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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
Commission file number: 0-18198
DEVLIEG-BULLARD, INC.
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(Exact name of registrant as specified in its charter)
Delaware 62-1270573
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(State of incorporation) (I.R.S. Employer
Identification No.)
One Gorham Island, Westport, CT 06880
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-221-8201
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Securities registered pursuant to Section 12 (b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation 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 Park III of this Form 10-K or any amendment to
this Form 10-K.[ ]
At September 30, 1998, the aggregate market value of the voting stock held by
nonaffiliates was approximately $7,318,000. The market value calculation was
determined using the closing price of registrant's common stock on September 30,
1998, as reported on the NASDAQ National Market System, and assumes all shares
beneficially owned by executive officers and members of the Board of Directors
of the registrant are shares owned by "affiliates," a status which each of the
executive officers and directors individually disclaims.
DeVlieg-Bullard, Inc. had 12,334,900 shares of common stock outstanding at
September 30, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Documents from which portions are
Part of Form 10-K incorporated by reference
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<S> <C>
III Proxy Statement relating to the
Company's Annual Meeting of Stockholders
On January 20, 1999
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
DeVlieg-Bullard, Inc. (the "Company") was formed in 1986 and became a public
company in 1990. It is a diversified industrial concern specializing in
manufacturing, servicing, upgrading, automating and remanufacturing precision
engineered machine tools. The Company also manufactures sophisticated original
and replacement tooling products used in industrial machine tools. Considered
together, these businesses provide a diversified line of original equipment and
aftermarket machine tool services and products ranging from highly automated
machine tools to replacement parts. In addition, the Company produces high
quality stationary power tools for use in the woodworking and metalworking
industries.
The Company conducts its business through the Services Group, Machine Tool
Group, Tooling Systems Group and Industrial Group in facilities located in
California, Connecticut, Illinois, Michigan, Ohio, Pennsylvania, Tennessee,
China, the United Kingdom and Germany. For financial information on the
Company's business segments, see Note 16 of Notes to the Company Financial
Statements.
The Services Group provides repair and replacement parts and field service for
the DeVlieg, Bullard, Acme-Gridley, American Tool, Brown & Sharpe, Futurmill,
Mattison, New Britain Machine, Rockford and White-Sundstrand brand machine
tools. The Services Group conducts its operations at facilities located in
Rockford, Illinois and Madison Heights, Michigan.
The Machine Tool Group manufactures original equipment multiple spindle
automatic bar and chucking machines, tooling and attachments under the trade
names of Acme-Gridley and New Britain Machine. The Machine Tool Group also
provides rebuild, retrofit and remanufacturing services predominantly for the
DeVlieg, Bullard, Acme-Gridley, American Tool, Brown & Sharpe, Futurmill,
Mattison, New Britain Machine, Rockford and White-Sundstrand brand machine
tools. The Machine Tool Group conducts its operations at facilities located in
Huntington Beach, California; Cleveland and Twinsburg, Ohio; and Hanover,
Pennsylvania.
The Tooling Systems Group ("Tooling Systems") manufactures precision tool
holding devices, machine tool spindles, boring tools, workholding chucks and
electronic tool management systems used in manual and computer numerically
controlled ("CNC") machine tools. These products are marketed under the
Universal Engineering, DeVlieg-Microbore, Cushman Industries and Microset trade
names primarily to the automotive, original equipment manufacturers, aerospace,
construction and farm equipment industries, along with general manufacturing
and job shops. Tooling Systems conducts its operations at facilities in
Frankenmuth and Gladwin, Michigan; Lutterworth, England; and through a 50%
owned joint venture in Bielefeld, Germany.
The Industrial Group, consisting of the Company's Powermatic Division
("Powermatic"), produces high quality, stationary power tools, including table
saws, shapers, bandsaws, panel saws, drill presses, wood lathes, planers and
jointers for use in the woodworking and metalworking industries. Powermatic
conducts its operations in two facilities, both located in McMinnville,
Tennessee.
BUSINESS STRATEGY AND MARKET DEVELOPMENT
The Company's business strategy is to capitalize on the opportunities for
growth in its core businesses by increasing its penetration of existing markets
through acquisitions and expanding into new markets by introducing new products
and services.
SERVICES GROUP
As a primary provider of aftermarket services for a large installed base of
machine tools, the Company believes it has a strong competitive position in
providing replacement parts and field repair for the DeVlieg, Bullard,
Acme-Gridley, American Tool, Brown & Sharpe, Futurmill, Mattison, New Britain
Machine, Rockford and White-Sundstrand brand machine tools. However, the
installed base of these machine tools is expected to decrease
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gradually over time as older machine tools historically supported by the
Company are retired from service. The Services Group's business strategy
includes expanding to other machine tool brands, by acquiring other machine
tool companies and by introducing engineered productivity improvements which
prolong the life of installed base equipment.
On January 17, 1997, the Company purchased all of the assets of Mattison
Technologies, Inc., a Rockford, Illinois-based machine tool company. The
Mattison business adds to the Company's existing parts business. See Note 2 of
Notes to the Company Financial Statements.
On October 23, 1995, the Company purchased The National Acme Company, a leading
manufacturer of original equipment multiple spindle bar and chucking machines,
as well as a supplier of related aftermarket parts and service. See Note 2 of
Notes to the Company Financial Statements. The National Acme aftermarket parts
business strengthens the Services Group parts offerings by expanding to a new
brand of machine tool.
On November 30, 1994, the Company acquired H.B. Industries, Inc. which conducts
its business as Ed Smith Machinery Sales. The acquisition complements the
Company's existing line of Bullard products, parts and services and strengthens
the Services Group's position in the automotive market.
MACHINE TOOL GROUP
The Machine Tool Group's business strategy includes expanding to other machine
tool brands, by acquiring other machine tool companies and by introducing
engineered productivity improvements which prolong the life of installed base
of equipment. In addition, the Machine Tool Group is placing increased emphasis
on international markets and reducing the costs of its product offerings.
On October 23, 1995, the Company purchased The National Acme Company, a leading
manufacturer of original equipment multiple spindle bar and chucking machines,
as well as a supplier of related aftermarket parts and service. See Note 2 of
Notes to the Company Financial Statements. National Acme's reputation has been
based on building highly durable multiple spindle automatic bar and chucking
machines. This has resulted in a large installed base of machines around the
world, including machines built by three licensees spanning over 50 years. The
National Acme Machines business increased the Company's participation in the
multiple spindle machine market by adding to the existing New Britain Machine
manufacturing and the remanufacturing capabilities of the Company.
On January 23, 1995, the Company acquired substantially all of the assets of
Mideastern, Inc. which has been an important provider of field and
remanufacturing services and aftermarket replacement parts for New Britain
Machine automatic screw machines since it was founded in 1986. The acquisition
of Mideastern strengthened the Machine Tool Group's New Britain Machine parts
remanufacturing capability and added field service expertise to the services
provided to the New Britain Machine customer base.
TOOLING SYSTEMS GROUP
The primary strategy for the Tooling Systems Group is to expand its product
lines through continued emphasis on the acquisition of additional tooling and
cutting tool companies. Metalworking software development companies will also
be added to the list of acquisition candidates. Sales of Tooling Systems' core
products will be driven by providing superior customer service, including
product quality, delivery and application engineering, with intense focus on
higher margin "specials." Recent new product introductions have centered on
applications used in high speed machining processes, currently the fastest
growing application base in the metalworking industry.
On September 9, 1994, the Company acquired certain assets of Cushman
Industries, Inc., a manufacturer of work holding devices including manual
chucks, power chucks and special order work holding systems.
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INDUSTRIAL GROUP
Powermatic enjoys strong name recognition and a reputation for quality among
its customers. Powermatic expects to capitalize on these strengths by
continuing to extend its line of woodworking machinery intended for the light
industrial market and the home hobbyist.
OPERATING GROUPS
SERVICES GROUP
The Services Group provides aftermarket services, consisting of repair and
replacement parts, engineered retrofit kits and field service, predominantly
for the DeVlieg, Bullard, Acme-Gridley, American Tool, Brown & Sharpe,
Futurmill, Mattison, New Britain Machine, Rockford and White-Sundstrand brand
machine tools.
Parts are sold primarily through direct customer contact and the Services Group
employs a technically-oriented customer service group and technical support
personnel. Because of the age, variety and technical complexity of the machine
tool population, identification of replacement parts or repair solutions
requires technically qualified employees who are familiar with the products
served. Products are marketed to over 5,000 active customers, consisting of
aerospace and defense contractors, automotive and transportation equipment
manufacturers, farm equipment builders, plumbing supply companies, bearings
manufacturers, manufacturers of industrial equipment and precision tool and die
shops located throughout the United States and overseas. Approximately 60,000
parts are stocked for "off the shelf" shipment to customers. Approximately
1,000,000 total parts are available through the Services Group to service the
estimated 45,000 machines included in the Company's installed base.
The Services Group's warranty policy covers all of its aftermarket products and
services and generally provides a one year warranty on defects in materials and
workmanship for replacement parts.
MACHINE TOOL GROUP
The Machine Tool Group manufactures new machines and provides rebuild, retrofit
and remanufacturing services. These machines and services are sold through
direct customer contact and through distributors worldwide. The Machine Tool
Group manufactures high quality, original equipment multiple spindle automatic
bar and chucking machines under the Acme-Gridley and New Britain Machine trade
names. The selling prices for machines range from $100,000 to over $1.0
million. All machines are covered by a one-year warranty.
The Machine Tool Group also provides rebuild, retrofit and remanufacturing
services for numerous brands of machine tools, including DeVlieg, Bullard,
Acme-Gridley, American Tool, Brown & Sharpe, Futurmill, Mattison, New Britain
Machine, Rockford and White-Sundstrand brands. The remanufacture of a machine
tool, typically consisting of replacing worn parts and components, realigning
the machine, adding updated CNC capability and electrical and mechanical
enhancements, generally takes two to six months to complete. Once completed, a
remanufactured machine is a "like new," state-of-the-art machine costing
approximately 50% of the price of a new machine. The warranty policy on a
remanufactured machine covers all newly manufactured and remanufactured
products and generally provides a one-year parts and labor warranty.
TOOLING SYSTEMS GROUP
Tooling Systems manufactures precision tool holders, boring tools, electronic
tool management systems and work holding chucks for use in tooling a wide range
of metal cutting machine tools and machining centers, including manual,
multiple spindle and general purpose machines along with CNC machining centers,
with and without automatic tool changers, and all types of lathes. Tooling
Systems includes the product offerings of Universal Engineering,
DeVlieg-Microbore and Cushman Industries. These product names have been
continuously present in their markets for over 50 years.
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Tool Holders. The primary focus of Tooling Systems is on the design and
manufacture of precision engineered tool holders and accessories. The products
are used in metal cutting machine tools, including tooling for manual machines,
proprietary Kwik Switch tooling systems, tooling systems for high production
dial and transfer machines, and tooling for CNC machining centers. Tool holders
and accessories provide the link between the drive shaft and the cutting
surface of machine tools, and are required to hold tolerances of up to .0001 of
an inch. The selling prices for tool holders range from $50 to $800.
Boring Tools. Through its Microbore product line, Tooling Systems provides a
broad line of standard and custom designed adjustable cartridge-type boring
tools used to cut, drill or bore metal and other parts. The Microbore product
line of boring tools provides rigidity and allows for rapid dimensional changes
while maintaining precise tolerance levels. The selling prices for boring tools
range from $125 to $10,000.
Electronic Tool Management Systems. Tooling Systems also supplies electronic
tool management systems, consisting of optical preset machines, which utilize
photosensitive reading heads to determine the length and diameter of the tool
boring set. Employing custom designed software packages, these machines preset
tolerances and provide a range of data for tooling away from the machining
center, thereby assuring fast, accurate set-up and changeovers on CNC machining
centers. The selling prices for these products are from $15,000 and up.
Work Holding Systems. Through its Cushman product line, Tooling Systems
supplies Cushman chucks and work holding products to assist customers with
holding parts and tools. Chucks and work holding products range from manual and
power chucks, super spacers and jaws, as well as special designs and rebuild
services. The selling prices of chucks range from $500 to $50,000.
Products offered by Tooling Systems are sold to users of precision metal
cutting machine tools, including the automotive, aerospace, defense and
construction manufacturing industries. The automotive industry is Tooling
Systems' largest customer source, representing approximately 45% of Tooling
Systems' net sales in fiscal 1998. Tooling Systems provides its customers with
a range of catalog products as well as special engineered products. In this
regard, Tooling Systems employs six engineers to work directly with customer
design engineers and purchasing agents to provide solutions for unique tooling
applications.
Substantially all of Tooling Systems' product line is sold by approximately 950
nonexclusive distributors located throughout the United States. A direct sales
force assists the distributors and sells a portion of the product line directly
to original equipment manufacturers. Tooling Systems' direct sales force is
paid a salary plus commission.
Tooling Systems offers no express warranty with respect to its tool holders and
boring tools. With respect to its electronic tool management systems, Tooling
Systems' warranty policy provides a one-year warranty on parts and labor for
defects of workmanship or material.
The basic raw material employed in the manufacturing process used by Tooling
Systems is steel bar stock, which is available from a number of sources.
Tooling Systems is not dependent on any one supplier and has not experienced
difficulty in obtaining necessary raw materials.
INDUSTRIAL GROUP
POWERMATIC. Powermatic manufactures and markets a broad line of high quality,
stationary power tools, and related replacement parts and accessories, each
used primarily in the woodworking and metalworking industries. Powermatic
offers a line of stationary tools for both industrial use and for home
hobbyists (the "Artisan" line).
Industrial Product Line. The primary focus of Powermatic is on the design,
manufacture and distribution of high quality, manually operated stationary
woodworking power tools and repair parts, including table saws, shapers,
bandsaws, panel saws, drill presses, wood lathes, planers and jointers.
Powermatic's industrial product line is marketed primarily to manufacturers of
millwork items, cabinetry and furniture as well as educational and
institutional markets for use in industrial arts and vocational training.
Powermatic also produces a line of manually
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operated stationary metalworking machines and related replacement parts and
accessories. These products are marketed primarily to machine, maintenance and
tool and die shops.
During fiscal 1998, approximately 90% of the products comprising the industrial
line were designed and manufactured by Powermatic. The remaining industrial
products are manufactured to Powermatic's specifications by firms located in
Taiwan, Italy and the United States. The Company believes there are alternative
sources of supply for its industrial line products. The selling prices for
Powermatic's industrial line products range from $500 to $20,000.
Artisan Product Line. The Artisan product line was introduced in February 1989
with five high quality, stationary woodworking power tools primarily for the
light industrial market and the home hobbyist. Today, the Artisan product line
consists of 14 different woodworking products. These products are manufactured
by Taiwanese suppliers to Powermatic's specifications. The Company believes
there are alternative sources of supply for its Artisan product line. The
selling prices for Powermatic's Artisan line products range from $100 to
$1,200.
Powermatic's Industrial and Artisan product lines are sold through
approximately 600 nonexclusive distributors located throughout the United
States. Powermatic's district sales managers are paid a salary plus commission
and its manufacturing representatives are paid on a commission-only basis.
Powermatic's warranty policy covers all of its manufactured products and
generally provides a warranty on parts and labor of one year or 2,000 hours of
use, whichever occurs first.
SEASONALITY
The Company's business is subject to certain seasonal fluctuations in sales,
with a pattern of net sales being lower in the second fiscal quarter due to
plant closings during the holidays and in the summer months due to customer
shutdowns, vacations and less activity from the home hobbyist.
COMPETITION
SERVICES GROUP
The market for aftermarket products and services for the machine tools serviced
by the Company is competitive, with competition from numerous independent parts
and service suppliers with various sales and resource levels. Management
believes the Company has a competitive advantage with respect to the DeVlieg,
Bullard, Acme-Gridley, American Tool, Brown & Sharpe, Futurmill, Mattison, New
Britain Machine, Rockford and White-Sundstrand brand machine tools because the
Company owns an estimated 1,000,000 drawings and other documents and customer
lists related to such machine tools, and employs skilled personnel who have
been trained for and have experience with these products. As a result,
management believes the Services Group has a distinct advantage with respect to
providing services for these brands of machine tools.
Principal competitive factors for the Services Group's products and services
are customer service and technical support, delivery times, price and
proprietary technology.
MACHINE TOOL GROUP
National Acme, acquired in fiscal 1996, commercialized multiple spindle
automatic bar and chucking machines in 1896. Since that time, National Acme has
sold more multiple spindle automatics in the United States than any other
company. The market is competitive with competition coming from a number of
companies both domestically and internationally. The Company believes National
Acme's and New Britain Machine's competitive advantages are based on the
durability of its machines, the large installed base of machines and its
technical expertise. To complement its durability, National Acme has developed
a new high precision design with a unique carrier holding feature, which allows
customers to produce parts with substantially increased accuracy at faster
speeds. This acquisition complemented the New Britain multiple spindle product
line, which was acquired in 1990.
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The market for rebuild services for the machine tools serviced by the Company
is competitive, with competition from numerous independent rebuild suppliers
with various sales and resource levels. Management believes the Company has a
competitive advantage with respect to the DeVlieg, Bullard, Acme-Gridley,
American Tool, Brown & Sharpe, Futurmill, Mattison, New Britain Machine,
Rockford and White-Sundstrand brand machine tools because the Company owns an
estimated 1,000,000 drawings and other documents and customer lists related to
such machine tools, and employs skilled personnel who have been trained for and
have experience with these products. As a result, management believes the
Machine Tool Group has a distinct advantage with respect to providing services
for these brands of machine tools.
Principal competitive factors for the Machine Tool Group's products and
services are proprietary technology, customer service and technical support,
delivery and price.
TOOLING SYSTEMS GROUP
The market for Tooling Systems' product lines is highly competitive. There are
a number of companies that manufacture precision tool holding devices and other
products within Tooling Systems' product lines that have greater sales and
financial resources than the Company. However, management believes that Tooling
Systems is one of the largest domestic manufacturers whose primary focus is on
the design and manufacture of precision tool holding, boring, electronic tool
management systems and work holding products. Principal competitive factors for
precision tooling products are product quality, delivery, service and price.
INDUSTRIAL GROUP
The market for Powermatic products is also highly competitive, with substantial
competition from both domestic and foreign manufacturers, many of which have
significantly greater sales and financial resources than the Company. Principal
competitive factors for Powermatic's product lines include product quality,
delivery, service and price.
PATENTS AND TRADEMARKS
The Company possesses rights to over 200 domestic and foreign patents and
trademarks relating to its businesses. While the Company considers its patents
and trademarks important in the operation of its business, its business is not
dependent on any single patent or trademark or group of patents or trademarks.
The Company considers the following trademarks to be important to its business:
Acme-Gridley(R), American Tool(R), Artisan(R), Belsaw(R), Bullard(R),
Cushman(R), DeVlieg(R), Futurmill(R), Microbore(R), New Britain Machine(R),
Powermatic(R), Universal Engineering(R) and White-Sundstrand(R). The Company
licenses the White-Sundstrand(R) trademark from Sundstrand Corporation under an
agreement which will expire in 2008. The Company sublicenses the Belsaw(R)
trademark from C.B. Tool & Supply, Inc. under an agreement which will expire in
2001. The DeVlieg(R) and Microbore(R) trademarks are licensed from D.V.
Associates, L.P. pursuant to a license agreement, and the Company's rights
thereto are subject to its payment of certain license fees. The Company holds
an option to purchase such trademarks from D.V. Associates, L.P.
EMPLOYEES
As of July 31, 1998, the Company had approximately 810 employees, approximately
450 of who were hourly employees and 360 of who were salaried employees.
Approximately 120 hourly employees at the Tooling Systems Group in Frankenmuth,
Michigan are covered by a collective bargaining agreement expiring in May 2000.
Approximately 130 hourly employees at the Powermatic Division in McMinnville,
Tennessee are covered by a collective bargaining agreement expiring in June
2001. Approximately 120 employees at the Machine Tool Group's Cleveland, Ohio,
location are covered by a collective bargaining agreement expiring in October
2000.
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ENVIRONMENTAL MATTERS
The Company, and the industry in which it competes, are subject to
environmental laws and regulations concerning emissions to the air, discharges
to waterways, and the generation, handling, storage, transportation, treatment
and disposal of waste materials. These laws and regulations are constantly
evolving and the Company cannot predict accurately the effect they will have on
the Company in the future. It is the Company's policy to comply with all
applicable environmental, health and safety laws and regulations. In many
instances, the regulations have not been finalized. Even where regulations have
been adopted, they are subject to varying and conflicting interpretations and
implementation. In some cases, compliance can only be achieved by capital
expenditures. The Company cannot accurately predict what capital expenditures,
if any, may be required.
Management believes that all operations conducted by the Company are in
compliance with all applicable laws and regulations relating to environmental
matters.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Company:
<TABLE>
<CAPTION>
Name Age Position with Company
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<S> <C> <C>
William O. Thomas 57 President, Chief Executive Officer and Director
Thomas V. Gilboy 44 Vice President and Chief Financial Officer
</TABLE>
Officers are elected by the Board of Directors. There are no family
relationships among any officers.
The following is a brief summary of the business experience of the executive
officers of the Company:
William O. Thomas has been a Director of the Company since 1986, served as its
Chairman from 1986 to December 1989 and served as its Vice Chairman from
December 1989 until March 2, 1992. Effective March 2, 1992, Mr. Thomas was
elected President and Chief Executive Officer of the Company. Mr. Thomas is
currently a Director of Sanitas, Inc. He received his B.S. Degree from Purdue
University.
Thomas V. Gilboy was elected as Vice President and Chief Financial Officer of
the Company effective June 10, 1998. Prior to joining the Company, Mr. Gilboy
was Chief Financial Officer of PureTec Corporation from 1996 to 1998 and was
Chief Financial Officer of Troy Corporation from 1991 to 1996. Mr. Gilboy
received his MBA from Columbia University and his BS from Lehigh University.
ITEM 2. PROPERTIES
The Company, headquartered in Westport, Connecticut, conducts its operations at
facilities located in California, Connecticut, Illinois, Michigan, Ohio,
Pennsylvania, Tennessee, China, the United Kingdom and Germany (50% owned joint
venture). The Company currently operates one shift a day, five days a week with
workforce and workweek adjustments made as required. Management believes that
the Company's facilities are in good condition and provide adequate capacity to
meet the Company's needs for the foreseeable future.
The table on the next page sets forth certain information relating to the
Company's principal facilities:
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<TABLE>
<CAPTION>
Approx. Owned/Leased
Floor Area (Expiration
Location in Sq Ft. Principal Uses Date if Leased)
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<S> <C> <C> <C>
DEVLIEG-BULLARD, INC.
Westport, CT 5,300 Corporate headquarters Leased (2002)
Beijing, China 500 Sales office Leased (1998)
SERVICES GROUP:
Rockford, IL 90,000 Administrative offices; Leased (1999)
warehousing of repair parts
Madison Heights, MI 17,000 Warehousing of repair parts Leased (1999)
MACHINE TOOL GROUP:
Machines:
- ---------
Cleveland, OH 559,700 Administrative offices and Owned (held for sale)
manufacturing
Remanufacturing:
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Twinsburg, OH 50,000 Remanufacturing Leased (2002)
Abbottstown, PA 13,000 Administrative offices; Owned (held for sale)
remanufacturing; field service
support and sales
Hanover, PA 47,000 Administrative offices; Leased (2005)
manufacturing; rebuild;
field service support and sales
Huntington Beach, CA 7,400 Field service support and sales Leased (1998)
TOOLING SYSTEMS GROUP:
Frankenmuth, MI 100,000 Administrative offices; design Leased (2006)
and manufacture of tooling
products
Gladwin, MI 40,000 Manufacturing; shipping and Owned
assembly
Lutterworth, UK 8,500 Sales offices; warehousing of Leased (2007)
repair parts
INDUSTRIAL GROUP:
Powermatic:
- -----------
McMinnville, TN 217,200 Administrative offices and Leased (2006)
manufacturing
McMinnville, TN 59,800 Foundry; administrative Leased (2006)
offices and production
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation and proceedings, including product
liability claims, in the ordinary course of its business. The Company does not
believe that the outcome of such litigation will have a material adverse effect
upon the Company, after taking into account any proceeds of available
insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the NASDAQ Stock Market under the symbol
"DVLG." The following table sets forth the high and low sales prices for the
shares of common stock as reported in the NASDAQ National Market System for
each quarterly period of the last two fiscal years.
<TABLE>
<CAPTION>
High Low
---- ---
For Fiscal Year 1998
- --------------------
Quarter ended:
<S> <C> <C> <C>
July 31 $3.38 $1.69
April 30 3.69 2.19
January 31 4.38 3.19
October 31 5.13 3.50
For Fiscal Year 1997
- --------------------
Quarter ended: July 31 $3.81 $2.81
April 30 3.56 2.81
January 31 3.69 2.06
October 31 2.50 2.19
</TABLE>
The Company has not declared any cash dividends on the common stock since
inception. Declaration of dividends with respect to the common stock is at the
discretion of the Board of Directors. Any determination to pay dividends will
depend upon the financial condition, capital requirements, results of
operations and other factors deemed relevant by the Board of Directors. The
declaration of dividends is subject to certain restrictive covenants contained
in the Company's loan agreements. See Notes 7 and 8 of Notes to the Company
Financial Statements.
The Company had 120 holders of record (not including individual participants in
securities position listings) of its common stock as of September 30, 1998,
representing approximately 1,000 individual participants.
The transfer agent and registrar for the common stock is The First National
Bank of Boston.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected historical data presented for each of the five years in
the period ended July 31, 1998, and as of the end of each of the five years in
the period ended July 31, 1998, are derived from the Company Financial
Statements. The following data should be read in conjunction with "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8 - Financial Statements and Supplementary Data."
<TABLE>
<CAPTION>
DEVLIEG-BULLARD, INC.
(in thousands, except per share data)
1998(a) 1997(b) 1996(c) 1995(d) 1994
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Net sales $116,767 $130,611 $113,314 $78,150 $63,619
Gross profit 28,611 34,988 31,459 22,155 18,079
Special charges
Redundant facilities and other
exit costs 5,883 -- -- -- --
Litigation settlement -- -- 4,600 1,500 --
Operating (loss) income before
interest and taxes (3,422) 11,763 3,635 3,405 2,832
Net income (loss) (6,406) 3,898 (717) 1,393 1,579
Income (loss) per common share:
Basic (0.45) 0.28 (0.05) 0.11 0.13
Diluted (0.45) 0.26 (0.05) 0.11 0.13
Weighted average common shares
outstanding:
Basic 14,082 14,041 13,773 13,244 12,431
Diluted (e) 14,082 15,179 13,773 13,266 12,431
ASSETS AND CAPITAL:
Total current assets $ 72,137 $ 66,149 $ 61,509 $36,321 $33,462
Property, plant and equipment 10,473 12,657 13,306 6,876 6,340
Total assets 123,915 121,444 119,803 66,232 51,263
Revolving credit agreement 25,670 22,525 19,195 12,115 --
Total current liabilities 58,503 47,876 48,515 25,490 12,474
Long term debt 13,528 14,179 15,175 13,639 14,577
Total Liabilities 104,509 95,731 98,219 45,662 33,887
Stockholders' equity 19,406 25,713 21,584 20,570 17,376
</TABLE>
(a) Fiscal 1998 includes special charges for the write-down of facilities to
estimated fair market value, write off of goodwill and other costs. See
Note 17 of Notes to the Company Financial Statements.
(b) On January 17, 1997, the Company acquired all of the assets of Mattison
Technologies, Inc. This acquisition was accounted for as a purchase. See
Note 2 of Notes to the Company Financial Statements.
(c) On October 23, 1995, the Company acquired The National Acme Company. This
acquisition was accounted for as a purchase. See Note 2 of Notes to the
Company Financial Statements.
(d) On September 9, 1994, the Company acquired specified assets of Cushman
Industries, Inc. On November 30, 1994, the Company acquired H.B.
Industries, Inc. On January 23, 1995, the Company acquired substantially
all of the assets of Mideastern, Inc. These acquisitions were accounted
for as purchases.
(e) When a net loss is recorded, additional shares for stock options and
contingently issuable stock purchase warrants are not included because
their inclusion would be antidilutive.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summarized below is a discussion of the results of operations of the Company,
including its Services, Machine Tool, Tooling Systems and Industrial Groups.
Amounts are expressed in thousands, except per share data. The Company adopted
SFAS 131 during fiscal 1998 and in accordance with the provisions of SFAS 131
has restated prior year's segment results.
OVERVIEW OF RESULTS
Fiscal 1998 was a year of transition for the Company as it moved to outsource
parts for the aftermarket and new machines businesses. As part of the Company's
strategic effort to streamline its operations by eliminating redundancies and
improving efficiency, the Company recorded a special charge to provide for the
plan to dispose of a number of redundant facilities, accrue for related exit
costs and write off goodwill and other intangible assets. Primarily as a result
of these measures, the Company recorded a charge of $5,883, or $0.34 per share
after taxes. Of this amount, $5,633, or $0.33 after taxes, was recorded during
the fourth quarter. The decision to close two facilities, in Cleveland, Ohio
and Abbottstown, Pennsylvania, is the result of changing requirements of the
National Acme and Mideastern businesses that facilitated the need for either
expanded space or more up-to-date facilities. The Fremont, Ohio warehouse was
closed last year when the parts inventories were consolidated in the Company's
expanded Rockford, Illinois operation last year. See Note 17 of Notes to the
Company Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth selected items from the Statements of Operations
as a percentage of the Company's net sales for the periods indicated. The
discussion which follows should be read in conjunction with the Company
Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
Fiscal year ended July 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 75.5 73.2 72.2
Gross profit 24.5 26.8 27.8
E S G & A expenses 22.7 17.8 20.5
Special charge
Redundant facilities and other exit costs 5.0 -- --
Litigation settlement -- -- 4.1
Operating (loss) income (2.9) 9.0 3.2
Net income (5.5) 3.0 (0.6)
</TABLE>
CONSOLIDATED RESULTS
SALES
Net sales for fiscal 1998 were $116,767 compared to $130,611 for fiscal 1997, a
decrease of 13,844, or 10.6%. The decrease in net sales was due primarily to
lower sales of new and rebuilt machines in the Machine Tool Group, and, to a
lesser extent, reduced revenues from the aftermarket parts business of the
Services Group. As more fully discussed as part of the Machine Tool Group
business segments below, the decline in sales in fiscal 1998 was the result of
inadequate inventory levels to support the Company during a transition to
outsourcing a major portion of machine and/or aftermarket parts that had
previously been produced internally. The inadequate levels of inventory led to
disruptions in production and difficulties in meeting shipping schedules of
machines during fiscal 1998. Net sales of the Services Group were down 9.6% and
the Machine Tool Group was down 25.1%, while the Industrial Group increased 6.3%
and the Tooling Systems Group increased 1.6% (inclusive of intersegment sales).
Sales were $113,314 in fiscal 1996. Fiscal 1997 sales increased $17,297, or
15.3%, over fiscal 1996 results. This included the incremental sales of $3,219
from the acquisition of Mattison and reflects the inclusion of National Acme for
a full year in 1997 as compared to nine months in the prior year. Net sales in
fiscal 1997 for the Services Group increased 16.8% and the Machine Tool Group
increased 35.1% as compared to fiscal 1996, while the Tooling Systems Group and
the Industrial Group were basically the same as in fiscal 1996.
13
<PAGE> 14
GROSS PROFIT
Gross profit was $28,611 in fiscal 1998, compared with $34,988 in
fiscal 1997, a decrease of $6,377, or 18.2%. Gross profit for the Tooling
Systems Group increased 9.9% and the Industrial Group increased 5.4% over the
prior year, while the Services Group declined 8.8% and the Machine Tool Group
was substantially lower than the prior year as a result of the production and
shipping problems discussed below.
Gross profit was $31,459 in 1996. The increase from fiscal 1996 to fiscal 1997
was $3,529, or 11.2%, however, gross profit as a percent of sales decreased to
26.8% in fiscal 1997 from 27.8% in fiscal 1996. This reduction reflects
unfavorable product mix with lower margin machine sales after the National Acme
acquisition, as well as actions taken by the Company to reduce inventories
during fiscal 1997, which resulted in lower production levels, and the
associated lower overhead absorption negatively affected gross profit.
E S G & A EXPENSES
E S G & A expenses were $26,469 in fiscal 1998 compared with $23,237 in fiscal
1997. The increase in operating expenses is the result of an increase in
international sales efforts, costs related to upgrading computer systems and
the absence in this year's results of certain income items related to a fiscal
1993 divestiture. In addition, fiscal 1997 included a reversal of a reserve for
legal costs that had been established in fiscal 1996.
E S G & A expenses were $23,273 in fiscal 1996, which was basically even with
the fiscal 1997 results. Increases due to increased international sales efforts
were offset by the reversal of a legal reserve that had been established in
fiscal 1996 as a litigation settlement and reversed in fiscal 1997 as part of
E S G & A expenses.
SPECIAL CHARGES
As discussed more fully above and in Note 17 of Notes to the Company Financial
Statements, during fiscal 1998, the Company recorded a provision of $5,883 to
record the writedown of certain real estate to fair market value and to write
off intangible assets and other items related to the Cleveland operations.
There were no special charges related to litigation expenses during fiscal 1998
or 1997. The Company is not aware of any outstanding legal proceedings the
outcome of which, in management's opinion, would have a material adverse effect
on the Company's results of operations or financial condition. Litigation
expenses of $4,600 were recorded in fiscal 1996. Of these expenses, $2,200
($1,320 after taxes) related to an adverse judgement rendered in a breach of
contract suit. Following the filing of a Notice of Appeal in fiscal 1996, the
Company settled this suit for $1,500 during fiscal 1997. The balance of $2,400
($1,440 after taxes) was provided for settlement and legal costs incurred in
connection with a class action suit filed in 1992, which was settled in fiscal
1996.
OTHER INCOME
Other income was $319 in fiscal 1998, $12 in fiscal 1997 and $49 in fiscal
1996. Fiscal 1998 other income includes a $190 gain on the sale of excess
machinery and equipment.
INTEREST EXPENSE
Interest expense was $5,347 and $5,090 in fiscal 1998 and 1997, respectively.
The increase in interest expense was a result of additional debt incurred to
finance the acquisition of Mattison during the last half of fiscal 1997.
Interest expense was $4,404 in fiscal 1996. The increase in interest expense
from fiscal 1996 to fiscal 1997 was primarily the additional debt related to
the National Acme acquisition during fiscal 1996.
INCOME TAXES
The income tax benefit of $2,363 in fiscal 1998 reflects the net loss recorded
during the year. The effective tax rate for fiscal 1998 was 27% compared to 42%
in fiscal 1997. The fiscal 1998 results include the impact of state tax
expense, where the net loss cannot be utilized, as well as the nondeductible
nature of certain intangible asset amortization and write-offs. Income tax
expense of $2,775 in fiscal 1997 reflected the profitability of the Company. An
income tax benefit of $52 was recorded for fiscal 1996 related to the loss
recorded in fiscal 1996 as a result of the litigation expenses for the year.
14
<PAGE> 15
OPERATING RESULTS BY BUSINESS SEGMENT
In August 1997, the Services Group and Machine Tool Group implemented a change
to outsourcing a major portion of National Acme's parts, which had been
produced internally. The outsourced parts are used in the manufacture of new
Acme-Gridley machines and are also sold separately in the aftermarket. As a
result of planning difficulties encountered during the changeover to
outsourcing, which resulted in inadequate inventory levels to support the
Company during the transition, the Machine Tool Group encountered disruptions
in production during the year. Both the Services Group and the Machine Tool
Group were adversely affected by this inadequate supply of parts for new
machines and aftermarket sales.
Management believes these problems have been addressed and aggressive action
has been taken to correct the problems, including replacing senior management
of the Machine Tool Group who were responsible for the initial planning errors,
scheduling a portion of the parts production at the Tooling Systems Group and
adding key people to our engineering and purchasing staff to quickly bring this
transition to a close. The steps taken to date have resulted in improved parts
availability, however, to date, the Company has not been able to outsource
sufficient parts to expand its sales efforts.
SERVICES GROUP sales were $39,963 in fiscal 1998, compared to $44,188 in fiscal
1997. The largest factor in the decline during fiscal 1998 was in the National
Acme aftermarket parts operation. Also causing unfavorable comparisons is the
sale of certain machines and product lines acquired with the Mattison
acquisition that were not part of the continuing business and the completion of
work started in fiscal 1997 of field service repairs required after flooding of
a customer's facility in the midwest. Operating income in fiscal 1998 was
$5,835 compared to $8,679 in fiscal 1997. The decrease in operating income was
a result of the sales volume decline mentioned above, as well as $501 of the
special charge and a change in product mix.
Sales and operating income were $37,821 and $4,767 in fiscal 1996. Mattison
added $3,219 in sales and $1,861 of operating income during fiscal 1997 as
compared to fiscal 1996. In addition, the fiscal 1996 results included nine
months of National Acme aftermarket parts business, as compared to a full year
in fiscal 1997, as well as a litigation settlement charge of $2,200 related to
a breach of contract suit. Without this litigation settlement, operating income
increased by 41.7% in fiscal 1997 compared to fiscal 1996. Operating income as
a percent of sales improved, primarily due to the addition of Mattison and the
field service leverage from higher sales against fixed costs in fiscal 1997.
MACHINE TOOL GROUP sales were $31,139 in fiscal 1998, compared to $41,594 in
fiscal 1997. The largest factor in the decline during fiscal 1998 was at
National Acme Machines operation, which experienced the greatest disruption
from the problems implementing the outsourcing efforts. The Machine Tool Group
reported an operating loss of $8,038, compared to an operating income of $2,835
during fiscal 1997. Included in the fiscal 1998 loss is $4,261 of the special
charge discussed above.
Net sales and operating income were $30,783 and $1,663 in fiscal 1996. The
primary reason for the increase in sales and operating income was the inclusion
of National Acme for the full year in fiscal 1997 as compared to nine months in
fiscal 1996.
TOOLING SYSTEMS GROUP sales were $21,499 in fiscal 1998 compared to $21,152 in
1997. Operating income increased to $1,701 in fiscal 1998 from $1,186 in fiscal
1997. Fiscal 1998 included $994 of sales to the Services and Machine Tool
Groups. Sales and operating income for fiscal 1996 were $20,983 and $1,064,
respectively.
INDUSTRIAL GROUP sales increased to $25,160 in fiscal 1998 from $23,677 in
fiscal 1997. Operating income decreased to $1,000 in fiscal 1998 from $1,225 in
1997, primarily as a result of increased healthcare and operating expenses
related to computer systems. Sales for fiscal 1996 were $23,727, with the
decline in fiscal 1997 sales the result of flooding at the Company's largest
distributor, which negatively impacted the fourth quarter results. Operating
income was $1,155 in fiscal 1996, with the improvement in fiscal 1997 primarily
a result of cost reductions, price increases and increased manufacturing
productivity.
15
<PAGE> 16
NEW ACCOUNTING PRONOUNCEMENTS
During the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
diluted earnings per share calculation under SFAS 128 is not materially
different from the earnings per share the Company had previously reported. In
accordance with SFAS 128, prior periods have been presented and, where
appropriate, restated to conform to the SFAS 128 requirements.
In July 1998, effective for fiscal 1998 the Company adopted Statement of
Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial reports. The effect of adoption had no significant impact on the
consolidated financial statements. In accordance with the provisions of SFAS
131, prior years have been restated to conform to the new disclosure
requirements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Historically, the Company's continuing operations have been financed by
internally generated funds. Acquisitions have been funded with increases in
indebtedness, while funds from divestitures have generally been used to reduce
indebtedness (see Note 2 of Notes to the Company Financial Statements).
However, with the operating difficulties the Company experienced during fiscal
1998, continuing operations were financed by increasing indebtedness.
Net cash used for operating activities was $2,049 in fiscal 1998 compared to
net cash provided by operating activities of $3,148 in fiscal 1997. Included in
the fiscal 1997 results is $1,500 paid to settle the breach of contract
lawsuit. Net of this item, cash flow from operating activities would have been
$4,648 for fiscal 1997.
Cash used for capital expenditures was $1,244, $1,216 and $1,138 in fiscal 1998,
1997 and 1996, respectively. During fiscal year 1999, the Company has committed
to a major capital expenditure program to replace its computer systems at
several operating divisions. The Company is contemplating financing these
capital expenditures with capital lease financing, as it has in the past with
similar projects. If the leasing alternative is not available to the Company on
acceptable terms, the Company expects that these capital expenditures can be
financed with funds from operations.
Cash of $6,746 was used in fiscal 1997 for the Mattison acquisition. During
fiscal 1998 and 1997, the Company disposed of excess machinery and equipment
for $470 and $2,566, respectively.
FINANCING AND INVESTING
The balance outstanding under the Company's revolving credit agreement was
$25,670 at July 31, 1998, compared to $22,525 at July 31, 1997. Long-term debt,
including current maturities at July 31, 1998, was $18,729 compared to $17,810
at July 31, 1997, an increase of $919. The Company's total indebtedness was
$44,399 and $40,335 at July 31, 1998, and 1997, respectively, an increase of
$4,064. Cash and equivalents at July 31, 1998 was $365, a decrease of $272
compared to July 31, 1997. Net cash provided by financing activities was $2,586
in fiscal 1998 compared to $2,049 in the prior year.
As outlined in Note 7 of Notes to the Company Financial Statements, the Company
amended its senior credit facility in January 1997 to increase the amount
available for borrowings thereunder to $40,000 from $32,000. Term loans in the
amount of $3,500, as well as a $2,334 seller's note, were obtained to finance
the Mattison acquisition (See Note 2 of Notes to the Company Financial
Statements). In March 1998, the Company borrowed an additional $2,514 and
consolidated the existing term loans into one term loan for $7,600, which
requires monthly payments of $200 beginning March 31, 1998. Interest on the term
loans is payable monthly at 1.25% above prime rate or, at the Company's option,
at alternative rates based on LIBOR. The effective rate based on LIBOR was 8.91%
at July 31, 1998.
The balance under the senior credit facility at July 31, 1998, is comprised of
$6,600 in term loans and a revolving credit agreement which provides for
borrowings up to $30,000. Interest on outstanding borrowings under the
revolving credit agreement is payable monthly in arrears at 1% above the prime
rate or, at the Company's option, at
16
<PAGE> 17
alternative rates based on LIBOR. The effective rate based on LIBOR was 8.66%
at July 31, 1998. The amount the Company may borrow under the revolving credit
agreement is based upon a formula related to the Company's eligible accounts
receivable and inventories, reduced by outstanding letters of credit. Unused
borrowings available at July 31, 1998 were $2,782.
Because of the special charge of $5,883 recorded in fiscal year 1998 (See Note
17 of Notes to the Company Financial Statements), the Company was not in
compliance with certain financial statement covenants in its senior credit
agreement. The lenders provided the Company with a waiver of these covenants as
of July 31, 1998. In addition, subsequent to year end, the Company and its
lenders agreed to certain amendments to the senior credit agreement to provide,
among other changes, for an increase in the total available under the revolving
credit facility from $30,000 to $31,500; a change in the financial statement
covenants effective from August 1, 1998; and an increase in the pricing on the
revolving credit agreement from 1% above prime to 1.25% above prime.
The lenders on the senior credit agreement also agreed subsequent to year end
to provide the Company with a new term loan of $2,500. In connection with this
new term loan, principal repayments on all term loans were kept at $200 per
month, however, the effective interest rate was increased effective November 1,
1998 to 1.50% above prime. As a result of the increase in the principal amount,
but keeping the amortization the same, the Company has a balloon payment of
$1,600 on the term loans at the final maturity of the term loan in fiscal 2001.
The terms of the amended credit agreement provide that proceeds from the sale or
disposition of fixed assets are to be applied to the term loans in reverse order
of maturity. Since the Company is planning to dispose of certain fixed assets
during fiscal year 1999, it is likely that the proceeds from these dispositions
will substantially reduce the balloon payment on these term loans. The fixed
assets being disposed of are principally the excess facilities associated with
the Special Charge recorded by the Company in fiscal 1998.
Pursuant to the subordinated debt facility, the Company issued Subordinated
Debentures in May 1994 in the principal amount of $12,000. Of this amount,
$4,000 was replaced by Junior Subordinated Debentures (see Note 8 of Notes to
the Company Financial Statements). Interest payments on the Subordinated
Debentures of 11.5% per annum are payable quarterly in arrears commencing July
1, 1994. The Subordinated Debentures provide for the repayment of principal of
$2,000 in fiscal 1999 and fiscal 2000 and $4,000 in fiscal 2001. Interest on
the Junior Subordinated Debentures accrues at 14.5%, and the cash interest of
11% per annum is payable quarterly in arrears commencing January 1, 1996. The
Junior Subordinated Debentures provide for the repayment of principal of $4,000
and unpaid interest in June 2001 or thirty days after the payment of the
Subordinated Debentures.
In connection with the impact of the Special Charge recorded by the Company in
fiscal year 1998, the Company was not in compliance with certain financial
statement covenants in the subordinated debt facility. The Subordinated
Debenture Holders have provided the Company with a waiver of those covenants
for the quarters ended July 31, 1998 and October 31, 1998.
In addition, the amendment of certain provisions in the senior credit agreement
was approved by the Subordinated Debenture Holders, and in connection with these
changes, certain other changes have been negotiated in the subordinated debt
facility, including a change in the financial statement covenants effective
August 1, 1998 and a deferral in the payment date for the $2,000 principal
repayment due in May 1999.
The Company believes that proceeds from expected asset sales, cash flows from
operations and amounts available under the revolving credit facility will be
sufficient to meet expected liquidity needs during the next twelve months.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries to represent years. These systems and products
will need to be able to accept four digit entries to distinguish years
17
<PAGE> 18
beginning with 2000 from prior years. As a result, systems and products that do
not accept four digit year entries will need to be upgraded or replaced to
comply with such "Year 2000" requirements.
The Company believes that its internal systems are Year 2000 compliant or will
be replaced in connection with previously planned upgrades to information
systems prior to the need to comply with Year 2000 requirements. The Company
believes that, with modifications to existing software and conversions to new
systems, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or not completed timely, the Year 2000 issue could have a material impact
on the operations of the Company. In order to assure that this does not occur,
the Company plans to devote all resources required to resolve any significant
year 2000 issues in a timely manner. A number of the Company's customers and
suppliers may also be affected by the Year 2000 issue that require that they
expend significant resources to modify or replace their existing systems; their
failure to properly address the Year 2000 issue could have significant impact
on the Company's operations.
The Services and Machine Tool Groups (which operate off one computer system)
will be upgrading to a new system that will provide substantially greater
functionality, particularly in the area of materials requirement planning. The
Tooling Systems Group is installing the same system, while the Industrial Group
has completed their installation of the same software. The total expected costs
for these upgrades is approximately $2,800, of which approximately $400 has
already been spent. A significant amount of fiscal 1999 capital expenditures
will be devoted to upgrading current hardware and software to add capabilities
and comply with Year 2000 issues.
The Company expects to complete the system upgrades by the summer of 1999.
However, if there is a delay in new system installation, management believes the
existing systems can be upgraded to Year 2000 compliance in a relatively short
period of time.
CAUTIONARY FACTORS
The discussions in this document may include certain forward-looking statements.
Actual results could differ materially from those reflected by the
forward-looking statements contained in this document and a number of factors
may affect future results, liquidity and capital resources. These factors
include: the ability of the Company to obtain sufficient parts from its Vendors;
the ability of the Company to obtain trade credit from those vendors on
favorable terms; the fact that the Company derives a substantial portion of its
sales from cyclical industries, including the automotive, aerospace and housing
industries; the ability to introduce new products in a timely fashion; the pace
of technological changes affecting the products manufactured and services
provided by the Company; the Company's substantial debt service requirements,
much of which are based on variable rates; the dependence of the Company's
growth on acquisitions and the Company's ability to finance such acquisitions
and to profitably integrate the acquired operations; the level of margins
achievable in the markets served by the Company; and the ability to continue to
minimize operating expenses. Although the Company believes it has the business
strategy and resources needed for improved operations, future sales and margin
trends cannot be reliably predicted.
IMPACT OF INFLATION
Management does not believe that inflation has had a material impact on the
Company's net sales or net income during the last three fiscal years.
Borrowings under the senior credit facility bear interest at short-term rates.
Increases in the prevailing rate of inflation could be accompanied by increases
in short-term interest rates, which could have an adverse impact on the
Company's net income and cash flow.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company holds no market risk sensitive trading instruments. Substantially
all Company balance sheet items and sales are in U.S. dollars, therefore the
Company has no foreign currency exchange rate risk related to these financial
data. The Company does not use financial instruments for trading purposes.
Certain Company debt, primarily a revolving credit agreement, is subject to
variable interest rates. The Company has assessed its exposure to market risk
for its variable rate debt and believes that a 1% change in interest rates
would have a $325,000 effect on income before taxes (based on the balances
outstanding at July 31, 1998).
18
<PAGE> 19
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
Balance Sheets
July 31, 1998 and 1997
Statements of Operations
Years ended July 31, 1998, 1997 and 1996
Statements of Cash Flows
Years ended July 31, 1998, 1997 and 1996
Statements of Changes in Stockholders' Equity
Years ended July 31, 1998, 1997 and 1996
Notes to the Company Financial Statements
19
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of DeVlieg-Bullard, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) on page 43 present fairly, in all material respects, the financial
position of DeVlieg-Bullard, Inc. at July 31, 1998, and 1997 and the results of
its operations and its cash flows for each of the three years in the period
ended July 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
September 15, 1998, except as to Notes 7 and 8 which are as of November 9, 1998.
20
<PAGE> 21
DeVlieg-Bullard, Inc.
Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
Year ended July 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 365 $ 637
Accounts receivable, net 24,895 25,798
Inventories, net 45,459 38,195
Other current assets 1,418 1,519
-------- --------
Total current assets 72,137 66,149
Property, plant and equipment, net 8,781 12,657
Assets held for sale 1,692 --
Engineering drawings, net 16,393 18,039
Goodwill, net 11,025 11,948
Other assets, 13,887 12,651
-------- --------
Total assets $123,915 $121,444
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 17,625 $ 9,751
Accrued expenses and other current liabilities 10,007 11,969
Revolving credit agreement 25,670 22,525
Current portion of long-term debt 5,201 3,631
-------- --------
Total current liabilities 58,503 47,876
Long-term debt (related party
1998 - $4,375; 1997 - $4,227) 13,528 14,179
Postretirement benefit obligation 21,357 21,999
Other noncurrent liabilities 11,121 11,677
-------- --------
Total liabilities 104,509 95,731
-------- --------
Stockholders' equity:
Common stock, $0.01 par value; authorized
30,000,000 shares; issued and outstanding
12,334,900 and 12,275,400 shares, respectively 123 123
Additional paid-in capital 34,230 34,096
Excess purchase price over net assets acquired from
related parties (16,242) (16,242)
Retained earnings 1,438 7,844
Cumulative translation adjustment (143) (108)
-------- --------
Total stockholders' equity 19,406 25,713
-------- --------
Total liabilities and stockholders' equity $123,915 $121,444
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
DeVlieg-Bullard, Inc.
Statement of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended July 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $116,767 $130,611 $113,314
Cost of sales 88,156 95,623 81,855
-------- -------- --------
Gross profit 28,611 34,988 31,459
-------- -------- --------
Operating expenses:
Engineering 1,883 1,771 1,623
Selling 12,975 11,123 10,553
General and administrative 11,611 10,343 11,097
-------- -------- --------
Total E S G & A expenses 26,469 23,237 23,273
Special charges
Redundant facilitites and other exit costs 5,883 -- --
Litigation settlement -- -- 4,600
Other expense/(income), net (319) (12) (49)
-------- -------- --------
Total operating expenses 32,033 23,225 27,824
-------- -------- --------
Operating (loss)/income (3,422) 11,763 3,635
Interest expense (including related party interest
of $707, $686 and $452) 5,347 5,090 4,404
-------- -------- --------
Income/(loss) before income taxes (8,769) 6,673 (769)
(Benefit)/provision for income taxes (2,363) 2,775 (52)
-------- -------- --------
Net (loss)/income $ (6,406) $ 3,898 $ (717)
======== ======== ========
Income per common share:
Basic $ (0.45) $ 0.28 $ (0.05)
======== ======== ========
Diluted $ (0.45) $ 0.26 $ (0.05)
======== ======== ========
Average number of shares outstanding:
Basic 14,082 14,041 13,773
======== ======== ========
Diluted 14,082 15,179 13,773
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
DeVlieg-Bullard, Inc.
Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended July 31,
Cash flows from operating activities: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net (loss) income $(6,406) $ 3,898 $ (717)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,853 4,505 4,612
Deferred income taxes (2,340) 2,444 (636)
Provision for losses on accounts receivable (195) 30 152
Net loss on disposal of assets held for sale 3,062 -- --
Changes in assets and liabilities, net of effects
from acquisitions
Decrease/(increase) in accounts receivable 1,098 (6,723) 285
(Increase)/decrease in inventories (7,264) 5,710 (4,936)
Decrease/(increase) in other current assets 101 (301) (758)
Increase/(decrease) in accounts payable 7,874 (103) 1,402
(Decrease)/increase in accrued expenses
and other current liabilities (1,814) (4,422) 3,638
Other, net (1,018) (1,890) 452
------- ------- -------
Net cash (used for)/provided by
operating activities (2,049) 3,148 3,494
------- ------- -------
Cash flows from investing activities:
Purchase of business -- (6,746) (10,656)
Capital expenditures (1,244) (1,216) (1,138)
Proceeds from sale of other assets 470 2,566 --
------- ------- -------
Net cash used for investing activities (774) (5,396) (11,794)
------- ------- -------
Cash flows from financing activities:
Borrowings under revolving credit agreement 123,001 127,647 121,032
Repayments under revolving credit agreement (119,856) (124,317) (113,952)
Proceeds from issuance of long-term debt 2,514 5,834 8,000
Payments of long-term debt (3,207) (6,938) (5,193)
Debt issuance costs -- (224) (1,215)
Proceeds from exercise of stock options 134 47 --
------- ------- -------
Net cash provided by financing activities 2,586 2,049 8,672
Effect of exchange rate changes on cash (35) 68 (19)
------- ------- -------
Net increase in cash and cash equivalents (272) (131) 353
Cash and cash equivalents at beginning of period 637 768 415
------- ------- -------
Cash and cash equivalents at end of period $ 365 $ 637 $ 768
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 4,612 $ 4,456 3,808
Income taxes, net of refunds 305 986 (83)
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
Supplemental schedule of non-cash investing and financing information:
During fiscal 1996, the Company assumed liabilities in the amount of $38,781 in
connection with the National Acme acquisition.
During fiscal 1996, in connection with the consent by the holders of the
$12,000 principal amount of subordinated debentures to the acquisition of
National Acme and to the refinancing of the Company's senior credit facility
and to the refinancing of $4,000 principal amount of such subordinated
debentures, the Company issued stock purchase warrants valued at $1,750. Such
amount was credited to Additional paid-in capital and charged as a discount to
subordinated debentures, reducing the carrying value of the debentures (see
Notes 8 and 10).
The amortization of the debt discount was $594, $472 and $342 in fiscal 1998,
1997 and 1996, respectively.
The Company's tax benefit related to the Excess purchase price over net assets
acquired from related parties reduces the Company's income tax liability (see
Note 1). Such amount included in fiscal 1998, 1997 and 1996 is $0, $116 and $0,
respectively.
During fiscal 1998, 1997 and 1996, the Company entered into capital leases for
equipment totaling $870, $192 and $471, respectively, which were financed by
capital lease obligations.
24
<PAGE> 25
DeVlieg-Bullard, Inc.
Statement of Changes in Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Common
Shares Additional Excess Cumulative
Year ended Issued and Common Paid-in Purchase Retained Translation
July 31, 1998, 1997 and 1996 Outstanding Stock Capital Price Earnings Adjustment Total
----------- ----- ------- ----- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1995 12,250 $123 $32,299 $(16,358) $4,663 $(157) $20,570
Net income -- -- -- -- (717) -- (717)
Issuance of stock purchase warrants -- -- 1,750 -- -- -- 1,750
Foreign currency translation adjustment -- -- -- -- -- (19) (19)
------ ---- ------- -------- ------ ----- -------
Balance, July 31, 1996 12,250 123 34,049 (16,358) 3,946 (176) 21,584
Net income -- -- -- -- 3,898 -- 3,898
Tax benefit realized related to Excess purchase
price over net assets acquired from
related parties -- -- -- 116 -- -- 116
Exercise of stock options 25 -- 47 -- -- -- 47
Foreign currency translation adjustment -- -- -- -- -- 68 68
------ ---- ------- -------- ------ ----- -------
Balance, July 31, 1997 12,275 123 34,096 (16,242) 7,844 (108) 25,713
Net income -- -- -- -- (6,406) -- (6,406)
Exercise of stock options 60 -- 134 -- -- -- 134
Foreign currency translation adjustment -- -- -- -- -- (35) (35)
------ ---- ------- -------- ------ ----- -------
Balance, July 31, 1998 12,335 $123 $34,230 $(16,242) $1,438 $(143) $19,406
====== ==== ======= ======== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
DEVLIEG-BULLARD, INC.
NOTES TO THE COMPANY FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
DeVlieg-Bullard, Inc. (the "Company") is a diversified industrial concern
specializing in manufacturing, servicing, upgrading, automating and
remanufacturing precision engineered machine tools. The Company also
manufactures sophisticated original and replacement tooling products used in
industrial machine tools and a variety of power tools for niche industrial
markets. The Company conducts its business through four operating groups: the
Services Group, the Machine Tool Group, the Tooling Systems Group and the
Industrial Group.
BASIS OF PRESENTATION
The financial statements include all accounts of the Company after elimination
of all significant interdivision transactions and balances. Certain amounts in
the fiscal 1997 and 1996 financial statements have been reclassified to conform
with the fiscal 1998 presentation. Amounts, except per share data, are expressed
in thousands.
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 and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents. The Company invests excess funds in
short-term, interest-bearing obligations. When a balance is outstanding on the
Company's revolving credit agreement, all available cash is used to decrease
such outstanding balance.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on the first-in, first-out basis for approximately 58% of the total
inventory, with the remaining 42% being determined on the last-in, first-out
(LIFO) method of inventory accounting.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and depreciated using the
straight-line method over the shorter of the estimated life of the asset or the
lease term ranging from three to thirty-one years. Cost represents estimated
fair market value at date of acquisition for acquired businesses, or the
predecessor entity's net book value if acquired by the Company from a related
party. Depreciation for tax purposes is calculated in accordance with applicable
Internal Revenue Code provisions.
OTHER ASSETS
Intangible assets, consisting of engineering drawings and bills of material for
parts and machine assemblies, are amortized over their estimated useful lives,
ranging from ten to thirty years, using the straight-line method. Goodwill, the
excess of purchase price over net assets acquired, is amortized over the
estimated useful lives, ranging from fifteen to thirty years. Deferred financing
costs are amortized on a straight-line basis, which is not materially different
from the effective interest method, over the life of the related indebtedness.
IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), which established standards
for recognition and measurement of impairment losses on long-lived assets,
certain identifiable assets and goodwill. SFAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used or disposed of
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the
26
<PAGE> 27
carrying value of an asset may not be recoverable. The Company's adoption of
this statement had no impact on the financial statements of the Company.
The Company recognized impairment losses of $4,276 for the write down of certain
real estate and intangible assets, as more fully discussed in Note 17 "Special
Charges and Fourth Quarter Adjustments."
FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities are translated at exchange rates in
effect on reporting dates, and income and expenses are translated at rates in
effect on transaction dates. The resulting differences due to changing exchange
rates are charged or credited directly to the "Cumulative translation
adjustment" account included as part of stockholders' equity.
REVENUE RECOGNITION
Revenue recognized on long-term contracts is accounted for using the
percentage-of-completion method based on costs incurred as a percentage of
estimated total costs of individual contracts. Anticipated losses are recognized
when they become known. Estimated costs to complete are reviewed monthly and
revisions in estimated profits are made, if necessary. Deferred revenue from
noncompetition agreements is recognized over the contractual period of the
agreement, generally five years. All other revenue is recognized when earned.
STOCK-BASED EMPLOYEE COMPENSATION PLANS
As described in Note 10, the Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion No. 25 for stock-based
compensation and to furnish the pro forma disclosures required under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").
INCOME TAXES
The Company uses Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes," which requires that deferred taxes be established
for all temporary differences between the book and tax bases of assets and
liabilities.
A portion of the assets and liabilities acquired by the Company in 1990 from a
related party was recorded at the predecessor entity's net book value for
financial reporting purposes. The difference between the fair value and the
predecessor's book value at the purchase date of $23,500 was recorded in the
account "Excess purchase price over net assets acquired from related parties."
The tax benefit of the amortization of this difference is recorded upon
realization as an increase to stockholders' equity by reducing the account
"Excess purchase price over net assets acquired from related parties." The
remaining balance in this account at July 31, 1998 was $16,242.
INCOME (LOSS) PER SHARE
Effective with the second quarter of fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). In
accordance with SFAS 128, prior periods have been presented and, where
appropriate, restated to conform to the SFAS 128 requirements. The diluted
earnings per share under SFAS 128 is not materially different from the earnings
per share the Company previously reported. In accordance with the provisions of
SFAS 128, the number of basic shares includes the average of shares outstanding
and the stock purchase warrants that are not contingently issuable (the Class A
and Class B Warrants). The contingently issuable stock purchase warrants (Class
C Warrants) and stock options are included in the number of shares to be used in
the diluted earnings per share calculation. Loss per share is computed by
dividing net loss by the number of basic shares outstanding during the period.
Stock options and contingently issuable stock purchase warrants are not included
in this calculation, as they would be antidilutive.
SEGMENT REPORTING
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 changes the way public companies report segment information in
annual financial statements and also requires those companies to report selected
27
<PAGE> 28
segment information in interim financial reports. The Company adopted SFAS 131
for the fiscal year ended July 31, 1998 and the effect of adoption had no
significant impact on the consolidated financial statements.
NOTE 2 - ACQUISITIONS
MATTISON TECHNOLOGIES
On January 17, 1997, the Company acquired substantially all of the assets of
Mattison Technologies, Inc., a Rockford, Illinois-based machine tool company
("Mattison"), including intellectual property, parts inventory, accounts
receivable and customer lists. This acquisition was accounted for by the
purchase method of accounting and, accordingly, the purchase price has been
allocated to assets acquired based upon the fair market value at the date of
acquisition. The excess purchase price over net assets acquired of approximately
$900 was recorded as engineering drawings and is being amortized on a
straight-line basis over ten years for specified assets subject to a license
agreement and thirty years for the remaining assets. The purchase price was
$6,544, plus legal and closing costs, and was financed with term debt of $3,500
and a $2,334 seller's note, $1,600 of which was secured by Mattison's accounts
receivable, as well as with funds from the revolving credit facility. As the
Mattison accounts receivable were collected, the Company paid down the principal
on the seller's note; the balance on the seller's note of $733 was paid in
January 1998. The Mattison operations have been consolidated with the Services
Group.
NATIONAL ACME
On October 23, 1995, the Company acquired (the "Acquisition") all of the
outstanding stock of The National Acme Company, an Ohio corporation ("National
Acme"). Immediately following the consummation of the Acquisition, National Acme
was merged with and into the Company with the Company as the surviving
corporation.
The consideration paid for the Acquisition consisted of $8,987 at closing for
the outstanding stock of National Acme and in consideration for a noncompete
agreement, and $1,314 for additional purchase price adjustment in March 1996, as
well as closing costs. The Company borrowed funds under its senior credit
facility to finance the Acquisition (see Notes 7 and 8).
National Acme, located in Cleveland, Ohio, manufactures Acme-Gridley multiple
spindle automatic bar and chucking machines and supplies related aftermarket
parts and service. The National Acme operations have been consolidated with the
Services and Machine Tool Groups, based on their respective product lines.
The Acquisition was accounted for by the purchase method of accounting and,
accordingly, the purchase price has been allocated to the estimated fair market
value of net assets acquired based on information available at this time. The
aggregate of the assets acquired were $49,082, which was allocated based on the
fair values at the time of acquisition. The excess of purchase price over net
assets acquired of $4,831 has been allocated to goodwill and $10,695 to
engineering drawings. These amounts will be amortized on a straight-line basis
over thirty years. The noncompete agreement of $1,400 will be amortized on the
straight-line basis over ten years. Liabilities of $38,781 were assumed in
connection with the Acquisition, primarily for postretirement medical benefits
($20,559) and pension benefits ($10,926). The results of operations of National
Acme have been included in the Company's balance sheet starting with the second
quarter of fiscal 1996.
The following pro forma information has been prepared assuming the acquisition
of National Acme had occurred on August 1, 1995:
Pro forma results of operations:
<TABLE>
<CAPTION>
(unaudited - in thousands, except per share data) Year ended July 31,
1996
----
<S> <C>
Net sales $121,798
Net (loss) income (598)
Net (loss) income per common share $ (0.04)
Average diluted shares outstanding 13,887
</TABLE>
28
<PAGE> 29
In preparing the unaudited pro forma summary of operations, adjustments were
made to the historical financial statements to reflect increases in the
revolving line of credit and interest expense; amortization of intangible
assets; depreciation of fixed asset write-up to fair market value; and other
estimated purchase accounting entries. The pro forma results are not necessarily
indicative of what would have been obtained if the operations had been combined
during fiscal 1996, nor are they necessarily indicative of the results that may
occur in the future.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consisted of:
<TABLE>
<CAPTION>
July 31,
1998 1997
---- ----
<S> <C> <C>
Trade receivables $19,209 $18,798
Unbilled receivables on contracts in progress 5,760 6,990
Other 325 400
------- -------
25,294 26,188
Less: allowance for doubtful accounts (399) (390)
------- -------
$24,895 $25,798
======= =======
</TABLE>
The Company's trade receivables are concentrated in the machine tool and related
manufacturing industries. Unbilled receivables on contracts in progress
represent revenue recognized under the percentage of completion method and are
expected to be received within one year. All amounts included in unbilled
receivables on contracts in progress are related to long-term contracts and are
reduced by appropriate progress billings.
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
Inventories consisted of: July 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 1,620 $ 1,448
Work-in-process 14,671 11,452
Finished goods 29,168 25,295
------- -------
$45,459 $38,195
======= =======
</TABLE>
Valuation reserves for obsolete, excess and slow-moving inventory aggregated
$10,556 and $10,504 at July 31, 1998 and 1997, respectively. Inventories valued
using LIFO were $19,298 and $12,819 at July 31, 1998 and 1997, respectively.
There was no material difference between current cost and recorded cost. The
financial accounting basis for the inventories of acquired companies exceeds the
tax basis by $12,224 at July 31, 1998 and 1997.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
July 31,
1998 1997
---- ----
<S> <C> <C>
Real property $ 1,806 $ 5,814
Machinery and equipment 14,335 14,843
Capitalized leased assets 3,044 2,174
Furniture and fixtures 5,593 4,653
-------- --------
24,778 27,484
Less: allowance for accumulated depreciation (15,997) (14,827)
-------- --------
$ 8,781 $ 12,657
======== ========
</TABLE>
29
<PAGE> 30
Depreciation expense, including amortization of leased assets, totaled $2,030,
$2,156 and $2,512 for fiscal years 1998, 1997 and 1996, respectively.
Capitalized leased assets are comprised of computer hardware, software and
related installation costs.
Assets held for sale consists of land and buildings (see Note 17).
NOTE 6 - OTHER ASSETS
<TABLE>
<CAPTION>
Other assets consisted of: July 31,
1998 1997
---- ----
<S> <C> <C>
Engineering drawings $ 22,164 $ 23,103
Less: accumulated amortization (5,771) (5,064)
-------- --------
$ 16,393 $ 18,039
======== ========
Goodwill $ 12,980 $ 13,464
Less: accumulated amortization (1,955) (1,516)
-------- --------
$ 11,025 $ 11,948
======== ========
Other Assets:
Deferred taxes, net of valuation of allowance
(Note 12) $ 11,036 $ 8,696
Deferred financing costs 3,032 2,912
Investments carried at equity 137 137
Pension asset 254 569
Other 2,962 3,075
-------- --------
17,421 15,389
Less: accumulated amortization (3,534) (2,738)
-------- --------
Total other assets $ 13,887 $ 12,651
======== ========
</TABLE>
Amortization of intangible and other assets totaled $2,291, $2,378 and $2,257
for the years ended July 31, 1998, 1997 and 1996, respectively.
NOTE 7 - REVOLVING CREDIT AGREEMENT
On October 23, 1995, the Company replaced its existing revolving credit
agreement and term loan with a $30,000 senior credit facility comprised of a
$25,000 revolving credit agreement and a $5,000 term loan. The funding occurred
on October 23, 1995, contemporaneously with the Company's completion of the
acquisition of National Acme (see Note 2). On April 12, 1996, the Company
obtained an additional $3,000 term loan to help fund certain litigation
settlement costs (see Note 15) and increased the senior credit facility to
$32,000. In connection with the acquisition of Mattison (see Note 2), the
Company amended its senior credit facility to increase it to $40,000. This
facility now consists of a $30,000 revolving credit agreement and up to $10,000
in term loans. Funds from two new term loans totaling $3,500 were used to
finance the acquisition. Of this amount, $2,000 was repaid in March 1997 with
proceeds from the sale of excess machinery and equipment. On March 11, 1998, the
Company borrowed an additional $2,514, bringing the total term loan balance to
$7,600. Payments on the term loans are $200 per month beginning March 31, 1998.
Interest rates are based on the prime rate or alternative rates based on LIBOR.
The senior credit facility is secured by all of the Company's assets. Under the
terms of the facility, the Company is required to comply with various
operational and financial covenants, as defined, including (i) minimum net
worth, (ii) interest coverage ratio, (iii) liabilities to net worth ratio, (iv)
current ratio, (v) fixed charge coverage ratio and (vi) minimum earnings levels,
as defined. In addition, the facility places limitations on the Company's
ability to make capital expenditures and to pay dividends. Because of the
special charge recorded by the Company in fiscal 1998 (see Note 17), the Company
was not in compliance with these covenants. The lenders provided the Company
with a waiver of these covenants as of July 31, 1998. See Note 8 for a
discussion of additional changes in the senior credit facility and Subordinated
Debt Agreements.
The maturity date for the senior credit facility was extended to October 23,
2000, subject to renewal by agreement of the parties. Amounts available under
the revolving credit agreement are based upon a formula related to the Company's
eligible accounts receivable and inventories. Interest on outstanding balances
is payable monthly in arrears, at 1.0% above the prime rate or, at the Company's
option, at alternative rates based on LIBOR. A line of
30
<PAGE> 31
credit fee of 0.25% per annum is payable monthly on the difference between the
revolving credit agreement and the average loan balance under the agreement. The
amendment to the revolving credit agreement also provides for loan facility fees
of $120 paid in January 1997 and a collateral management fee of $60 per year,
payable each October. There are early termination fees should the Company
terminate the agreement prior to its third anniversary.
At July 31, 1998, borrowings outstanding under the revolving credit agreement
were $25,670. The rate in effect at July 31, 1998, was 8.66%.
NOTE 8: LONG-TERM DEBT
<TABLE>
<CAPTION>
July 31,
1998 1997
---- ----
<S> <C> <C>
Term loans $ 6,600 $ 6,300
Subordinated Debentures, net of discount 10,498 9,756
Seller's note 160 733
Promissory note 107 213
Capital lease obligations 1,364 606
Other -- 202
-------- --------
18,729 17,810
Less: current maturities (5,201) (3,631)
-------- --------
$ 13,528 $ 14,179
======== ========
</TABLE>
On March 11, 1998, the Company amended its credit facility with its senior
lender to increase the term loan by approximately $2,500. The new term loan was
consolidated with the existing term loans for an aggregate term loan of $7,600.
The proceeds from the new term loan were used to repay a portion of the
outstanding revolving credit agreement. Principal payments on the term loan are
$200 monthly, starting March 31, 1998. Interest on the term loans is payable
monthly at 1.25% above prime rate or, at the Company's option, at alternative
rates based on LIBOR. The rate in effect at July 31, 1998 was 8.91%.
On May 25, 1994, the Company entered into an investment agreement with a
syndicate of lenders (the "Investment Agreement") pursuant to which, among other
things, the Company issued Subordinated Debentures in the aggregate amount of
$12,000. Consummation of the Acquisition (see Note 2) and the refinancing of the
senior credit facility (see Note 7) required the consent of the holders of the
Subordinated Debentures pursuant to the terms of the investment agreement. Due
to the inability of the Company to obtain the consent of one of the debenture
holders on mutually agreeable terms, Charles E. Bradley and John G. Poole,
directors and significant shareholders of the Company, loaned the Company $2,500
and $1,500, respectively, pursuant to the terms of Junior Subordinated
Debentures, to replace the principal owed to one of the Subordinated Debenture
holders. Also in connection with the refinancing, the holders of the
Subordinated Debentures agreed to release their security interest in the
Company's assets. Mr. Bradley has pledged assets to secure the Subordinated
Debentures and he and his son will receive $90 annually as a collateral fee for
as long as the pledge is in effect, payable in monthly installments.
Interest on the Subordinated Debt is 11.5% per annum, payable quarterly in
arrears commencing July 1, 1994. Interest on the Junior Subordinated Debentures
accrues at the rate of 14.5% per annum, with cash interest payable at 11% per
annum on a quarterly basis commencing January 1, 1996. Under the terms of the
Subordinated Debentures, the Company is required to comply with various
operational and financial covenants which are the same nature as those required
under the terms of the senior credit facility (see Note 7) but at reduced
levels.
The Subordinated Debentures are due $2,000 in fiscal 1999 and fiscal 2000 and
$4,000 in fiscal 2001. The Junior Subordinated Debentures plus unpaid interest
are due June 30, 2001, or 30 days after the Subordinated Debentures are paid in
full.
In conjunction with the issuance of the Subordinated Debentures in May 1994, the
Company issued one million stock purchase warrants (see Note 10). The discount
on the Subordinated Debentures initially aggregating $1,750 represents the fair
market value of the stock purchase warrants issued to the original holders of
the Subordinated
31
<PAGE> 32
Debentures. In connection with the refinancing of the senior credit facility and
the issuance of the Junior Subordinated Debentures, the Company issued an
additional 500 Class A stock purchase warrants and 750 Class C stock purchase
warrants (see Note 10). An additional discount of $1,750 was recorded on the
Subordinated Debt and the Junior Subordinated Debt, representing the fair market
value of the stock purchase warrants issued. The discount was $1,877 and $2,471
at July 31, 1998 and 1997, respectively, and is being amortized over the
remaining life of the Subordinated Debentures using effective interest rates of
approximately 21%.
The seller's note of $733 was issued in connection with the Mattison acquisition
(See Note 2) and was paid in January 1998. The note bore interest at a rate of
10%. The Company has negotiated an agreement with the Seller related to a
purchase price adjustment for an additional $160 payment, which was paid in
October 1998.
A promissory note of $427 was issued in connection with the Cushman acquisition.
It is payable in four equal annual installments of $107 through September 1998.
At July 31, 1997, other long-term debt included $200 related to an earnout note
originally issued for $600 in connection with the Mideastern acquisition. This
was paid in January 1998. The note bore interest at a rate of 8%.
Scheduled debt maturities for the next five fiscal years in the aggregate are
$5,201 in fiscal 1999, $4,860 in fiscal 2000, $10,534 in fiscal 2001 and $11 in
fiscal 2002.
Because of the special charge of $5,883 recorded by the Company in fiscal year
1998 (see Note 17), the Company was not in compliance with certain financial
statement covenants in its senior credit agreement. The lenders provided the
Company with a waiver of these covenants as of July 31, 1998. In addition,
subsequent to year end, the Company and its lenders agreed to certain amendments
to the senior credit agreement to provide, among other changes, for an increase
in the total available under the revolving credit facility from $30,000 to
$31,500; a change in the financial statement covenants effective from August 1,
1998; and an increase in the pricing on the revolving credit agreement from 1%
above prime to 1.25% above prime.
The lenders on the senior credit agreement also agreed subsequent to year end to
provide the Company with a new term loan of $2,500. In connection with this new
term loan, principal repayments on all term loans were kept at $200 per month,
however, the effective interest rate was increased effective November 1, 1998 to
1.50% above prime. As a result of the increase in the principal amount, but
keeping the amortization the same, the Company has a balloon payment of $1,600
on the term loans at the final maturity of the term loan in fiscal 2001. The
terms of the amended credit agreement provide that proceeds from the sale or
disposition of fixed assets are to be applied to the term loans in reverse order
of maturity.
In connection with the impact of the Special Charge recorded by the Company in
fiscal year 1998, the Company was not in compliance with certain financial
statement covenants in the subordinated debt facility. The Subordinated
Debenture Holders have provided the Company with a waiver of those covenants
for the quarters ended July 31, 1998 and October 31, 1998.
In addition, the amendment of certain provisions in the senior credit agreement
was approved by the Subordinated Debenture Holders, and in connection with these
changes, certain other changes have been negotiated in the subordinated debt
facility, including a change in financial statement covenants effective August
1, 1998 and a deferral in the payment date for the $2,000 principal repayment
date in May 1999.
32
<PAGE> 33
NOTE 9 - STOCKHOLDERS' EQUITY
The Company issued common stock in connection with the exercise of stock options
during fiscal 1998 and 1997; $134 and $47 was credited to Additional paid-in
capital, respectively.
In October 1995, the Company issued stock purchase warrants with an aggregate
fair market value of $1,750 (see Notes 8 and 10). Such amounts increased
Additional paid-in capital.
NOTE 10 - STOCK OPTIONS AND STOCK PURCHASE WARRANTS
STOCK OPTIONS
Pursuant to the Company's 1989 Employee Stock Plan, an incentive stock
compensation plan which permits the issuance of up to 1,300 shares of common
stock, options have been granted to certain employees to purchase shares of the
Company's common stock at a price not less than the fair market value at the
date of grant. Options granted after July 31, 1993 vest and become exercisable
in installments of 30% at the end of the first and second years and 40% at the
end of the third year, and they terminate ten years from the date of grant. The
options granted on or before July 31, 1993 are exercisable in annual
installments of up to 20% of the total shares represented by options, commencing
one year from the date of grant and terminating ten years thereafter.
A summary of the status of the Company's Stock Option Plan at July 31, 1998,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Shares Weighted Average
Under Option Exercise Price
------------ --------------
<S> <C> <C>
Outstanding at July 31, 1995 934 $1.89
Forfeited (20) 2.63
Granted 157 2.41
-----
Outstanding July 31, 1996 1,071 1.96
Granted 100 2.44
Exercised (25) 1.87
Forfeited (7) 2.26
-----
Outstanding July 31, 1997 1,139 1.96
Granted 120 2.38
Exercised (60) 2.25
Forfeited (215) 2.03
-----
Outstanding July 31, 1998 984 2.02
=====
</TABLE>
<TABLE>
<CAPTION>
Range of Exercise Prices:
Under $2.00 $2.00 and over
----------- --------------
<S> <C> <C>
Options outstanding:
Number outstanding 420 564
Weighted average remaining years of contractual life 5.5 4.6
Weighted average exercise price $1.75 $2.23
Options exercisable:
Number exercisable 420 356
Weighted average exercise price $1.75 $2.13
</TABLE>
Effective January 10, 1991, the Company adopted a stock option plan for its
outside directors, and granted each outside director an option to purchase 5
shares of common stock (an aggregate of 25 shares) at $2.50 per share, the then
fair market value of the shares. The Company has reserved a total of 50 shares
for issuance under this stock option plan. The options are exercisable one year
from the date of grant and terminate ten years thereafter. On June 13, 1996, the
Company granted an additional 25 shares under the outside director's plan at
$2.56 per share, the then fair market value of the shares. On December 18, 1996,
the shareholders approved an increase in the number of options available for
grant under this plan to 65 shares.
33
<PAGE> 34
On January 27, 1995, in connection with the Mideastern acquisition, the Company
issued options to the former Mideastern shareholders to purchase up to 100
shares of common stock at a purchase price of $1.50 per share. If, on January
27, 1998, the fair market value of the shares covered by these options is not at
least $3.50 per share (subject to adjustment), the optionee could have elected
to and did redeem the options for $1.50 per share. The Company recognized $150
in compensation expense during fiscal 1998.
The Company applied APB Opinion No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for its
stock option plans in its results of operations. Had the Company recorded a
charge for the fair value of options granted consistent with SFAS 123, net
income and net income per common share would have been reduced by $37 and $0.01
in fiscal 1998, $81 and $0.01 in fiscal 1997 and $18 and no impact in fiscal
1996, respectively. The fair value of options granted during fiscal 1998, 1997
and 1996 was $184, $171 and $195, respectively. The fair value of each option
grant for the Company's plans is estimated on the date of the grant using the
Black Scholes option pricing model, with the following assumptions used for
grants in fiscal 1998, 1997 and 1996:
<TABLE>
<S> <C>
Risk free rate of interest 5.5% - 7%
Expected option lives 10 years for Directors and Executive Officers, 3 years for other grants
Expected Volatility 50 - 57%
</TABLE>
STOCK PURCHASE WARRANTS
In conjunction with the issuance of the Subordinated Debentures (see Note 8),
the Company issued Class A Stock Purchase Warrants (the "Class A Warrants")
which permit holders of the Subordinated Debentures to purchase one million
shares of the Company's common stock at an exercise price of $0.01 per share.
The Class A Warrants are exercisable from May 25, 1996, through May 25, 2004, or
three years after final payment of the Subordinated Debentures, if later. The
Company also issued Class B Stock Purchase Warrants (the "Class B Warrants"),
which became available to the Subordinated Debenture holders as a result of the
settlement of the class action suit filed in 1992. The actual number of Class B
Warrants outstanding, based on a formula that uses the average closing stock
price for 90 days prior to May 25, 1997, is 289.
In connection with the issuance of the Junior Subordinated Debentures, the
Company issued Class A Stock Purchase Warrants (the "Class A Warrants") to
Messrs. Bradley and Poole, representing the right to purchase 52 and 31 shares
of the Company's common stock, respectively. These Class A Warrants were
originally issued to the Subordinated Debenture holder who was replaced by the
Junior Subordinated Debentures which were issued to Messrs. Bradley and Poole.
Pursuant to the terms of the Investment Agreement, as amended, the Company
issued additional Class A Stock Purchase Warrants to acquire 500 shares of the
Company's common stock. The Company also issued Class C Stock Purchase Warrants
("Class C Warrants") to acquire 750 shares of the Company's Common Stock,
subject to adjustment in certain circumstances, to the Subordinated and Junior
Subordinated Debenture holders, pro rata based on the principal amount of the
Subordinated Debt and Junior Subordinated Debt. The exercise price of the Class
A and Class C Warrants is $0.01 per share. The Class A Warrants may be exercised
at any time in whole or in part from and after October 23, 1997, and shall
expire the later of three years from the date of final payment on the
Subordinated Debt or May 25, 2004. The Class C Warrants may be exercised at any
time after October 31, 1998, subject to earlier exercise upon the sale of the
Company, and expire on the later of three years after the payment of the
Subordinated Debt or October 31, 2005.
The number of shares of the Company's Common Stock which the holders of the
Class C Warrants have the right to acquire may be reduced based on the Company
attaining earnings levels, as defined in the Investment Agreement, as amended.
The Company recorded 200 warrants as likely to be issued. The additional Class A
and Class C Warrants had an aggregate fair market value of $1,750. Such amount
increased Additional paid-in capital and is recorded as a discount to the
Subordinated Debentures. This discount is being amortized as interest expense
over the life of the Subordinated Debt.
34
<PAGE> 35
The Class A Warrants, Class B Warrants and Class C Warrants are subject to
anti-dilution protection and the holders of such warrants are entitled to
certain registration rights.
NOTE 11 - EMPLOYEE BENEFIT PLANS
PENSION
The Company has noncontributory defined benefit pension plans covering
essentially all of its union hourly and certain salaried employees. The plans
provide retirement, death and disability benefits to eligible employees based
upon age, salary and length of service. The Company's funding policy for these
plans is to satisfy the minimum funding requirements of ERISA, which is tax
deductible under the Internal Revenue Code.
Assets of the plans, comprised of temporary cash investments, convertible
debentures and preferred and common stocks, including 110 shares of the
Company's common stock, are invested in a master trust.
Pension expense is as follows:
<TABLE>
<CAPTION>
Year ended July 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 685 $ 653 $ 656
Interest on projected benefit obligation 3,765 3,810 2,393
Actual return on plan assets (11,283) (2,719) (4,080)
Net amortization and deferral 7,886 (790) 1,979
-------- ------- -------
$ 1,053 $ 954 $ 948
======== ======= =======
</TABLE>
Effective September 1, 1996, the benefits under the National Acme Salaried
Employees Plan were frozen. The Company recognized $408 of net curtailment
income in fiscal 1997.
The funded status of plans in which plan assets at fair market value exceed the
projected benefit obligation is presented below:
<TABLE>
<CAPTION>
July 31,
1998 1997
---- ----
<S> <C> <C>
Plan assets at fair market value $ 15,190 $ 8,063
Projected benefit obligation 11,279 6,025
-------- -------
Excess fair value of assets over projected benefit
obligation 3,911 2,038
Unrecognized prior service cost 32 36
Contribution after measurement date 91 8
Unrecognized net gain (3,780) (1,513)
-------- -------
Accrued pension asset $ 254 $ 569
======== =======
</TABLE>
The projected benefit obligations at July 31, 1998, and 1997 include accumulated
benefit obligations of $11,279 and $6,025 and vested benefit obligations of
$10,794 and $5,843, respectively.
The funded status of plans in which the projected benefit obligation exceeds
plan assets at fair market value is presented below:
<TABLE>
<CAPTION>
July 31,
1998 1997
---- ----
<S> <C> <C>
Plan assets at fair market value $ 31,382 $ 31,524
Projected benefit obligation 37,390 41,141
-------- --------
Excess projected benefit obligation over
fair value of assets (6,008) (9,617)
Unrecognized transition obligation 146 183
Unrecognized net gain (7,616) (4,177)
Unrecognized prior service cost and other 670 735
Contribution after measurement date 246 336
-------- --------
Accrued pension liability $(12,562) $(12,540)
======== ========
</TABLE>
35
<PAGE> 36
The projected benefit obligations at July 31, 1998, and 1997 include accumulated
benefit obligations of $37,390 and $41,141 and vested benefit obligations of
$36,616 and $39,934, respectively.
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.75% and 8.25% for fiscal 1998 and 1997,
respectively. The expected long-term rate of return on plan assets was 9% for
both years.
OTHER EMPLOYEE BENEFITS
The Company also has two defined contribution pension plans pursuant to Section
401(k) of the Internal Revenue Code. All non-union and salaried employees of the
Company are eligible for participation in one of the plans. Plan participants
may contribute up to 15% of gross compensation. The Company provides a match of
50% of participant contributions, up to 6% of each participant's compensation.
Contribution expense for the years ended July 31, 1998, 1997 and 1996 was $396,
$480 and $343, respectively.
Certain union employees hired by National Acme after April 1, 1986, no longer
accrue benefits under the defined benefit pension plan. These employees receive
a contribution to the plan, based on their hire date, of either 1% or 3% of
compensation. Plan participants may also contribute up to 15% of compensation.
Contributions under this plan were $153, $100 and $99 during fiscal 1998, 1997
and 1996, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain employees with health and life insurance benefits
after retirement. Health insurance benefits require employee contributions in
certain cases. The Company assumed postretirement medical liabilities of $20,559
as a result of the acquisition of The National Acme Company on October 23, 1995
(see Note 2).
Postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Year ended July 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 102 $ 101 $ 129
Interest on projected benefit obligation 1,298 1,725 1,203
Amortization of actuarial (gains)/losses (712) (131) 3
------- ------- ------
Net periodic postretirement benefit cost $ 688 $ 1,695 $1,335
======= ======= ======
</TABLE>
The Company has not funded any portion of its postretirement benefit
obligations.
The following table sets forth the amount recognized in the accompanying balance
sheets:
<TABLE>
<CAPTION>
July 31,
1998 1997
---- ----
<S> <C> <C>
Retirees $ 7,620 $17,306
Active plan participants - fully eligible 622 843
Other active plan participants 2,075 2,355
------- -------
Accumulated postretirement benefit obligation 10,317 20,504
Unrecognized plan change 10,477 --
Unrecognized gain 1,793 3,694
------- -------
$22,587 $24,198
======= =======
</TABLE>
The assumed discount rate used to measure the accumulated postretirement benefit
obligation was 7.75% and 8.25% for fiscal 1998 and 1997, respectively. The
medical cost trend rate in fiscal 1998 and 1997 was 8.0% and 8.5%, respectively,
declining on a linear basis to a terminal rate of 5.25% by the year 2004. A one
percentage point increase in the assumed health care cost trend rates for each
future year would have increased fiscal 1998 and 1997 costs by approximately $77
and $95, respectively, and the accumulated postretirement benefit obligation as
of July 31, 1998 and 1997 by $626 and $969, respectively.
36
<PAGE> 37
NOTE 12 - INCOME TAXES
Pre-tax income/(loss) was $(8,769), $6,673 and $(769) in fiscal 1998, 1997 and
1996, respectively.
The (benefit)/provision for income taxes on income/(loss) is summarized below:
<TABLE>
<CAPTION>
Year ended July 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current tax expense
Federal $ (257) $ 104 $ 132
State and local 234 227 170
------- ------ -----
Total current (23) 331 302
------- ------ -----
Deferred tax expense (benefit)
Federal (1,769) 2,195 (301)
State and local (571) 133 (53)
------- ------ -----
Total deferred (2,340) 2,328 (354)
------- ------ -----
Release of valuation allowance:
Charged to Excess of purchase price over net
assets acquired from related parties -- 116 --
------- ------ -----
Total $(2,363) $2,775 $ (52)
======= ====== =====
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
July 31,
1998 1997
---- ----
<S> <C> <C>
Intangible assets $ (2,017) $ (1,944)
Fixed assets (2,038) (2,742)
Inventories (4,632) (4,632)
-------- --------
Gross deferred tax liabilities (8,687) (9,318)
Net operating loss and other carryforwards 3,676 527
Noncompetition agreement 35 60
Inventory reserves 3,770 4,145
Intangible assets 1,874 2,367
Accounts receivable reserves 248 240
Accrued postretirement benefits 9,124 9,688
Accrued pension benefits 4,712 4,722
Accrued expenses and other 873 854
-------- --------
Gross deferred tax assets 24,312 22,603
Deferred tax assets valuation allowance (4,589) (4,589)
-------- --------
Net deferred taxes $ 11,036 $ 8,696
======== ========
</TABLE>
The tax benefit resulting from the amortization of excess tax basis (i.e. the
excess over recorded book value) of certain intangible assets will reduce the
equity account "Excess purchase price over net assets acquired from related
parties," which will increase stockholders' equity (see Note 1). The Company has
a valuation allowance of $2,367 in fiscal 1998 and 1997 related to this item
because of the uncertainty of realization of this asset.
The Company recorded deferred tax assets of $7,551 related to the acquisition of
National Acme (see Note 2) and also established a valuation allowance of $2,222
due to uncertainty of the realization of the deferred tax assets.
37
<PAGE> 38
The differences between the U.S. federal statutory tax rate and the Company's
effective tax rate on income/(loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended July 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 1.6 3.5 (10.0)
Nondeductible goodwill (8.0) 3.5 (23.4)
Other nondeductible items (0.7) -- (0.8)
Other -- 0.6 6.9
---- ---- -----
26.9% 41.6% 6.7%
==== ==== =====
</TABLE>
The Company has a net operating loss carryforward at July 31, 1998 of
approximately $8,249, which expires at various dates through 2012. The Company
also has investment tax credit carryforwards of $287 which expire at various
dates through the year 2000 and minimum tax credit carryforwards of $90 which
have no expiration.
NOTE 13 - RELATED PARTIES
STANWICH PARTNERS, INC. ("SPI")
Two of the principals of SPI serve on the Company's Board of Directors. The
Company has a consulting agreement, as amended, with SPI through July 2001,
which provides for payments to SPI for consulting services of $261 per year for
each of the three fiscal years ending July 31, 1996, 1997 and 1998. Aggregate
SPI consulting fee expense under all agreements was $261 for each of the fiscal
years ended July 31, 1998, 1997 and 1996. In fiscal 1996, the Company paid $250
for additional services in connection with the refinancing of the senior credit
facility (see Notes 7 and 8).
In fiscal 1998, 1997 and 1996 the Company reimbursed SPI approximately $3, $11
and $5, respectively, for travel expenses incurred by SPI on behalf of the
Company.
D.V. ASSOCIATES, L.P.
Pursuant to a license agreement, the Company licenses certain trademarks from
D.V. Associates, L.P., and the Company's rights to these trademarks are subject
to the payment of certain license fees. The Company paid license fees to D.V.
Associates, L.P., of $300 in fiscal 1998, 1997 and 1996. The Company holds an
option to purchase the trademarks from D.V. Associates, L.P., for $3,000. Two of
the Company's directors have limited partnership interests in D.V. Associates,
L.P.
CHARLES E. BRADLEY AND JOHN G. POOLE
In order to obtain the consent of the Subordinated Debt holders to the
refinancing of the senior credit facility in October, 1995, Messrs. Bradley and
Poole, directors and significant shareholders of the Company, loaned the Company
$2,500 and $1,500, respectively, pursuant to the terms of Junior Subordinated
Debentures, to replace the principal owed to one of the Subordinated Debenture
holders. Also in connection with the refinancing, the holders of the
Subordinated Debt agreed to release their security interest in the Company's
assets. Mr. Bradley has pledged assets to secure the Subordinated Debt and will
receive $90 annually as collateral fee for as long as the pledge is in effect,
payable in monthly installments. During fiscal 1998, 1997 and 1996, the Company
paid $90, $90 and $68 as collateral fee to Mr. Bradley and his son. Interest
payments on the Junior Subordinated Debt of $291, $282 and $191 were paid to Mr.
Bradley and $175, $169 and $115 were paid to Mr. Poole for fiscal 1998, 1997 and
1996, respectively. In addition, interest payable to Messrs. Bradley and Poole
of $234 and $141, respectively, has been added to the Junior Subordinated Debt
balances as of July 31, 1998.
NOTE 14 - LEASE COMMITMENTS
The Company has various non-cancelable operating leases relating principally to
machinery and equipment and real property, which expire at various dates through
2006. Two of the Company's operating facilities were leased in April 1986 under
an operating lease with an initial 20-year term. This lease contains an
escalation provision, effective commencing on the fifth anniversary of the lease
and thereafter at each five-year anniversary, based on
38
<PAGE> 39
increases in the consumer price index. Monthly payments are $80 after the
escalation effective May 1996. The lease is renewable for four additional
five-year terms. Upon completion of the initial 20-year term, the Company is
required to renew the lease for at least one five-year term or purchase the
property. Accordingly, the minimum rental commitments shown below reflect one
additional five-year renewal term.
Rental expense relative to all operating leases for the years ended July 31,
1998, 1997 and 1996 was $2,924, $2,529 and $2,731, respectively. At July 31,
1998, future minimum rental commitments under non-cancelable operating leases
with a term in excess of one year are $18,639 and are due $2,611 in fiscal
1999, $2,514 in fiscal 2000, $2,345 in fiscal 2001, $2,125 in fiscal 2002,
$1,384 in fiscal 2003 and $7,660 thereafter.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
On March 2, 1992, a purported class action suit was filed in the United States
District Court for the District of Connecticut against the Company, Stanwich Oil
& Gas, Inc., the First Boston Corporation and certain of the Company's officers
and directors. The suit alleged violations of the federal securities laws and
state and federal common law in connection with alleged misrepresentations and
omissions made by the Company in connection with its initial public offering in
March 1990 and in certain reports later issued by the Company. While management
continues to believe the allegations were without merit, in March 1996 the
Company and all the remaining defendants, collectively, reached a settlement of
the suit with representatives of the purported class. Under the terms of the
settlement, the defendants collectively would pay a total of approximately
$1,500 over approximately five months. The Company accrued $2,400 in fiscal 1996
for the settlement and related litigation costs. The settlement was approved by
the court at a hearing on July 19, 1996.
On November 3, 1995, a jury rendered a verdict against the Company in the net
amount of approximately $1,300, plus interest, relating to a civil suit filed
against the Company in the Supreme Court for the State of New York, County of
Erie, styled Watson Bowman Acme Corp. v. DeVlieg-Bullard, Inc. The plaintiff
alleged losses resulting from a breach of contract by the Company, as successor
to DeVlieg-Lyons Integrated Systems, Inc., in connection with the delivery to
the plaintiff of a CNC Milling Machine. The suit was originally filed on
November 21, 1991.
The Company believes that the jury's verdict in this case failed to consider
material evidence in the case that indicates that the Company was not in breach
of the contract. Accordingly, a Notice of Appeal was filed on February 9, 1996.
The Company made an accrual in the first quarter of fiscal 1996 in the amount of
$2,200 for the jury's verdict, plus interest and other costs. This suit was
settled for $1,500 during fiscal 1997.
The Company is also involved in litigation and proceedings, including product
liability claims, in the ordinary course of its business. The Company does not
believe that the outcome of such litigation will have a material adverse effect
upon the Company, after taking into account any proceeds of available insurance.
NOTE 16 - BUSINESS SEGMENTS
The Company's business activities are conducted by four business segments: the
Services Group, the Machine Tool Group, the Tooling Systems Group and the
Industrial Group. The business segments are organized along product offerings.
The Services Group provides repair and replacement parts and field service
primarily for well-known brands such as DeVlieg, Bullard, Acme-Gridley, American
Tool, Brown & Sharpe, Futurmill, Mattison, New Britain Machine, Rockford and
White-Sundstrand. The Machine Tool Group manufactures original equipment
multi-spindle automatic lathes, automatic bar and chucking machines, tooling and
attachments under the trade
39
<PAGE> 40
names Acme-Gridley and New Britain Machine. The Machine Tool Group also provides
rebuild, retrofit and remanufacturing services for highly respected machine tool
brands, such as DeVlieg, Bullard, Acme-Gridley, American Tool, Brown & Sharpe,
Futurmill, Mattison, New Britain Machine, Rockford and White-Sundstrand. The
Tooling Systems Group manufactures precision tool holding devices, machine tool
spindles, boring tools, workholding chucks and electronic tool management
systems used in manual and computerized machine tools under the trade names
Universal Engineering, DeVlieg-Microbore, Cushman and Microset. The Industrial
Group manufactures high quality, stationary power tools, including table saws,
shapers, lathes, jointers, band saws, panel saws, wood lathes, planers and drill
presses marketed under the Powermatic and Artisan brand names. Financial
information for each of these segments is summarized below:
<TABLE>
<CAPTION>
Machine Tooling
Services Tool Systems Industrial
Group Group Group Group Corporate Total(d)
----- ----- ----- ----- --------- --------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1998
Sales $39,963 $31,139 $21,499 $25,160 $ -- $117,761
Intersegment sales -- -- (994) -- -- (994)
Net sales 39,963 31,139 20,505 25,160 -- 116,767
Operating income (a) 5,835 (8,038) 1,701 1,000 (3,920) (3,422)
Identifiable assets 50,045 33,183 17,920 8,255 14,512 123,915
Capital expenditures (b) 695 153 213 842 211 2,114
Depreciation and amortization 1,499 1,024 635 498 1,197 4,853
YEAR ENDED JULY 31, 1997
Net sales $44,188 $41,594 $21,152 $23,677 $ -- $130,611
Operating income 8,679 2,835 1,186 1,225 (2,162) 11,763
Identifiable assets 40,353 42,802 18,992 7,182 12,115 121,444
Capital expenditures (b) 313 364 60 391 280 1,408
Depreciation and amortization 1,951 1,207 350 388 609 4,505
YEAR ENDED JULY 31, 1996
Net sales $37,821 $30,783 $20,983 $23,727 $ -- $113,314
Operating income (c) 4,767 1,663 1,064 1,155 (5,014) 3,635
Identifiable assets 45,682 37,544 19,942 8,022 8,613 119,803
Capital expenditures (b) 206 747 40 441 175 1,609
Depreciation and amortization 1,661 1,128 963 527 333 4,612
</TABLE>
(a) Special charges were allocated $4,261 to the Machine Tool Group, $501 to the
Services Group and $1,121 to Corporate (See Note 17).
(b) Capital expenditures include $870, $192 and $471 of leased assets financed
by capital lease obligations in fiscal 1998, 1997 and 1996, respectively.
(c) Litigation settlement charges of $4,600 in fiscal 1996 were allocated as
follows: $2,200 to the Services Group and $2,400 to Corporate.
(d) Interest expense and income taxes are primarily allocated as Corporate
expenses.
NOTE 17 - SPECIAL CHARGES AND FOURTH QUARTER ADJUSTMENTS
As part of its continuing effort to streamline its operations by eliminating
redundancies and improving efficiency, the Company recorded a special charge to
provide for the plan to dispose of a number of redundant facilities, accrue for
related exit costs and write off goodwill and other intangible assets. Primarily
as a result of these measures, the Company recorded a charge of $5,883, of this
amount, $5,633 was recorded during the fourth quarter of fiscal 1998. The
closing of two facilities, in Cleveland, Ohio and Abbottstown, Pennsylvania, is
the result of changes or growth that facilitated the need for either expanded
space or more up-to-date facilities. The Fremont, Ohio warehouse was closed last
year when the parts inventories were consolidated in the Company's expanded
Rockford, Illinois operation last year.
40
<PAGE> 41
The $5,883 charge is comprised of $1,799 write-down of real estate, $2,477
write-off of goodwill, other intangible assets and other items and $1,607
provision for future costs associated with the planned streamlining of the
National Acme business, including severance and other related exit costs. The
goodwill written off related to the National Acme Machines business; the Company
still carries $12,398 in engineering drawings and goodwill related to the
National Acme aftermarket parts business.
In addition to the above item, during the fourth quarter of fiscal 1998, the
Company recognized $356 of income based on the final actuarial valuation of
changes to the postretirement medical program and approximately $500 of income
related to a review of its excess and obsolete inventory reserve position. Also
in the fourth quarter, the Company recognized an adjustment of $700 to its
income tax provision to reflect the reduced tax benefit for the nondeductible
nature of the write-off of intangible assets.
NOTE 18 - EARNINGS PER SHARE
The implementation of SFAS 128 did not have a material impact on the financial
statements. The table below sets forth the computation of the weighted average
number of shares used for basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year ending July 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average common shares outstanding 12,299 12,259 12,250
Stock purchase warrants (a) 1,783 1,782 1,523
------ ------ ------
Average common shares outstanding-basic 14,082 14,041 13,773
Effect of dilutive securities(b):
Contingently issuable stock purchase warrants 748 747 576
Stock options 428 391 233
------ ------ ------
Average common shares outstanding-diluted 15,258 15,179 14,582
====== ====== ======
</TABLE>
(a) Class A and Class B Stock Purchase Warrants are included in the computation
of basic earnings per share.
(b) When a net loss is recorded, additional shares for stock options and
contingent stock purchase warrants are not included because their inclusion
would be antidilutive. Because fiscal 1998 and 1996 results reflect a net loss,
basic and diluted earnings per share are calculated based on the same weighted
average number of shares outstanding.
41
<PAGE> 42
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Proxy Statement issued in connection with the Annual Meeting of Stockholders
to be held on January 20, 1999 contains, under the caption "Proposal 1: Election
of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance,"
information required by Item 10 of Form 10-K as to directors and executive
officers of the Company and is incorporated herein by reference. Pursuant to
General Instruction G(3), certain information concerning executive officers of
the Company is included in Part I of this Form 10-K, under the caption "Business
Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement issued in connection with the Annual Meeting of Stockholders
to be held on January 20, 1999 contains, under the caption "Executive
Compensation and Other Information," information required by Item 11 of Form
10-K and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Proxy Statement issued in connection with the Annual Meeting of Stockholders
to be held on January 20, 1999 contains, under the captions "Security Ownership
of Certain Beneficial Owners" and "Proposal 1: Election of Directors,"
information required by Item 12 of Form 10-K and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Proxy Statement issued in connection with the Annual Meeting of Stockholders
to be held on January 20, 1999 contains, under the caption "Certain
Relationships and Related Transactions," information required by Item 13 of Form
10-K and is incorporated herein by reference.
42
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) The following financial statements of DeVlieg-Bullard, Inc., are
included herein under Item 8 of Part II; Pages 19 to 41.
Report of Independent Accountants
Balance Sheets
July 31, 1998 and 1997
Statements of Operations
Years ended July 31, 1998, 1997 and 1996
Statements of Cash Flows
Years ended July 31, 1998, 1997 and 1996
Statements of Changes in Stockholders' Equity
Years ended July 31, 1998, 1997 and 1996
Notes to the Company Financial Statements
(2) The following financial statement schedules of DeVlieg-Bullard, Inc.,
are included herein on pages 49 to 51:
Report of Independent Accountants on Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Management and Compensatory Plans and Arrangements
DeVlieg-Bullard, Inc., 1989 Employee Stock Plan (included as Exhibit
10.03).
DeVlieg-Bullard, Inc., 1991 Stock Option Plan for Outside Directors
(included as Exhibit 10.05).
Non-Interference and Non-Disclosure Agreement executed by William O.
Thomas dated May 25, 1994 (included as Exhibit 10.11).
Consulting Agreement dated as of August 1, 1998, between the Company
and Stanwich Partners, Inc. (included as Exhibit 10.13).
Employment Agreement dated as of March 23, 1998, between the Company
and Thomas V. Gilboy (included as Exhibit 10.40).
(b) DeVlieg-Bullard, Inc., did not file any reports on Form 8-K for the quarter
ended July 31, 1998.
43
<PAGE> 44
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- --------------------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement on
Form S-1 Registration No. 33-32725 ("Registration Statement."))
3.2 Restated Bylaws of the Company. (Incorporated by reference to Exhibit
3.2 to the Company's Registration Statement.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement.)
4.2 Article IV of the Restated Certificate of Incorporation of the Company.
(Included in Exhibit 3.1.)
10.01 Form of Registration Rights Agreement dated as of March 22, 1990, among
the Company and certain stockholders identified therein. (Incorporated
by reference to Exhibit 10.5 to the Company's Registration Statement.)
10.02 License Agreement dated as of March 22, 1990, between D.V. Associates,
L.P. and the Company. (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement.)
10.03 DeVlieg-Bullard, Inc., 1989 Employee Stock Plan. (Incorporated by
reference to Exhibit 10.15 to the Company's Registration Statement.)
10.04 Amendment No. 1 to Shareholders' Agreement dated December 15, 1989.
(Incorporated by reference to Exhibit 10.30 to the Company's
Registration Statement.)
10.05 DeVlieg-Bullard, Inc., 1991 Stock Option Plan for Outside Directors.
(Incorporated by reference to Exhibit 10.05 to the Company's Annual
Report on Form 10-K for the year ended July 31, 1996 ("1996 Form
10-K").)
10.06 Amended and Restated Lease Agreement by and between Corporate Property
Associates 5 and DeVlieg-Bullard, Inc., dated as of April 3, 1986, and
amended and restated as of November 24, 1992. (Incorporated by
reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K
for the year ended July 31, 1993.)
10.07 Investment Agreement dated May 25, 1994, among (i) the Company and (ii)
Allied Investment Corporation, Allied Investment Corporation II and
Allied Capital Corporation, Banc One Capital Partners Corporation, and
PNC Capital Corp. The Company agrees to furnish supplementally a copy
of any omitted schedules to the Commission upon request. (Incorporated
by reference to Exhibit 10.43 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1994 ("April 1994 Form 10-Q."))
10.08 Debenture in the original principal amount of $2,360,000 issued May 25,
1994, by the Company to Allied Investment Corporation, the "Allied
Investment Corporation Debenture." Although the Company repaid this
debt on October 23, 1995, the following debentures are outstanding on
terms that are substantially identical to the Allied Investment
Corporation Debenture except as to Holder and amount:
<CAPTION>
Holder Principal Amount
------ ----------------
<S> <C> <C>
Banc One Capital Partners Corporation $4,000,000
PNC Capital Corp. 4,000,000
(Incorporated by reference to Exhibit 10.44 to the Company's April 1994
Form 10-Q.)
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C>
10.09 Class A Stock Purchase Warrant issued by the Company May 25, 1994, to
PNC Capital Corp., the "PNC Class A Warrant," for the right to purchase
333,333 shares of the Company's common stock. In addition, the Company
issued the following warrant which is substantially identical to the
PNC Class A Warrant except as to Holder:
<CAPTION>
Number of Shares
Holder Subject to Warrant
------ ------------------
<S> <C> <C>
Banc One Capital Partners Corporation 333,333
(Incorporated by reference to Exhibit 10.45 to the Company's April 1994
Form 10-Q.)
10.10 Registration Agreement dated May 25, 1994, by and between
DeVlieg-Bullard, Inc., and Allied Investment Corporation, Allied
Investment Corporation II, Allied Capital Corporation, Banc One Capital
Partners Corporation and PNC Capital Corp. (Incorporated by reference
to Exhibit 10.47 to the Company's April 1994 Form 10-Q.)
10.11 Non-Interference and Non-Disclosure Agreement executed by William O.
Thomas dated May 25, 1994. (Incorporated by reference to Exhibit 10.48
to the Company's April 1994 Form 10-Q.)
10.13 Consulting Agreement dated as of August 1, 1998, between the Company
and Stanwich Partners, Inc.
10.15 First Amendment to Investment Agreement dated October 23, 1995, among
Banc One Capital Partners Corporation, PNC Capital Corp., Allied
Investment Corporation, Allied Investment Corporation II, Allied
Capital Corporation II, Charles E. Bradley, Sr., John G. Poole and
DeVlieg-Bullard, Inc. (Incorporated by reference to Exhibit 10.4 the
Company's Form 8-K dated November 7, 1995.)
10.16 Debenture in the original principal amount of $2,500,000 issued October
23, 1995, by DeVlieg-Bullard, Inc., to Charles E. Bradley, Sr.
(Incorporated by reference to Exhibit 10.5 to the Company's Form 8-K
dated November 7, 1995.)
10.17 Debenture in the original principal amount of $1,500,000 issued October
23, 1995, by DeVlieg-Bullard, Inc., to John G. Poole. (Incorporated by
reference to Exhibit 10.6 to the Company's Form 8-K dated November 7,
1995.)
10.18 Class A Stock Purchase Warrant issued by DeVlieg-Bullard, Inc. on
October 23, 1995, to Charles E. Bradley, Sr. (the "Bradley Class A
Warrant") for the right to purchase 52,083 shares of the Company's
common stock. In addition, the Company issued the following additional
Class A Stock Purchase Warrants, which were substantially identical to
the Bradley Class A Warrant, except as to the holder and number of
shares subject to the warrant:
</TABLE>
<TABLE>
<CAPTION>
Number of Shares
Holder Subject to Warrant
------ ------------------
<S> <C> <C>
John G. Poole 31,250
Charles E. Bradley, Sr. 104,166
John G. Poole 62,500
Banc One Capital Partners Corporation 166,667
PNC Capital Corp. 166,667
Allied Capital Corporation II 21,250
Allied Investment Corporation II 81,250
Allied Investment Corporation 147,501
(Incorporated by reference to Exhibit 10.7 to the Company's Form 8-K
dated November 7, 1995.)
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
10.19 Class B Stock Purchase Warrant issued by DeVlieg-Bullard, Inc. dated
October 23, 1995, to PNC Capital Corp. (The "PNC Class B Warrant") for
the right to purchase a presently indeterminable number of shares of
the Company's common stock. In addition, the Company issued
substantially identical Class B Stock Purchase Warrants to each of Banc
One Capital Partners Corporation, Allied Investment Corporation, Allied
Investment Corporation II and Allied Capital Corporation II.
(Incorporated by reference to Exhibit 10.8 to the Company's Form 8-K
dated November 7, 1995.)
10.20 Class C Stock Purchase Warrant issued by DeVlieg-Bullard, Inc., dated
October 23, 1995, to PNC Capital Corp. (the "PNC Class C Warrant") for
the right to purchase 250,000 shares of the Company's common stock. In
addition, the Company issued the following additional Class C Stock
Purchase Warrants, which are substantially identical to the PNC Class C
Warrant, except as to the holder and number of shares subject to the
warrant:
<CAPTION>
Number of Shares
Holder Subject to Warrant
------ ------------------
<S> <C> <C>
Banc One Capital Partners Corporation 250,000
Charles E. Bradley, Sr. 156,250
John G. Poole 93,750
(Incorporated by reference to Exhibit 10.9 to the Company's Form 8-K
dated November 7, 1995.)
10.21 Credit Support Agreement dated October 23, 1995, between
DeVlieg-Bullard, Inc., and CPS Holdings, Inc. (Incorporated by
reference to Exhibit 10.10 to the Company's Form 8-K dated November 7,
1995.)
10.22 First Amendment to Registration Rights Agreement dated October 23,
1995, among Allied Investment Corporation, Allied Investment
Corporation II, Allied Capital Corporation II, Banc One Capital
Partners Corporation, PNC Capital Corp., Charles E. Bradley, Sr., John
G. Poole and DeVlieg-Bullard, Inc. (Incorporated by reference to
Exhibit 10.11 to the Company's Form 8-K dated November 7, 1995.)
10.23 Second Amendment to the DeVlieg-Bullard, Inc. 1989 Employee Stock
Option Plan (Incorporated by reference to Exhibit 10.34 to the 1996
Form 10-K.)
10.24 Second Amendment to the DeVlieg-Bullard, Inc. 1991 Stock Option Plan
for Outside Directors. (Incorporated by reference to Exhibit A to the
Company's Proxy Statement dated November 13, 1996.)
10.25 Amended and Restated Financing and Security Agreement dated January 17,
1997, between the CIT Group/Business Credit, Inc. and DeVlieg-Bullard,
Inc. The Company agrees to furnish supplementally a copy of any omitted
exhibits or schedules to the Commission upon request. (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 1997 ("January 1997 Form
10-Q."))
10.26 Amended and Restated Revolving Loan Promissory Note dated January 17,
1997, in the principal amount of $30,000,000 between the CIT
Group/Business Credit, Inc., and DeVlieg-Bullard, Inc. (Incorporated by
reference to Exhibit 10.2 to the Company's January 1997 Form 10-Q.)
10.27 Asset Purchase Agreement between Mattison Technologies, Inc. and
DeVlieg-Bullard, Inc. dated December 18, 1996. (Pursuant to Item
601(b)(2) of Regulation S-K, the schedules to this agreement are
omitted, but will be provided supplementally to the Commission upon
request.) (Incorporated by reference to Exhibit 2.1 to the Company's
Form 8-K dated February 3, 1997.)
10.28 Secured Promissory Note dated January 16, 1997 in the principal amount
of $2,600,000 between Mattison Technologies, Inc., and DeVlieg-Bullard,
Inc. (Incorporated by reference to Exhibit 2.2 to the Company's Form
8-K dated February 3, 1997.)
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C>
10.29 Registration Rights Agreement dated February 27, 1997, among
DeVlieg-Bullard, Inc., Charles E. Bradley, Stanwich Oil and Gas, Inc.
and Corestates Bank. (Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended April 30,
1997 ("April 1997 Form 10-Q."))
10.30 Second Amendment to Investment Agreement dated April 12, 1996, among
DeVlieg-Bullard, Inc., Banc One Capital Partners Corporation, PNC
Capital Corp., Charles E. Bradley and John G. Poole. (Incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K
for the year ended July 31, 1997.)
10.31 Third Amendment to Investment Agreement dated January 17, 1997, among
DeVlieg-Bullard, Inc., Banc One Capital Partners Corporation, PNC
Capital Corp., Charles E. Bradley and John G. Poole. (Incorporated by
reference to Exhibit 10.2 to the Company's April 1997 Form 10-Q.)
10.32 Second Amendment to Amended and Restated Financing and Security
Agreement dated September 17, 1997 among DeVlieg-Bullard, Inc., the CIT
Group/Business Credit Inc., and BNY Financial Corporation.
(Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 31, 1997.)
10.33 Third Amendment to Amended and Restated Financing and Security
Agreement dated December 29, 1997 among DeVlieg-Bullard, Inc., the CIT
Group/Business Credit Inc., and BNY Financial Corporation.
(Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1998 ("January
1998 Form 10-Q").)
10.34 Fourth Amendment to Amended and Restated Financing and Security
Agreement dated March 11, 1998 among DeVlieg-Bullard, Inc., the CIT
Group/Business Credit Inc., and BNY Financial Corporation.
(Incorporated by reference to Exhibit 10.1 to the Company's January
1998 Form 10-Q.)
10.35 Amended and Restated Term Loan Promissory Note dated March 11, 1998 in
the principal amount of $4,750,000 between DeVlieg-Bullard, Inc. and
the CIT Group/Business Credit, Inc. (Incorporated by reference to the
Company's January 1998 Form 10-Q.)
10.36 Amended and Restated Term Loan Promissory Note dated March 11, 1998 in
the principal amount of $2,850,000 between DeVlieg-Bullard, Inc. and
BNY Financial Corporation. (Incorporated by reference to the Company's
January 1998 Form 10-Q.)
10.37 Fourth Amendment to Investment Agreement dated September 17, 1997,
among DeVlieg-Bullard, Inc., Banc One Capital Partners Corporation, PNC
Capital Corp., Charles E. Bradley and John G. Poole. (Incorporated by
reference to the Company's January 1998 Form 10-Q.)
10.38 Fifth Amendment to Investment Agreement dated March 11, 1998, among
DeVlieg-Bullard, Inc., Banc One Capital Partners Corporation, PNC
Capital Corp., Charles E. Bradley and John G. Poole. (Incorporated by
reference to the Company's January 1998 Form 10-Q.)
10.39 Amendment to Intercreditor Agreement dated March 11, 1998 between the
CIT Group/Business Credit, Inc., Charles E. Bradley, John G. Poole,
Banc One Capital Partners Corporation and PNC Capital Corp.
(Incorporated by reference to the Company's January 1998 Form 10-Q.)
10.40 Employment Agreement dated as of March 23, 1998, between the Company
and Thomas V. Gilboy.
23 Consent of PricewaterhouseCoopers, LLP
27 Financial Data Schedules (for SEC use only)
</TABLE>
47
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on September 24, 1998.
DEVLIEG-BULLARD, INC.
(Registrant)
By: /s/ William O. Thomas
---------------------
William O. Thomas
President and
Chief Executive 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>
Signatures and Title(s) Date
- ----------------------- ----
<S> <C>
/s/ William O. Thomas September 24, 1998
- ------------------------------------
William O. Thomas
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ Thomas V. Gilboy September 24, 1998
- ------------------------------------
Thomas V. Gilboy
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Charles E. Bradley September 24, 1998
- ------------------------------------
Charles E. Bradley
Chairman of the Board
/s/ Burton C. Borgelt September 24, 1998
- ------------------------------------
Burton C. Borgelt, Director
/s/ Thomas L. Cassidy September 24, 1998
- ------------------------------------
Thomas L. Cassidy, Director
/s/ John R. Kennedy September 24, 1998
- ------------------------------------
John R. Kennedy, Director
/s/ John E. McConnaughy, Jr. September 24, 1998
- ------------------------------------
John E. McConnaughy, Jr., Director
/s/ John G. Poole September 24, 1998
- ------------------------------------
John G. Poole, Director
</TABLE>
48
<PAGE> 49
DeVlieg-Bullard, Inc.
Index To Financial Statement Schedules
<TABLE>
<CAPTION>
Description
<S> <C>
Report of Independent Accountants on Financial Statement Schedules 50
Schedule VIII -Valuation and Qualifying Accounts 51
</TABLE>
All other financial statement schedules are either not required or not
applicable to the Company.
49
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of DeVlieg-Bullard, Inc.
Our audits of the financial statements referred to in our report dated September
15, 1998, except as to Notes 7 and 8 which are as of November 9, 1998, appearing
on page 20 of this Annual Report on Form 10-K also included an audit of the
Financial Statement Schedule listed in the index appearing under Item 14(a)(2)
of this Form 10-K on page 43. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
September 15, 1998
50
<PAGE> 51
DeVlieg-Bullard, Inc.
Schedule VIII - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance at
August 1, 1995 Expense Other Deductions July 31, 1996
-------------- ------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Accounts Receivable $ 810 $ 61 $ 69 a $ (487)b $ 453
Inventories 6,105 (68)c 4,942 e (57)d 10,922
Deferred Tax Assets 2,483 -- 2,222 e -- 4,705
Litigation Reserve 38 4,600 f -- (2,329)f 2,309
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance at
August 1, 1996 Expense Other Deductions July 31, 1997
-------------- ------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Accounts Receivable $ 453 $ 36 $ -- $ (99)b $ 390
Inventories 10,922 674 c -- (1,092)d 10,504
Deferred Tax Assets 4,705 -- -- (116) 4,589
Litigation Reserve 2,309 (712) -- (1,597)f --
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance at
August 1, 1997 Expense Other Deductions July 31, 1998
-------------- ------- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Accounts Receivable $ 390 $ (195) $ 282 a $ (78) $ 399
Inventories 10,504 918 c 127 g (993)d 10,556
Deferred Tax Assets 4,589 -- -- -- 4,589
Accrual for redundant facility costs (h) -- 1,542 -- -- 1,542
</TABLE>
(a) Recoveries of amounts previously written off.
(b) Write-off amounts deemed uncollectible.
(c) Provision for obsolescence.
(d) Scrapped inventory.
(e) Includes reserves of companies acquired (see Note 2 of Notes to the
Company Financial Statements).
(f) See Note 15 of Notes to the Company Financial Statements for a
description of litigation expenses. The Company settled one of the
cases during fiscal 1997 and one during fiscal 1996.
(g) Reserve for favorable purchase price on bulk purchased inventory.
(h) See Note 17 of Notes to the Company Financial Statements for a
description of the special charge for redundant facilities and related
exit costs.
51
<PAGE> 1
Exhibit 10.13
CONSULTING AGREEMENT
AGREEMENT, dated as of August 1, 1998, between DEVLIEG-BULLARD, INC., a
Delaware corporation (the "Company"), and STANWICH PARTNERS, INC., a Delaware
corporation (the "Consultant").
WITNESSETH:
WHEREAS, the Consultant, by and through its officers and other employees,
has developed in connection with the conduct of its business and affairs various
areas of expertise in the fields of general corporate management, corporate
financing and business investment; and
WHEREAS, the Company desires to obtain the assistance of the Consultant in
those areas hereinabove enumerated and which the Consultant is acknowledged to
have expertise, for a period of three (3) years from the date of this Agreement;
and
WHEREAS, the Company wishes to employ the foregoing and mutual covenants
herein contained, the parties agree as follows:
1. Engagement.
The Company hereby engages the Consultant and the Consultant hereby
accepts such engagement for the term set forth in Paragraph 3 below as a
consultant.
2. Duties and Responsibilities.
During the term hereof, the Consultant shall be a consultant to the
Company, and shall render to the Company, by and through its officers,
employees and agents as the Consultant, in its sole discretion, shall designate
from time to time, executive consulting services. Said consulting services shall
consist of general management, finance and business investment, and such other
financial, administrative and management consulting services as shall from time
to time be requested by the president of the Company and his authorized
designees, up to a maximum not to exceed twenty (20) hours in any week during
the term hereof unless the Consultant shall otherwise agree.
3. Term.
The term of the Consultant's engagement pursuant to this Agreement shall
commence on the date hereof and shall end on July 31, 2001.
4. Compensation.
For services rendered under this Agreement during the term hereof, the
Company shall pay the Consultant compensation in the amount of $21,750 per
month.
<PAGE> 2
5. Reimbursement of Expenses.
The Company agrees to reimburse the Consultant for all reasonable
business expenses incurred or expended by such corporation and its employees
incident to the performance of the Consultant's duties hereunder upon
submission by the consultant to the Company of expense reports and reasonable
vouchers or other evidence supporting such expenses.
6. Restrictive Covenants and Confidentiality; Injunctive Relief:
(a) Recognizing that certain of the knowledge, information and
relationship with resources, suppliers and customers of the Company and their
subsidiaries, and the knowledge of the Company's and its subsidiaries'
financial condition, business methods, systems, trade secrets, know-how,
proprietary process, plans and policies which the Consultant has and shall
hereafter establish, receive or obtain as an employee of the Company and its
subsidiaries, Consultant agrees that during and for a period of six months
after the terms of this Agreement, Consultant shall not disclose, without the
prior written consent of the Board of Directors of the Company, any
confidential proprietary or non-public proprietary knowledge or information
pertaining to the Company and its subsidiaries, their management financial
condition, customer lists, trade secrets, know-how, proprietary processes,
sources of supply, business, personnel, policies or prospects, to any person,
firm, corporation or other entity other than Consultant's agents and employees,
other than disclosure in the conduct of the business of the Company which the
Consultant determines in good faith to be in the interest of the Company,
provided that after the term hereof these restrictions shall not apply to such
secrets, know-how and proprietary processes which are then in the public domain
(provided that the Consultant was not directly responsible for such secrets,
know-how or processes entering the public domain without the Company's consent).
(b) Consultant acknowledges and agrees that all memoranda, notes,
reports, records and other documents made or complied by the Consultant, or
made available to the Consultant prior or during the term of this Agreement,
concerning the Company's and its subsidiaries' business, shall be the Company's
property and shall be delivered to the Company on the termination of this
Agreement or at any other time on request by the Board of Directors of the
Company.
(c) The provisions of this Paragraph 6 shall survive the
termination or expiration of this Agreement for a period of six months
irrespective of the reason therefor.
7. Notices.
All notices, requests, demands and other communications provided for
by this Agreement shall be in writing and shall be personally delivered or
mailed (by registered or certified mail) to Stanwich Partners, Inc., One
Stamford Landing, 62 Southfield Avenue, Stamford, Connecticut 06902, Attention:
Charles E. Bradley, in the case of the Consultant, or to the Company at One
Gorham Island, Westport, Connecticut 06880, Attention: William O. Thomas, or to
such office or address as the Company shall notify Consultant:
<PAGE> 3
Any such notices shall be effective upon receipt, if personally
delivered, or three business days after mailing, if mailed.
8. Assignability and Binding Effect.
This Agreement shall inure to the benefit of and shall be binding upon
the successors, assigns and legal representatives of the Consultant, and shall
inure to the benefit of and be binding upon the Company and its successors, but
the obligations of the Consultant and the Company may not be delegated without
the prior written consent of the other party.
9. Complete Understanding.
This Agreement constitutes the complete understanding between the
parties with respect to the engagement of the Consultant hereunder and no
statement, representation, warranty or covenant has been made by either party
with respect thereto except as expressly set forth herein. This Agreement shall
not be altered, modified, amended or terminated except by written instrument
signed by each of the parties hereto.
10. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
11. Severability.
In case any one or more of the provisions of this Agreement shall be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any
way be affected thereby.
12. Paragraph Headings.
The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
13. Termination of Old Consulting Agreements.
This Agreement supersedes and replaces the Consulting Agreement dated
as of August 1, 1995 between the Company and the Consultant.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this document to be executed
under seal as of the day and year first above written.
DEVLIEG-BULLARD, INC.
By: /s/ William O. Thomas
----------------------------------
Name: William O. Thomas
----------------------------
Title: President & CEO
----------------------------
STANWICH PARTNERS, INC.
By: /s/ John G. Poole
--------------------------------
Name: John G. Poole
--------------------------
Title: V.P.
-------------------------
<PAGE> 1
EXHIBIT 10.40
CONFIDENTIAL
March 23, 1998
Mr. Thomas V. Gilboy
44 Benjamin Street
Old Greenwich, CT 06870 VIA OVERNIGHT COURIER
Dear Tom:
DeVlieg-Bullard, Inc. (DBI) is pleased to offer you the position of Vice
President and Chief Financial Officer (CFO) of the Corporation.
The CFO's main functions are to plan for, obtain, and use funds to maximize the
value of the firm. This function involves several important activities.
First, the CFO is responsible for planning and forecasting, and for looking
ahead and interacting with the executives who are accountable for the
general planning activities of the firm.
Second, the CFO is responsible for optimizing investment and financing
decisions and their interactions.
Third, the CFO is responsible for interacting with the operational and
other parts of the business to help the firm operate as efficiently as
possible. The CFO is responsible for all aspects of operational and
financial control.
Fourth, the CFO is responsible for linking the firm to the financial
markets in which funds are raised and in which the firm's securities are
traded.
In sum, the central responsibilities of the CFO relate to planning, decisions
on investments, operational and financial control, and how the firm's needs are
financed. In performance of these functions, the CFO's responsibilities have a
direct bearing on the key decisions affecting the value of the firm.
The terms and conditions of the offer are as follows:
1. Start Date April 17, 1998
2. Base Salary $160,000 per year paid semi-monthly
3. Bonus Potential Fifty percent of your base pay
4. Stock Options 100,000 shares of DBI common stock will be
awarded to you at the option price set by
the closing price per share on March 10, 1997
(2 3/4) as approved by the Board of
Directors, in accordance with and pursuant
to the terms of the DBI 1989 Employee Stock
Plan. You shall vest in 30%; 30% and 40%
annual increments commencing one year from
the date of grant. The options shall
terminate ten years from the date of grant.
<PAGE> 2
Thomas V. Gilboy
March 23, 1998
Page 2
5. Benefits You will be eligible for the employee
benefits outlined in the DBI "Your
ChoiceComp Plan Benefits Workbook"
(provided under separate cover). No
pre-employment physical is required
for enrollment in the ChoiceComp Plan
Details of the Split Dollar insurance
program will be forwarded to you under
separate cover.
Vacation allowance will be three weeks
per year.
6. Automobile You will participate in the Company
Car Program and receive a leased
automobile.
7. Severance/Change in
Control On December 14, 1995, the Compensation
Committee of the Board of Directors
approved one year of severance
compensation for the CFO position in
the event of termination without cause
or as a result of a change in control.
The position will be located in Westport, Connecticut and you will report to me.
We are excited about the future of DeVlieg-Bullard, Inc. and look forward to
your contribution to the company.
If this offer is acceptable to you, please indicate your acceptance by signing
below and returning a copy to DBI.
Sincerely,
/s/ William O. Thomas
Chief Executive Officer
Accepted by: /s/ Thomas V. Gilboy
--------------------
Date: 3-24-98
-------
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
DeVlieg-Bullard, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-40874, 33-54608, 33-85528, 333-02335 and
333-22667) of DeVlieg-Bullard, Inc. of our report dated September 15, 1998,
except as to Notes 7 and 8 which are as of November 9, 1998, appearing on page
20 of this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on the Financial Statement Schedules which appears on
page 50 of this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
November 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FORM
10-K FOR THE YEAR ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) ANNUAL REPORT.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 365
<SECURITIES> 0
<RECEIVABLES> 19,209
<ALLOWANCES> (399)
<INVENTORY> 45,459
<CURRENT-ASSETS> 72,137
<PP&E> 27,038
<DEPRECIATION> (16,565)
<TOTAL-ASSETS> 123,915
<CURRENT-LIABILITIES> 58,503
<BONDS> 0
0
0
<COMMON> 123
<OTHER-SE> 19,283
<TOTAL-LIABILITY-AND-EQUITY> 123,915
<SALES> 116,767
<TOTAL-REVENUES> 116,767
<CGS> 88,156
<TOTAL-COSTS> 88,156
<OTHER-EXPENSES> 5,564
<LOSS-PROVISION> (195)
<INTEREST-EXPENSE> 5,347
<INCOME-PRETAX> (8,769)
<INCOME-TAX> (2,363)
<INCOME-CONTINUING> (6,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,406)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
