the Precision Machined Products segment is
affected by the acquisitions described in Note 2.
The accounting policies of the segments are the same as those
of the Company. There are no intersegment sales and management
does not allocate all corporate expenses to the segments. The
Company evaluates the performance of its segments and
allocates resources to them based on operating income from
continuing operations. Information by operating segment is
summarized below:
<TABLE>
<CAPTION>
Precision
Machined Rubber and Special
Products Plastic Machines Other Consolidated
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers
Two months ended December 31,
1998 $ 27,434 $ 7,854 $ 1,607 $ 36,895
1997 7,948 7,946 1,934 17,828
Operating income (loss)
Two months ended December 31,
1998 $ 3,276 $ 18 $ (532) $ (695) $ 2,067
1997 463 (166) (284) (675) (662)
Identifiable assets
December 31, 1998 $140,251 $32,917 $ 9,452 $25,118 $207,738
October 31, 1998 143,977 34,313 10,492 23,755 212,537
</TABLE>
<PAGE> 8
A reconciliation of operating income for reportable segments to consolidated
operating income (loss) is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Operating income for reportable segments $2,762 $ 13
Other operating loss, mainly unallocated corporate
and other expenses (695) (675)
Amortization expense (763) (154)
------ -----
Consolidated operating income (loss) $1,304 $(816)
====== =====
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
On December 21, 1998, the Company filed a current report on Form 8-K announcing
that the Board of Directors approved changing the Company's annual reporting
period from a fiscal year ending October 31 to a calendar year ending December
31. This Management's Discussion and Analysis compares the two month transition
period ended December 31, 1998 to the two month period ended December 31, 1997.
Overview
Newcor, Inc. (the "Company") is organized into three business segments: the
Precision Machined Products segment, the Rubber and Plastic segment and the
Special Machines segment. The Precision Machined Products segment produces
transmission, powertrain and engine components and assemblies for the
automotive, medium and heavy duty truck, and agricultural vehicle industries.
The Rubber and Plastic segment produces cosmetic and functional seals and boots
and functional engine compartment products primarily for the automotive
industry. The Special Machines segment designs and manufactures welding,
assembly, forming, heat treating and testing machinery and equipment for the
automotive, appliance and other industries.
The Company's strategy to build the Precision Machined Products segment as a
high volume automotive supplier took a significant step forward as a result of
the following actions. On December 23, 1997, the Company purchased the assets
and business of Machine Tool & Gear, Inc. ("MT&G") for approximately $27.3
million, and assumed $5.8 million of debt, which was subsequently retired. MT&G
manufactures differential pinion and side gears, output shafts and rear axle
shafts for the automotive industry. On March 4, 1998 the Company purchased the
common stock of Grand Machining Company, Deco Technologies, Inc. and Deco
International, Inc. (collectively, "Deco") for approximately $55.0 million and
the common stock of Turn-Matic, Inc. ("Turn-Matic") for approximately $17.0
million. These transactions were financed concurrent with the issuance of $125
million of 9.875% Senior Subordinated Notes due 2008 (the "Notes"). Deco
manufactures high-volume, precision-machined engine and powertrain components
and assemblies for the medium and heavy truck and automotive industries, while
Turn-Matic manufactures high volume, precision machined engine components and
assemblies for the automotive industry. These companies have product lines and
capabilities that management believes will complement Newcor's existing
precision machining businesses.
<PAGE> 9
Results of Operations
The following tables summarize the principal factors causing the Company's
change in sales by segment, including the effect of acquisitions and change in
sales from existing operations, for the two month period ended December 31, 1998
compared with the same period one year ago.
<TABLE>
<CAPTION>
Precision
Machined Rubber and Special
(In thousands) Products Plastic Machines Total
-------- ---------- -------- -----
<S> <C> <C> <C> <C>
Two month period ended
December 31, 1997 sales $ 7,948 $7,946 $1,934 $17,828
Acquisitions 21,160 -- -- 21,160
Change from existing business (1,674) (92) (327) (2,093)
------- ------ ------ -------
Two month period ended
December 31, 1998 sales $27,434 $7,854 $1,607 $36,895
======= ====== ====== =======
</TABLE>
Consolidated sales were $36.9 million for the two month transition period, an
increase of $19.1 million, or 107.3%, compared with sales of $17.8 million for
the two months ended December 31, 1997. Sales for the Precision Machined
Products segment increased $19.5 million, or 246.8%, to $27.4 million, sales for
the Rubber and Plastic segment decreased $0.1 million, or 1.2%, to $7.8 million,
and sales for the Special Machines segment decreased $0.3 million, or 16.9%, to
$1.6 million. The increase in sales for the Precision Machined Products segment
was due to sales from the recent acquisitions; MT&G, Deco and Turn-Matic,
referred to collectively as the "Acquisitions" which were partially offset by
lower sales of agricultural machined components. The Rubber and Plastic sales
were comparable to the sales for the same period one year ago. The Special
Machines segment sales for the transition period were lower due to insufficient
new orders to sustain the business that was achieved in the two month period
ended December 31, 1997.
Consolidated gross margin was $6.2 million, or 16.8% of sales, for the two month
period ended December 31, 1998 compared with $2.1 million, or 11.7% of sales,
for the same period of 1997. The gross margin increase of $4.1 million was due
to $4.6 million of gross margin from the Acquisitions, which was partially
offset by lower gross margin resulting from the low level of activity in the
Company's agricultural market served.
Selling, general and administrative expenses (SG&A) increased to $4.1 million,
or 11.2% of sales, for the two month period ended December 31, 1998 from $2.7
million, or 15.4% of sales, for the two month period ended December 31, 1997.
The increase in SG&A was primarily due to the Acquisitions, which added SG&A of
approximately $1.7 million in 1998.
Amortization expense increased to $0.8 million in the two month period ended
December 31, 1998 from $0.2 million in the same period of 1997 due to the
Acquisitions.
Operating income (loss) by segment was as follows (in thousands):
<TABLE>
<CAPTION>
Two Months Ended
------------------------
12/31/98 12/31/97
-------- --------
<S> <C> <C>
Precision Machined Products $3,276 $ 463
Rubber and Plastic 18 (166)
Special Machines (532) (284)
Corporate (695) (675)
Amortization expense (763) (154)
------ -----
Total operating income (loss) $1,304 $(816)
====== =====
</TABLE>
<PAGE> 10
Consolidated operating income for the two month period ended December 31, 1998
was $1.3 million, or 3.5% of sales, compared with an operating loss of $0.8
million for the same period one year ago. The increase in operating income was
due primarily to the Acquisitions, which contributed approximately $2.5 million
of operating income in the two month period ended December 31, 1998.
Operating income for the Precision Machined Products segment increased $2.8
million to $3.3 million in the two month period ended December 31, 1998 from
$0.5 million in the same period of 1997. Operating margin increased to 11.9% of
segment sales in 1998 from 5.8% of segment sales in 1997. The increase in
operating income and operating margin was primarily due to the Acquisitions.
Operating income and operating margins at existing divisions within this segment
were down when compared with 1997 primarily due to the effect of lower sales
caused by customer schedule reductions in particular for the Company's
agricultural industry machined components.
Operating income for the Rubber and Plastic segment increased $0.2 million to
zero in the two month period ended December 31, 1998 from an operating loss of
$0.2 million in the 1997 period. The increase in operating income was primarily
due to improvements in operational inefficiencies experienced in the 1997 period
that were mainly the result of high labor turnover caused by full employment in
local economies.
Operating loss for the Special Machines segment increased $0.2 million to $0.5
million in the two month period ended December 31, 1998 from a loss of $0.3
million in the same period of 1997. Operating margin decreased to (33.1%) of
segment sales in the 1998 period from (14.7%) in the 1997 period. The decrease
in operating income and operating margin was primarily due to the stage of
contracts in progress within the segment.
Interest expense increased $1.9 million to $2.3 million in the two month period
ended December 31, 1998 from $0.4 million in the two month period ended December
31, 1997. The increase in interest expense was due to additional debt related to
the issuance of the Notes which was incurred to finance the Acquisitions.
Interest expense for the 1998 period included approximately $0.1 million of
amortization of debt issuance costs.
On balance, the Company's sales outlook for 1999 remains good because the
Company's automotive and heavy and medium duty truck customers are forecasting
their sales to be comparable or slightly positive compared with 1998, and the
Company's Special Machines segment backlog was $9.6 million as of December 31,
1998, up $2.5 million compared with December 31, 1997. The Company's
agricultural machined component sales will continue to be down for the first
half of 1999 compared with 1998 due to the downturn in the agricultural market
which began in the summer of 1998.
Liquidity and Capital Resources
Cash outflows during the two month period, which were primarily used to fund
capital expenditures of approximately $2.4 million and $0.9 million to pay down
the Company's bank revolving credit facility and term loan, were financed by
$4.5 million of cash provided by operations and $0.7 million from the sale of
property.
Effective January 15, 1998 the Company's revolving credit facility was amended
and restated to become the Senior Credit Facility and was increased to provide
total revolving credit availability of $50.0 million concurrent with completion
of the issuance of the Notes on March 4, 1998. Availability of funds under the
Senior Credit Facility is subject to satisfaction of certain financial ratios
and other conditions. At December 31, 1998 the Company had $2.6 million
outstanding under its Senior Credit Facility. The Senior Credit Facility
covenant related to the ratio of funded debt to earnings before interest, taxes,
depreciation, and amortization would have limited the borrowing availability to
$24.1 million at December 31, 1998. The Senior Credit Facility is collateralized
by substantially all of the Company's non-real estate assets and by Rochester
Gear, Inc.'s real estate. The current expiration of the Senior Credit Facility
is February 28, 2001.
The Company is highly leveraged as a result of the Notes. The Company's ability
to make scheduled payments of principal of, or to pay the interest on, or to
refinance, its indebtedness (including the Notes) or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control.
The Company believes that, through a combination of cash flow from operations
and available credit under the Senior Credit Facility it will have adequate cash
available to service debt obligations, continue capital improvements and
maintain adequate working capital.
<PAGE> 11
No dividends were declared or paid during the two months ended December 31, 1998
and 1997. The terms of the Notes required the suspension of cash dividends.
Other Financial Data/Information
On a pro-forma basis as if Newcor had completed the acquisitions of Deco and
Turn-Matic at January 1, 1998, Newcor's sales, operating income, interest
expense, depreciation, amortization, and capital expenditures for the two and
twelve months ended December 31, 1998 would have been as follows:
<TABLE>
<CAPTION>
Period Ended December 31, 1998
Two Months Twelve Months
---------- -------------
<S> <C> <C>
Sales $36,900 $244,000
Operating income 1,300 13,500
Interest expense 2,300 14,700
Depreciation 1,100 6,700
Amortization 800 4,600
Capital expenditures 2,400 10,800
</TABLE>
Year 2000
The year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's systems or equipment that have date-sensitive software using only two
digits may recognize a date using "00" as the year 1900 rather than the year
2000. The resulting system failures or miscalculations may cause disruption of
operations, including the temporary inability to process transactions or send
and receive electronic data with third parties or engage in similar normal
business activities.
The Company began to address the Y2K issue in 1997 by identifying all systems
and equipment that could be affected by the Y2K issue. This process is
substantially complete. The Company is currently in the process of remediating
or replacing all identified non-compliant systems and equipment. For its
information technology, the Company is currently in the process of replacing old
non-compliant systems with a new Enterprise Resource Planning ("ERP") computer
system that is Y2K compliant. Capitalized costs related to the system
implementation, which were incurred in the last two fiscal years, approximated
$1.8 million as of December 31, 1998. Management currently estimates that
implementation of the new ERP system is approximately 25% complete, with
approximately 50% of the expected costs incurred for the project. Projected
completion of the new ERP system at locations that use non-compliant systems is
the second half of 1999. Costs incurred for remediation of non-information
technology systems and equipment, including production equipment, telephones,
security and electrical, are not expected to be material. Many of these systems
are currently Y2K compliant. The Company's Y2K efforts are funded through
operating cash flow.
In 1997 the Company began communicating with its significant suppliers and large
customers to determine the extent to which the Company is vulnerable to such
parties' failure to remediate their own Y2K issues. Management continues to
evaluate the responses received and their remediation plans. The Company's
evaluation of these remediation plans and its assessment of the risk that any
issues identified could have a material adverse impact on the Company could have
a significant impact on its development of a contingency plan.
Although a failure on the part of the Company's significant suppliers or large
customers to effectively remediate their Y2K issues in a timely manner may
affect Company operations, management does not believe that any material
exposure to significant business interruption exists as a result of Y2K
compliance issues. Therefore, the Company has not adopted any formal contingency
plan. While management believes that the estimated cost of becoming Y2K
compliant is not significant to the Company's financial results, failure to
complete all the work in a timely manner could result in material financial
risk. While management expects all planned work to be completed, there can be no
guarantee that all systems will be in compliance by the year 2000, that the
systems of the Company's significant suppliers and large customers will be
converted in a timely manner, or that contingency planning will be able to fully
address all potential interruptions. Therefore, Y2K issues could cause delays in
the Company's ability to produce or ship its products, process transactions, or
otherwise conduct its business.
<PAGE> 12
Cautionary Statements Under the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Statements contained in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and, in particular, the information
in the second paragraph under "Overview" concerning the expected impact of the
Acquisitions, the last paragraph under "Results of Operations" concerning the
Company's performance for the remainder of fiscal 1998 and the paragraph
concerning year 2000 conversion constitute "forward-looking statements" within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. A number of factors could cause actual results to differ materially from
those included in or suggested by such forward-looking statements, including
without limitation: the cyclical nature of the industries served by the Company,
all of which have encountered significant downturns in the past; the level of
production by and demand from the Company's principal customers, upon which the
Company is substantially dependent, including the three major domestic
automobile manufacturers, American Axle, Inc., Deere & Company and Detroit
Diesel, Inc.; whether, when and to what extent expected orders materialize; the
impact on the Company of actions by its competitors, some of which are
significantly larger and have greater financial and other resources than the
Company; and the extent to which the Company's new ERP computer system performs
as anticipated and the accuracy of the information supplied by the Company's
suppliers and customers concerning their year 2000 readiness. All
forward-looking statements in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section are qualified by such
factors. The Company disclaims any obligation to update any such forward-looking
statements.
NEWCOR, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 10 - Employment Agreement with Keith Hale dated
November 9, 1998 and signed February 5, 1999
(management contract or compensatory plan or
arrangement).
Exhibit 27 - Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on December 21, 1998
discussing the change in the Company's reporting period from
a fiscal year ending October 31 to a calendar year ending
December 31.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWCOR, INC.
----------------------------
Registrant
Date: February 11, 1999 /s/ John Garber
----------------- ----------------------------
John Garber
Vice President-Finance
Principal Financial and
Accounting Officer
<PAGE> 13
EXHIBIT INDEX
10 Employment Agreement with Keith Hale dated November 9, 1998 and signed
February 5, 1999.
27 Financial Data Schedule (EDGAR version only).
<PAGE> 1
EXHIBIT 10
EMPLOYMENT AGREEMENT
This Agreement, dated as of the 9th day of November, 1998, by and among NEWCOR,
INC., a Delaware corporation (the "Company"), and KEITH HALE ("Employee")
W I T N E S S E T H:
WHEREAS, the Company desires to engage the services of Employee, and Employee is
willing to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual undertakings set
forth herein the parties hereto agree as follows:
1. Employment and Duties; Board Appointment. In accordance with
actions taken and authorized by the Board of Directors of the
Company (the "Company Board"), effective upon the arrival of
Employee at the principal offices of the Company on November 9,
1998 prepared to commence his duties hereunder, Employee shall
become employed and appointed as the President and Chief Executive
Officer of the Company and shall have the duties and
responsibilities commensurate with such titles and offices,
including, without limitation, all such duties and
responsibilities as now are or hereafter may be set forth with
respect to such offices in the by-laws of the Company. The Board
has also taken the appropriate action to appoint Employee as a
director of the Company effective November 9, 1998. The Employee
shall continue to serve as a director as long as elected by the
shareholders of the Company, except that upon termination for any
reason of the Employee and upon request by the Board, Employee
agrees to resign as a director. During the period of his
employment hereunder, Employee also shall serve as an officer of
such other affiliates of the Company and in such other capacities
as he may be reasonably requested by the Company Board and shall
assume such additional duties and responsibilities as from time to
time may be reasonably assigned to him by the Company Board, all
without additional compensation therefor. Throughout the period of
his employment hereunder, Employee shall devote his business time,
attention, and energy on a full-time basis (subject to up to four
weeks of vacation to be taken at reasonable intervals during the
year) exclusively to the affairs of the Company and its
affiliates.
2. Term of Employment. The employment of Employee hereunder shall
become effective on November 9, 1998 and shall continue unless
terminated as hereinafter provided in Section 10 of this
Agreement.
<PAGE> 2
3. Cash Compensation. As full cash compensation for all services to
be performed by Employee hereunder, the Company shall pay to
Employee the following:
(a) salary at the rate of $275,000 per year (to be reviewed
annually by the Company Board), payable at the intervals at which
other executive officers of the Company are paid;
(b) eligibility for an additional incentive bonus (if earned) of
up to 100% base pay. Such bonus shall be payable after the fiscal
year-end in accordance with Company policy in an amount determined
based on performance criteria to be developed by the Compensation
Committee of the Board.
4. Certain Fringe Benefits. During the period of his employment
hereunder, the Company will:
(a) provide Employee with the use of a new American-made
automobile of Employee's choice (and replace such automobile every
two years or 50,000 miles, whichever first occurs), maintained,
insured, and equipped at the Company's expense (subject to a
$50.00 per month charge to Employee for personal use of the
automobile)
(b) subject to Employee's insurability, provide a minimum of
$800,000 of term life insurance benefits on the Employee's life.
5. Other Employee Benefits. During the period of his employment
hereunder, Employee also shall be entitled to participate in such
Company employee benefit plans as from time to time are
maintained, sponsored, or made available by the Company to its
employees or its executive employees generally (including but not
limited to the Company's pension plan, 401(k) plan, and medical
plan), in each case on the same terms and subject to the same
conditions and limitations generally applicable to other executive
officers of the Company with respect to participation therein.
6. Certain Expenses. The Company shall pay or reimburse Employee for
the reasonable travel, entertainment and other incidental expenses
(including the cost of business publications and professional
associations) incurred on business of the Company with the
approval of the Chairman of the Company, and in accordance with
the Company's practices as in effect during the term of this
Agreement as applied to executive officers.
7. Stock Options. As evidenced by that certain Stock Option Agreement
to between Employee and the Company (the "Option Agreement"),
Employee shall be granted under the Company's 1996 Employee
Incentive Stock Plan so-called non-qualified stock options to
purchase an aggregate of 50,000 shares of the common stock of the
Company (which options shall vest with respect to 12,500 shares
per year commencing one year from the date of the Option
Agreement) on the terms and subject to the conditions specified in
the Option Agreement, including a condition that
<PAGE> 3
Employee commence employment hereunder by November 9, 1998. An
additional option of 50,000 shares of Newcor, Inc. common stock
shall be granted following the conclusion of calendar year 1999
predicated upon the average of the bid and the asked price of
Newcor common stock traded on NASDAQ during the last five business
days of 1999 being a minimum of $6.00 per share.
8. Other Insurance. The Company shall have the right to purchase
disability and group life insurance policies (in addition to the
policy referred to in Section 4 above) on Employee whenever during
the period of his employment hereunder the Company deems it
reasonable to acquire such insurance. Employee agrees to cooperate
in the acquisition of such insurance and to perform all acts
necessary and proper in connection therewith, including submission
to such medical examinations as may be required. Any policy owned
by the Company may be dealt with in such manner as the Company
deems appropriate.
9. Certain Continuing Obligations of Employee. Throughout the period
of his employment hereunder and for a two (2) year period
thereafter, Employee agrees to keep confidential all trade
secrets, customer lists, business strategies, financial and
marketing information, and other data concerning the private
affairs of the Company or any of its affiliates made known to or
developed by Employee during the course of his employment
hereunder ("Confidential Information"), not to use any
Confidential Information or supply Confidential Information to
others other than in furtherance of the Company's business, and to
return to the Company upon termination of his employment all
copies, in whatever form, of all Confidential Information and all
other documents relating to the business of the Company or any of
its affiliates which may then be in the possession or under the
control of Employee. The obligation hereunder of Employee to
retain in confidence Confidential Information shall not apply to
information (i) which at the time of disclosure or subsequent
thereto becomes part of the public domain without action or fault
of the Employee, (ii) which is previously known to the Employee
from sources other than the Company, (iii) which is provided by
the Company to third parties without restriction, or (iv) which is
subject to disclosure pursuant to compulsory legal process.
Employee acknowledges and agrees that any intellectual property of
any sort developed or invented by Employee while employed by the
Company (whether or not during work hours) shall be and remain the
sole and exclusive property of the Company, and Employee shall
have no interest therein.
Employee further agrees that, during the period of his employment
hereunder and for a two year period thereafter, he will make no
attempt whatsoever to induce or encourage any other employee of
the Company or any of its affiliates
<PAGE> 4
to leave such employment for employment with any other entity
engaged in any line of business competitive with the Company or
any of its affiliates.
At the request of the Company Board, whether or not made during
the period of his employment hereunder, Employee agrees to execute
such confidentiality agreements, assignments of intellectual
property rights, and other documents as hereafter may be
reasonably determined by the Company Board to be appropriate to
carry out the purposes of this Section.
10. Termination of Employment; Effect.
(a) Employee's employment hereunder will be terminated in any of
the following ways:
(i) Immediately upon the death of the Employee;
(ii) Immediately upon the Employee becoming permanently
disabled within the meaning of the Company's long term disability
policy as then in effect;
(iii) By the Employee providing 30 days' prior written
notice to the Company of his desire to terminate the contract,
effective as of the date specified in such notice;
(iv) By the Company, without or with Cause (as hereinafter
defined), providing 30 days' prior written notice to the Employee,
effective as of the date specified in such notice.
(b) Upon the termination of Employee's employment in any of the
ways provided in subsection (a), then this Agreement and all rights and
obligations of Employee and the Company hereunder (as opposed to rights and
obligations under the Option Agreement and under any Company employee benefit
plan in which Employee participated) shall terminate and cease immediately,
except for (i) Employee's rights to the payments provided in Section 11 below;
and (ii) the rights and obligations set forth in Section 9 above and Section 14
below.
11. Payments on Termination. Employee shall be entitled to the
following payments and benefits upon termination of his
Employment:
(a) If Employee's employment is terminated under Section 10(a)(i)
above, or if Employee's employment is terminated by Employee under Section
10(a)(iii) above, or if Employee's employment is terminated for Cause by the
Company under Section 10(a)(iv) above, then the cash compensation under Section
3(a) above, and the benefits to which Employee is entitled under Sections 4 and
5 above, shall cease on the date of termination of employment.
(b) If Employee's employment is terminated under Section 10(a)(ii)
above, or by the Company without Cause under Section 10(a)(iv) above, Employee
shall be entitled to the cash compensation payable under Section 3(a) above,
<PAGE> 5
continuation of the benefits referred to in Sections 4(a) and 5 above
(subject to the provisions below regarding the Company medical plan),
and continuation of the life insurance benefits referred to in Section
4(b) above, for a period of one year following the effectiveness of
such termination of employment; and provided, further, that the
benefits provided under Section 4(a) above shall continue for the
period determined as aforesaid but not after Employee shall be
effectively provided with substantially equivalent such benefits by
another employer. In the event termination of employment occurs under
Section 10(a)(ii) above, the payments made by the Company as aforesaid
shall be reduced by any payments made to Employee under the Company's
long-term disability policy. In addition, Employee shall be entitled to
receive any bonus earned by Employee under Section 3(b) above through
the date of termination of employment payable at such time as any like
bonuses are paid by the Company generally, and outplacement services
(including an office) with a firm designated by the Employee and
approved by the Company for a period not to exceed twelve months, and
Company medical plan benefits as contemplated in Section 5, above, for
a period not to exceed twenty-four months.
12. Definition. For purposes of this Agreement, "Cause" means any of
the following:
(a) Material breach of any of the terms of this Agreement or of
the Company's policies and procedures applicable to employees and/or
directors;
(b) Conviction of or plea of guilty or nolo contendere to a crime
involving moral turpitude or involving any violation of securities or
commodities law or regulation, or the issuance of any court or
administrative order enjoining or prohibiting Employee from violating
any such law or regulation;
(c) Repeated or habitual intoxication with alcohol or drugs while
on the premises of the Company or any of its affiliates or during the
performance by Employee of any of his duties hereunder;
(d) Embezzlement of any property belonging or entrusted to the
Company or any of its affiliates;
(e) Repeated or protracted absence from work without cause;
(f) Willful misconduct or gross neglect of duties, or failure to
act with respect to duties or actions previously communicated to
Employee in writing by the Company Board;
13. Integration; Amendment. This Agreement and the Option Agreement
contain the entire agreement of the parties relating to the
subject matter hereof and thereof, and together supersede and
replace in their entirety any prior agreements or understandings
concerning such subject matter. This Agreement may not be waived,
changed, modified, extended, or discharged orally, but only by
agreement in writing signed in the case of the Company by a duly
authorized non-employee member of the Company Board.
<PAGE> 6
14. Arbitration. Any controversy, dispute, or claim arising out of or
relating to Employee's employment or to this Agreement or breach
thereof shall be settled by arbitration in accordance with the
commercial rules of the American Arbitration Association at its
Southfield, Michigan offices. Judgment upon any award may be
entered in any circuit court or other court having jurisdiction
thereof, without notice to the opposite party or parties. Anything
contained herein to the contrary notwithstanding, this agreement
to arbitrate shall not be deemed to be a waiver of the Company's
right to secure equitable relief including injunction (whether as
part of or separate from the arbitration proceeding) if and when
otherwise appropriate.
15. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Michigan applicable to
contracts made and to be performed within such State.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
NEWCOR, INC.
By /s/ William A. Lawson
----------------------------------
Its Chairman of the Board
----------------------------
/s/ Keith Hale
----------------------------------
KEITH HALE
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