SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
[No Fee Required]
For the fiscal year ended December 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
[No Fee Required]
For the transition period from to
Commission file number 0-3108
TRION, INC.
(Exact name of Registrant as specified in its charter)
Commonwealth of Pennsylvania 25-0922753
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 760, 101 McNeill Road
Sanford, North Carolina 27331-0760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (919)775-2201
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50
(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 requirement 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 information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 2, 1998.
Common Stock, par value $.50 - $30,360,135
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock as of March 2, 1998.
7,128,797 shares of Common Stock, par value $.50
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the annual Proxy Statement
dated March 13, 1998 are incorporated by reference into Part III.
<p>1
PART I
Item 1. Business.
General
Trion, Inc. (the "Company" or "Trion") was incorporated in 1946 in
the Commonwealth of Pennsylvania and is principally engaged in the design,
manufacture, sale and distribution of equipment to improve indoor air quality
("IAQ"). On August 1, 1995 the Company acquired Envirco Corporation
("Envirco"), a manufacturer and distributor of ultra clean air systems and
components located in Albuquerque, New Mexico. In addition, on August 30,
1996 the Company acquired Herrmidifier Company, Inc. ("Herrmidifier"), a
manufacturer and distributor of humidification systems and components located
in Lancaster, Pennsylvania.
Products and Markets
The Company's industry segments are Engineered Products, Consumer
Products and European Operations. See Note M to the financial statements
included in Item 8 of this Annual Report on Form 10-K for financial
information concerning the Company's industry segments.
Engineered Products. The Engineered Products group designs,
manufactures and sells indoor air quality and dust collection equipment.
Engineered Products comprised 70%, 73% and 65% of the Company's total sales in
the years 1997, 1996 and 1995, respectively.
The Company's Sanford, North Carolina operation provides air
cleaning equipment and systems primarily designed for industrial, residential,
commercial and specialty uses. These products are used in a wide variety of
industries including residential, metal working, pharmaceuticals, medical,
commercial buildings, general manufacturing and ships and submarines.
Products range from custom-engineered systems that remove large volumes of
airborne contaminants caused by industrial processes to self-contained air
cleaners used to capture tobacco smoke, dust and pollen in environments such
as enclosed work areas, restaurants and homes.
Herrmidifier manufactures and sells humidification products used
for residential, commercial, and industrial applications. Products range from
custom-designed systems used in industrial processes and commercial
installations to residential humidifiers installed with heating and air
conditioning systems in homes. The residential humidifier production was
relocated to the Sanford facility during the second quarter of 1997 and it is
planned that the entire remaining portion of the Herrmidifier Lancaster
operation will be relocated to Sanford during the second quarter of 1998.
Through its subsidiary Envirco, the Company utilizes high
efficiency particulate arrestance ("HEPA") and ultra low particulate
arrestance ("ULPA") technologies in manufacturing contamination control air
systems and filters for applications including cleanrooms in the semiconductor
and microelectronics industries and systems to provide hospitals with clean
environments for surgery rooms, cancer research, patient isolation and sterile
medication preparation. The Company's products include the patented MAC-10r
used in cleanroom applications and Hospi-Gardr, a portable filtration unit
used in medical applications.
<p>2
The Company also manufacturers equipment to electrostatically
distribute microthin films of lubricants, corrosion inhibitors and other
protective coatings to metal strips on high speed lines in its Sanford
facility.
Consumer Products. The Company's Consumer Products group, also
located in Sanford, North Carolina, manufactures and markets appliance air
cleaners, including both tabletop and free standing console units. The
Company's appliance units historically have been marketed principally to
retailers and others on a private label basis. In recent years, the Company
has begun to market products under Trion brand names. The Company introduced a
newly designed line of products in 1997. Consumer Products comprised 19%, 16%
and 24% of the Company's total sales in the years 1997, 1996 and 1995,
respectively.
European Operations. European Operations consists of sales and
distribution primarily in Europe of both engineered and consumer IAQ products
manufactured at Trion's U.S. facilities. European Operations comprised 11% of
the Company's total sales in each of the years 1997, 1996 and 1995,
respectively.
Technologies
In its air cleaning products, the Company utilizes what it
believes to be the industry's broadest range of technologies to collect
airborne contaminants.
- HEPA filtration utilizes laminar flow filtration which ensures
even and constant airflow and has 99.97% efficiency on 0.3
micron size particles. ULPA filtration functions similarly
and has 99.999% efficiency on 0.12 micron size particles. These
processes provide the level of airborne contamination control
essential for applications requiring ultra-clean air, such as
cleanrooms and hospital and laboratory settings.
- Electrostatic precipitators are high efficiency electronic
air filters. In an electrostatic precipitator, air passes
through an ionizing section where airborne particles are
electrically charged by ions in an electrostatic field.
The charged particles then enter a collecting cell where
the particles are repelled from charged plates and collected
on grounded plates within the cell. This process is highly
effective at capturing submicron particulate, including
particulate found in tobacco smoke, dust, pollen, welding
smoke and oil mists from machining operations.
- In a media filtration system, air passes through media
filters that trap airborne particles. Some of these
filters, like cartridge collectors, can collect submicron
particulate, such as welding smoke, as well as larger
particulate. Other filters, like bag collectors, are
useful for larger particulate such as that generated in
machining and welding processes. In some systems, air
passes through a prefilter where larger particles are
collected and then pass through a second or third media
filter where smaller particles are collected.
<p>3
In its humidification products, the Company also uses multiple
technologies. Humidification is accomplished by introducing moisture in the
form of steam, water vapor or water droplets into the air system. The
moisture raises the relative humidity of the air stream to a desired level for
human comfort, protection of valuable articles and manufacturing processes.
Raw Materials and Purchased Components
Raw materials and components used by the Company in the
manufacturing process are either readily available from a number of suppliers
or are manufactured by the Company from raw materials that have such
availability.
Aluminum, steel and filter paper represent principal raw materials
in the Company's products. Prices for aluminum, steel and filter paper can be
subject to wide fluctuation and the Company's products cannot always be priced
to take into account such fluctuations, especially in the short term. Other
significant materials used by the Company include motors, blowers, injection
molded plastics, media filters, packaging materials and various electrical
components. In aggregate, the cost of materials in 1997 and 1996 increased
slightly less than the consumer price index. The Company does not anticipate
significant cost increases during 1998.
Sales and Distribution
Engineered Products are sold in North America by the Company's own
sales force to end users, contractors and distributors as well as through
manufacturers' representatives. Consumer Products are sold directly to
retailers, distributors and other companies for ultimate sale to consumers
through retail outlets.
Trion sells appliance air cleaners on a recurring basis to Sears,
Roebuck and Co. within Consumer Products. This customer represented
approximately 8% of consolidated sales in 1997 and the loss of the account
could have an adverse effect on the Company.
The Company's indoor air quality products are sold throughout the
world. Through Trion Limited, a wholly-owned subsidiary, the Company has a
marketing and distribution office in Andover, England, servicing primarily the
European market directly and through distributors and representatives. The
Company's products are also sold in other countries outside Europe through
distributors and representatives, principally in the Pacific Rim.
For information regarding the Company's export sales, see Note M
to the financial statements included in Item 8 of this Annual Report on Form
10-K.
Competition
While the Company is a principal competitor in most of its
markets, the indoor air quality industry is highly competitive. In Engineered
Products, the market is fragmented, with no company having a predominant
share. In the domestic Consumer Products markets, while appliance air
cleaners are sold by a large number of companies, Honeywell, Inc., Holmes
Products Corporation, Rival Company / Bionaire Corporation and Trion together
have the predominant share of the market. Of the four, Trion is the only
<p>4
manufacturer of electronic appliance air cleaners. Principal competitors
outside the United States include Matsushita Electric Works Ltd., some of the
domestic companies as well as other foreign competitors. Competition in the
Company's market segment is primarily on the basis of price, product
technology, product quality and customer service with a majority of the
Company's business obtained through competitive bidding. Some of the
Company's competitors have assets and/or sales substantially in excess of the
Company.
Patents and Trademarks
The Company holds a number of patents that relate to the design
and use of its products, some of which it considers significant to the overall
conduct of the Company's business. One significant patent held by the Company
will expire in December 2002, however, subsequent patented improvements and
design features should minimize the impact to the Company.
The Company owns several trademarks that it considers important in
the marketing of its products and believes that its rights in these trademarks
are adequately protected and of unlimited duration.
Research and Development
The Company's ongoing research and development program involves
creating new products and redesigning existing products to reduce
manufacturing costs and to increase product efficiencies. During 1997, 1996
and 1995, the Company spent approximately $1,328,000, $1,259,000, and
$977,000, respectively, on research and development activities.
Employees
As of December 31, 1997, the Company employed approximately 501
persons worldwide. The Company's employees are not represented by a union.
The Company believes its employee relations are satisfactory.
Backlog
The backlog of unfilled orders at December 31, 1997 was $8,747,000
as compared to $6,912,000 at the prior year-end. Substantially all of this
backlog is scheduled for shipment during 1998.
Risks
As a cautionary note to investors, statements made in this Annual
Report on Form 10-K which are not historical are forward - looking
statements that involve risks and uncertainties. In addition, the Company may
from time to time make oral forward - looking statements. There are several
important factors that could cause actual results to differ materially from
those contained in any forward - looking statement made by or on behalf of the
Company. Such factors include, but are not limited to, those set forth below.
Potential Fluctuations in Operating Results
The Company can experience fluctuations in operating results, both
on a quarterly and annual basis, caused by various factors, including general
economic conditions and the factors discussed below under "Cyclicality".
<p>5
Fluctuations in the Company's operating results, particularly quarter-to-
quarter, are also affected in certain of its markets by the timing of customer
orders, the pattern of customer purchasing cycles and the resulting changes in
product mix.
Cyclicality
Sales of Engineered Products in general are tied to capital
spending levels. A significant percentage of the Company's sales of
residential wholehouse air cleaners is dependent upon new residential
construction, which is a cyclical industry. In addition, the Company has
substantial sales of products for cleanroom applications to the
microelectronics industry, which can be cyclical. Sales of Consumer Products
may also be subject to cycles due to the seasons and weather conditions.
Competition
While the Company is a principal competitor in most of its
markets, the indoor air quality industry is highly competitive. There can be
no assurance that there will not be adverse changes in the Company's
competitive environment in the future, including those resulting from
consolidation in the air quality industry. Competition is primarily on the
basis of price, product quality, product technology and customer service, with
a majority of the Company's business obtained through competitive bidding.
See "Business - Competition" for a more detailed discussion of competition in
the Company's markets.
Fluctuations in Raw Material Costs
Aluminum, steel and filter paper represent principal raw materials
in the Company's products. Prices for these materials can be subject to wide
fluctuation and the Company's products cannot always be priced to take into
account such fluctuations, especially in the short term. See "Business - Raw
Materials and Purchased Components" for a more detailed discussion of raw
materials used in the Company's business.
International Transactions
The Company has sold and expects it will continue to sell products
in areas outside the United States. Such transactions entail the risks
associated with conducting business internationally, including the risk of
currency fluctuations, slower payment of invoices, adverse trade regulatons
and possible social, political and economic instability. In particular, the
Company has significant sales in Asia which will be adversely affected by
current economic conditions in that region. While the full impact of this
economic instability cannot be predicted, it could have a material adverse
effect on the Company's revenue and profitability.
Intellectual Property
The Company's success is dependent in part on its ability to
protect proprietary technology contained in certain of its products. While
Trion's critical technologies are patented, there can be no assurance that
this will prove sufficient to deter misappropriation of those technologies or
independent third-party development of rival technologies, which would have an
adverse effect on the Company's sales. The defense and prosecution of patent
<p>6
suits are both costly and time-consuming, even if the outcome is favorable to
the Company. In foreign countries, the expenses associated with such
proceedings can be prohibitive. In addition, there is an inherent
unpredictability in obtaining and enforcing patents in foreign countries.
Acquisition Strategy
The Company has initiated an acquisition program as part of its
strategic plan. The Company's acquisition strategy entails the potential risk
inherent in assessing the value, strengths, weaknesses, contingent and other
liabilities and potential profitability of acquisition candidates and in
integrating the operations of acquired companies and/or product lines. There
can be no assurance that suitable acquisition opportunities will be available,
that the Company will have access to the capital required to finance potential
acquisitions, that the Company will continue to acquire businesses or that any
business acquired will be integrated successfully or prove profitable.
Reliance on Key Personnel
The Company's operations are dependent on the continued efforts of
senior management, in particular Steven L. Schneider, its President and Chief
Executive Officer. Should any of the senior managers be unable to continue in
their present roles, the Company's prospects could be adversely affected.
Potential Regulatory Risks
The Company's business and products may be significantly
influenced by the constantly changing body of environmental laws and
regulations, which require that certain environmental standards be met and
impose liability for the failure to comply with such standards. While the
Company endeavors at its facilities to assure compliance with environmental
laws and regulations, future changes in such standards could have an adverse
effect on the Company. In addition, to some extent, changes in the
liabilities and risks imposed by the environmental laws on the Company's
customers could impact demand for certain of the Company's products or impose
greater liabilities and risks on the Company, which could also have an adverse
effect on the Company's business.
Year 2000
The Company's has determined that it will need to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company also
has initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the
extent to which its operations are vulnerable should those organizations fail
to remediate properly their computer systems.
The Company's comprehensive Year 2000 initiative is being managed
by a team of internal staff and outside consultants. The team's activities
are designed to ensure that there is no adverse effect on the Company's core
business operations and that transactions with customers, suppliers and
financial institutions are fully supported. The Company is well under way
with these efforts, which are scheduled to be completed in early 1999. While
<p>7
the Company believes its planning efforts are adequate to address it Year 2000
concerns, there can be no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company. The cost of the
Year 2000 initiatives is not expected to be material to the Company's results
of operations or financial position.
Item 2. Properties.
The Company owns a 263,000 square foot modern brick facility on 27 acres
in Sanford, North Carolina which houses the Company's corporate headquarters
as well as manufacturing, engineering, sales and distribution operations.
This property plus equipment are pledged to secure industrial revenue bonds
totaling $3,200,000 at December 31, 1997. The bonds mature on November 1,
2011. The carrying value of assets pledged to secure these bonds was
approximately $4,822,000 at December 31, 1997. In addition, the Company
leases a 45,000 square foot facility in Albuquerque, New Mexico which houses
Envirco. The lease expires in May 1998, however, at the Company's sole option
the Albuquerque facility can and will be maintained for an indefinite period
of time while alternatives and options are evaluated. During May 1998, the
lease for a 53,000 square foot facility located in Lancaster, Pennsylvania
housing the Herrmidifier operation will expire. The Company has made plans to
relocate and consolidate all Lancaster operations into its Sanford facility at
this time.
Foreign properties consist of a 53,000 square foot facility located in
Andover, England owned by the Company.
The Company's facilities in Sanford and Andover are suitable for their
intended uses; however, Andover has excess capacity for current needs. The
facility in Albuquerque is approaching full capacity. The facility in
Andover, England remains for sale.
Item 3. Legal Proceedings.
Various lawsuits, claims and proceedings have been or may be instituted
or asserted against the Company, in which the amounts claimed may be
substantial. However, based on facts currently available, management believes
that the disposition of matters that are currently pending or asserted will
not have a material adverse effect on the financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant
Positions and
Name Age Office Held
Joseph W. Deering (1) 57 Chairman of the Board
Steven L. Schneider (2) 54 President, Chief
Executive Officer
Brian H. Boender (3) 48 Vice President - Sales
and Marketing
<p>8
Charles A. Haynes (4) 49 Vice President - Engineering
Calvin J. Monsma (5) 46 Vice President and
Chief Financial Officer
Herbert A. Rose (6) 43 Vice President - Sales
and Marketing
J. Gary Waters (7) 5 2 Vice President - Finance
North America Operations
On March 31, 1993 the Company and Mr. Schneider entered into an employment
agreement which was subsequently amended and restated on July 28, 1995 (the
"Agreement") providing for his employment as President and Chief Executive
Officer for a three-year term commencing on May 24, 1993 and which, after the
initial term, is automatically extended for an additional year on each
anniversary date. A more complete discussion regarding the Agreement may be
found under the caption "Compensation Agreements" on page 11 of the annual
Proxy Statement dated March 13, 1998 and is incorporated herein by reference.
All other executive officers serve at the discretion of the Board.
(1) Mr. Deering is President of PMI Food Equipment Group (a division of
Premark International, Inc.) a manufacturer of commercial food service
products located in Troy, Ohio.
(2) Mr. Schneider joined the Company on May 24, 1993. For a period of more
than five years prior to joining the Company, Mr. Schneider served as Group
President of Tomkins Industries U.S.A., a subsidiary of Tomkins PLC, a
diversified manufacturing company.
(3) Prior to joining the Company on July 19, 1993, Mr. Boender was Vice
President-International for White-Rodgers (Division of Emerson Electric Co.),
a leading manufacturer in the HVAC industry, from May 1992 until July 1993.
(4) Prior to joining the Company on July 6, 1994, Mr. Haynes was Engineering
Director of Heating Products for NORDYNE, a leading manufacturer of HVAC
products for modular housing and residential applications from August 1992
until June 1994.
(5) Prior to joining the Company on July 11, 1994, Mr. Monsma was employed by
Concurrent Computer Corporation, a provider of high-performance real-time
computer systems, serving as Director of Finance for worldwide sales and
international operations until he joined the Company.
(6) Mr. Rose joined Trion on January 15, 1996. From September 1991 to
January 1996 he served in various sales and marketing responsibilities at
Whirlpool Corporation, including Director of Merchandising for that company's
appliance business with Sears and Director of Trade Marketing for the
Whirlpool, KithchenAid and Roper brands in North America.
(7) Mr. Waters assumed responsibility for the newly created position of Vice
President Finance for North America Operations on November 1, 1996. Prior to
that he had served as Vice President - Operations since September 1, 1994 and
Vice President and Controller from 1989 until his election as Vice President -
Operations.
<p>9
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:
"TRON". There were 971 shareholders of record on January 2, 1998. High and low
sales prices and dividends declared by quarter for the last two years were:
<TABLE>
<CAPTION>
1997 1996
1997 Market Price Dividends 1996 Market Price Dividends
Quarter Ended High Low Declared High Low Declared
<S> <C> <C> <C> <C> <C> <C>
March 31. . . . . $6.25 $3.88 $0.02 $6.88 $4.62 $0.02
June 30 . . . . . $5.38 $3.50 $0.02 $9.00 $5.88 $0.02
September 30. . . $5.50 $3.88 $0.02 $7.12 $5.12 $0.02
December 31 . . . $5.88 $4.13 $0.02 $5.88 $3.69 $0.02
</TABLE>
<TABLE>
Item 6. Selected Financial Data.
(dollars in thousands, except per share data)
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Sales . . . . . . . . . . $65,150 $62,401 $49,565 $39,090 $40,209
Net Income. . . . . . . . . . $ 2,051 $ 1,112 $ 2,303 $ 1,734 $ 1,686
Return on Sales . . . . . . . 3.1% 1.8% 4.6% 4.4% 4.2%
Shareholders' Equity . . . . $22,867 $21,042 $20,142 $18,007 $15,854
Return on Beginning
Shareholders' Equity . . . . 9.7% 5.5% 12.8% 10.9% 11.9%
Total Assets . . . . . . . . $42,192 $40,796 $40,464 $27,146 $25,427
Long-Term Debt . . . . . . . $ 8,250 $ 9,908 $10,836 $ 3,525 $ 3,923
Working Capital . . . . . . . $13,646 $14,182 $16,486 $15,385 $13,547
Per Common Share:
Earnings (Basic). . . . . . . $ 0.29 $ 0.16 $ 0.33 $ 0.25 $ 0.25
Earnings (Diluted). . . . . . $ 0.29 $ 0.16 $ 0.32 $ 0.24 $ 0.24
Dividends Declared. . . . . . $ 0.08 $ 0.08 $ 0.08 $ None $ None
Book Value . . . . . . . . . $ 3.21 $ 3.01 $ 2.90 $ 2.61 $ 2.32
</TABLE>
The earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, Earnings Per
Share (SFAS 128). For further discussion of earnings per share and the impact
of SFAS 128, see Notes to the Consolidated Financial Statements.
All amounts prior to 1996 have been restated to reflect the acquisition of the
Herrmidifier Company in August 1996 which was accounted for as a pooling of
interest. The restated financial and performance highlights for 1995 through
1993 above include the historical financial statements of Herrmidifier Company
for the years ended December 31, 1995 and 1994 and the year ended March 31,
1994. For year ended March 31, 1994, Herrmidifier Company presented financial
statements based on a fiscal year end March 31. For the three-month period
ended March 31, 1994, which results have been included in both the financial
and performance highlights for 1994 and 1993, Herrmidifier Company net sales
were approximately $1,827,000 and net income was approximately $156,000. Past
performance may not be indicative of future results.
<p>10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Net sales for the year 1997 were $65,150,000, a 4% increase over the
$62,401,000 recorded in 1996. On a year on year basis, the Company
experienced improvement in sales in its domestic consumer and traditional
commercial/industrial product lines with 29% and 15% increases, respectively.
The increase in Consumer Products sales are directly attributable to the
introduction of a new line of appliance air cleaners during the year.
Increases in the traditional commercial/industrial product lines are
associated with the Company's continued focus and emphasis on the Engineered
Products segment.
The Company's operation in New Mexico, Envirco Corporation (Envirco), had
previously experienced a downward trend in sales in the second half of 1996
which subsequently carried into the first half of 1997. Although Envirco
annual sales levels for 1997 were down by 3% from 1996, this trend turned
around significantly in the latter part of 1997, and especially in the fourth
quarter, where a 74% increase was posted over the same quarter in the previous
year. Sales by consolidated European Operations recorded increases of 1% and
26% in 1997 and 1996, respectively, primarily due to sales of products
manufactured by Envirco.
Net sales in 1995 were $49,565,000. The primary reason for the significant
increase in 1996, to $62,401,000, was the August 1995 acquisition of Envirco
which was accounted for as a purchase. Twelve months' activity was included
in 1996 as compared to only five months' activity in 1995.
Consolidated gross profit as a percentage of sales in 1997 improved slightly
over 1996, coming in at 33.7% for the current year as compared to 33.5% the
year before and 36.2% in 1995. Operating improvements were recorded by both
recent acquisitions, Envirco and Herrmidifier, due to profit improvement
programs and value analysis activities as well as the relocation of the
Herrmidifier residential products manufacturing line, previously located in
Lancaster, Pennsylvania, into the Sanford, North Carolina facility. These
improvements were partially offset by start up production costs associated
with the introduction of the new line of consumer appliance products. The
decline in the consolidated gross profit as a percentage of sales for 1995 to
1996 was primarily due to the increased sales of Envirco products, which have
a lower gross profit margin as well as product/customer mix and the Company's
commitment to reducing inventory balances to improve asset management which
caused lower levels of direct labor, reduced overhead absorption and higher
comparative cost of products sold. In all years, the Company has partially
offset cost increases in raw materials and manufacturing processes through
profit improvement and value analysis programs. Additional savings are
expected going forward as the Company has recently formalized plans to close
the Lancaster facility in May of 1998 and relocate all production of the
humidifier products into Sanford. Further evaluation of the Company's product
lines, production methods, facilities and locations will continue.
Selling, administration and engineering expenses as a percentage of sales were
27.8% in 1997 in comparison to 28.5% and 27.9% in 1996 and 1995, respectively.
Contributing to the improvement in 1997 were lower promotion expenses as a
percentage of sales and the consolidation of Lancaster administrative
functions into Sanford. The Company continues to increase its spending in
<p>11
research and development as a percentage of sales. The comparative increase
in selling, administration and engineering expenses for 1995 to 1996 was
primarily attributable to additional spending in sales and marketing efforts,
especially in the Consumer Products segment, which incurred higher costs as a
result of developing the new line of appliance air cleaner products.
Interest expense during 1997 was $978,000 as compared to $856,000 in 1996 and
$578,000 in 1995. The increase in 1997 was due to incremental borrowings used
primarily to fund capital expenditures and long-term debt repayment. In
addition, the average interest rate charged on the Company's master credit
facility increased to 7.2% in 1997 as compared to 6.9% a year ago.
Additionally in 1996, the Company entered into an interest rate hedge
agreement on $6,000,000 at an interest rate fixed at 7.5% for three years.
The increase in interest expense from 1995 to 1996 was primarily attributable
to a net increase in borrowing of $6,800,000 to finance the purchase of
Envirco.
Amortization expense was $344,000 for 1997 and 1996 and $143,000 for 1995
reflecting the amortization of goodwill recorded for the purchase of Envirco
(effective August 1995).
Onetime acquisition expense of $414,000 in 1996 was directly related to the
Herrmidifier acquisition in August 1996.
Income taxes were $662,000, $502,000 and $1,366,000, or an effective rate of
24.4%, 31.1% and 37.2% in 1997, 1996 and 1995, respectively. This reduction
in the effective income tax rate is primarily attributable to the profits
posted by the Company's subsidiary in the United Kingdom offset by the
utilization of related tax loss carryforwards and, in 1997, research and
development tax credits.
Net income for the year ended 1997 was $2,051,000 as compared to $1,112,000 in
1996 and $2,303,000 in 1995. The 84% improvement in 1997 was the result of
the previously mentioned increase in sales, favorable gross profit and
operating expenses as a percentage of sales, and the lower effective rate in
income taxes. In addition, impacting the 1996 results as compared to the two
other periods presented were the onetime acquisition expense for the
Herrmidifier acquisition and the increased investment in sales and marketing
programs. The resulting basic and diluted earnings per share were the same in
1997, $0.29 per share, and in 1996, $0.16 per share. Basic and diluted
earnings per share in 1995 were $0.33 and $0.32 per share, respectively.
Liquidity and Sources of Capital
Cash flow provided by operating activities was sufficient to fund working
capital requirements. Net capital expenditures during 1997 were $2,998,000 as
compared to $3,149,000 in 1996. This level of spending is significantly above
years in the past and reflects the Company's commitment towards long-term
growth through investment in tooling, machinery and equipment to lower
manufacturing costs and streamline production processes. The increase in the
cash balance to $2,979,000 from $2,073,000 is directly related to improved
accounts receivable collections and inventory control. Working capital
declined by 4% to $13,646,000 in 1997 and the ratio of current assets to
current liabilities is at 2.2 to 1 as compared to 2.4 to 1 a year ago. The
Company will continue to take measures to improve asset and resource
<p>12
management.
Currently, the Company has an unsecured line of credit in the amount of
$18,000,000 with Wachovia Bank of North Carolina, N.A. expiring in 1998 which,
when combined with operating cash flows, is deemed sufficient to fund future
operating requirements. It is the Company's intention to secure a replacement
credit facility during the upcoming year, and it is currently conducting
discussions with various financial institutions. An increase in the line of
credit may result to finance activities associated with future growth
opportunities, including potential acquisitions. The Company has no
commitments with respect to additional acquisitions at this time.
Implications of the Year 2000 Issue
The Company has determined that it will need to modify or replace portions of
its software so that its computer systems will function properly with respect
to dates in the year 2000 and beyond. The Company also has initiated
discussions with its significant suppliers, large customers and financial
institutions to ensure that those parties have appropriate plans to remediate
Year 2000 issues where their systems interface with the Company's systems or
otherwise impact its operations. The Company is assessing the extent to which
its operations are vulnerable should those organizations fail to remediate
properly their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team of
internal staff and outside consultants. The team's activities are designed to
ensure that there is no adverse effect on the Company's core business
operations and that transactions with customers, suppliers and financial
institutions are fully supported. The Company is well under way with these
efforts, which are scheduled to be completed in early 1999. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's systems and operations rely will be converted on a timely basis and
will not have a material effect on the Company. The cost of the Year 2000
initiatives is not expected to be material to the Company's results of
operations or financial position.
The foregoing discussion contains some forward-looking statements about the
Company's financial condition and results of operations, which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's judgement only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements
to reflect events and circumstances that arise after the date hereof. Factors
that might cause the Company's actual results to differ materially from those
anticipated in forward-looking statements include the following: generally
adverse economic and industry conditions, including a decline in demand for
IAQ products or significant changes in preferences in or use of such products;
changes in the competitive environment, including increased competition in the
Company's primary markets and consolidation in the air quality industry;
economic or political changes in the countries in which the Company operates
or adverse trade regulations; and non-availability of resources for the
Company, or its suppliers and customers, to complete their respective Year
2000 compliance effectively.
<p>13
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and the report of independent auditors
are set forth below. Information required by Item 302, "Supplementary Data,"
is set forth in Note K of the Notes to Consolidated Financial Statements.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(in thousands, except per share amounts)
TRION, INC. AND SUBSIDIARIES
<CAPTION>
Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . $65,150 $62,401 $49,565
Cost and expenses:
Cost of products sold . . . . . . . . . 43,171 41,487 31,603
Selling, administration
and engineering expenses. . . . . . . 18,090 17,792 13,851
Interest . . . . . . . . . . . . . . . 978 856 578
Amortization . . . . . . . . . . . . . 344 344 143
Acquisition expense . . . . . . . . . . -- 414 --
Other expense (income), net . . . . . . (146) (106) (279)
62,437 60,787 45,896
Income before income taxes . . . . . . . . 2,713 1,614 3,669
Income tax expense (benefit):
Current . . . . . . . . . . . . . . . . 716 685 1,314
Deferred . . . . . . . . . . . . . . . (54) (183) 52
662 502 1,366
Net income for the year . . . . . . . . . . 2,051 1,112 2,303
Retained earnings at beginning of year . . 16,193 15,620 13,831
Dividends declared: ($0.08 per share) . . . (563) (539) (514)
Retained earnings at end of year . . . . . $17,681 $16,193 $15,620
Earnings per share of common stock -
basic. . . . . . . . . . . . . . $ 0.29 $ 0.16 $ 0.33
Earnings per share of common stock -
assuming dilution. . . . . . . . $ 0.29 $ 0.16 $ 0.32
See notes to consolidated financial statements
</TABLE>
<p>14
<TABLE>
CONSOLIDATED BALANCE SHEETS
(in thousands)
TRION, INC. AND SUBSIDIARIES
<CAPTION>
ASSETS December 31
1997 1996
<S> <C> <C>
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . $ 2,979 $ 2,073
Trade accounts receivable less allowance for
doubtful accounts: ($454,000 in 1997 and
$448,000 in 1996) . . . . . . . . . . . . . . 11,815 11,650
Inventories . . . . . . . . . . . . . . . . . . 9,228 9,329
Prepaid expenses and other current assets . . . 536 882
Deferred current income taxes . . . . . . . . . 163 94
Total current assets . . . . . . . . . . . . 24,721 24,028
PROPERTY, PLANT AND EQUIPMENT
Land . . . . . . . . . . . . . . . . . . . . . 78 78
Buildings . . . . . . . . . . . . . . . . . . . 5,428 5,467
Equipment . . . . . . . . . . . . . . . . . . . 19,810 16,928
Allowance for depreciation . . . . . . . . . . (14,861) (13,250)
10,455 9,223
OTHER ASSETS
Goodwill less accumulated amortization:
($830,000 in 1997 and $486,000 in 1996) . . . 6,049 6,393
Deferred income taxes . . . . . . . . . . . . . 323 338
Other non-current assets . . . . . . . . . . . 644 814
7,016 7,545
$42,192 $40,796
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . $ 2,714 $ 2,900
Revolving line of credit. . . . . . . . . . . . 2,000 1,000
Accrued expenses:
Compensation and fringes . . . . . . . . . . 1,653 1,054
Selling and promotions . . . . . . . . . . . 685 636
Other . . . . . . . . . . . . . . . . . . . . 1,322 1,515
Income taxes . . . . . . . . . . . . . . . . . 193 77
Current portion of long-term debt . . . . . . . 2,508 2,664
Total current liabilities . . . . . . . . . . 11,075 9,846
LONG-TERM DEBT . . . . . . . . . . . . . . . . . 8,250 9,908
19,325 19,754
SHAREHOLDERS' EQUITY
Common stock, par value $0.50 a share:
Authorized 20,000,000 shares
Issued and outstanding: (7,128,797 in 1997
and 6,997,519 in 1996). . . . . . . . . . . 3,564 3,499
Additional paid-in capital . . . . . . . . . . 1,448 1,017
Retained earnings . . . . . . . . . . . . . . . 17,681 16,193
Foreign currency translation adjustment - unrealized 174 333
22,867 21,042
$ 42,192 $40,796
See notes to consolidated financial statements
</TABLE>
<p>15
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
TRION, INC. AND SUBSIDIARIES
<CAPTION>
Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . $2,051 $1,112 $2,303
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . 1,753 1,581 1,147
Amortization . . . . . . . . . . . . . . . . 344 344 143
Deferred income taxes . . . . . . . . . . . . (54) (183) 52
Changes in operating assets and liabilities:.
Accounts receivable . . . . . . . . . . . . (165) 1,436 (2,612)
Inventory and prepaid expenses . . . . . . 617 934 (1,806)
Accounts payable and accrued expenses . . . 385 (1,829) 2,151
Foreign currency transaction loss (gain) . . (71) (68) (26)
Net cash provided by operating activities . 4,860 3,327 1,352
INVESTING ACTIVITIES
Purchase of Envirco Corporation . . . . . . . . -- -- (8,502)
Retirement of Envirco Corporation debt . . . . . -- -- (1,958)
Purchases of property, plant and equipment(net). (2,998) (3,149) (1,540)
Net cash used by investing activities . . . (2,998) (3,149) (12,000)
FINANCING ACTIVITIES
Net proceeds from master credit facility . . . . 2,200 3,500 6,906
Principal payments on long-term debt . . . . . . (3,014) (1,901) --
Stock issued . . . . . . . . . . . . . . . . . . 496 174 234
Cash dividends paid . . . . . . . . . . . . . . (563) (528) (386)
Net cash provided (used) by
financing activities . . . . . . . . . . (881) 1,245 6,754
Effect of foreign exchange rate changes on cash . (75) 153 242
Increase (decrease) in cash . . . . . . . . . . . 906 1,576 (3,652)
Cash at beginning of year . . . . . . . . . . . . 2,073 497 4,149
Cash at end of year . . . . . . . . . . . . . . . $2,979 $2,073 $ 497
See notes to consolidated financial statements
</TABLE>
<p>16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
Operations: The Company is principally engaged in the design, manufacture and
sale of equipment to improve the quality of indoor air in the consumer,
residential, commercial and industrial markets, and equipment to
electrostatically distribute micro-thin films of lubricants, corrosion
inhibitors and other protective coatings to metal strips on high speed process
lines.
Translation of Foreign Currencies: Assets and liabilities of foreign
subsidiaries are translated using year-end exchange rates and revenues and
expenses are translated using exchange rates prevailing during the year.
Unrealized currency translation adjustments are recorded as a component of
shareholders' equity and are not included in income until realized.
Principles of Consolidation: The financial statements include the accounts of
the Company's subsidiaries, all of which are wholly owned. All significant
intercompany transactions have been eliminated.
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Interest Rate Hedge Agreement: The interest rate differential to be paid or
received as a result of the interest rate hedge agreement is paid quarterly
and recognized as an adjustment to interest expense. (See Note E)
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out method for domestic inventories and by
the first-in, first-out method for all other inventories. Obsolete or slow
moving inventory is written off or written down when it is determined that the
carrying value of the particular item exceeds realizable value.
Property, Plant and Equipment: Property, plant and equipment are carried at
cost. Depreciation is computed by the straight-line method. The range of the
estimated lives used in depreciating buildings are 25 to 40 years and for
equipment 4 to 10 years.
Intangible and Long-Lived Assets: The carrying value of intangible and long-
lived assets are reviewed if the facts and circumstances indicate impairment
of their carrying value. Any impairment in the carrying value of such
intangibles is recorded when identified. Goodwill is amortized on a straight
line basis over 20 years.
Pension and Savings Plans: The Company has one noncontributory defined benefit
pension plan and three defined contribution profit sharing plans covering
eligible employees. (See Note J)
Net Sales: The Company generally recognizes revenues on product sales when
goods are shipped.
<p>17
Advertising Costs: It is the Company's policy to expense all advertising costs
in the year the advertising occurs. Advertising expenses were $784,000,
$764,000 and $923,000 for the years 1997, 1996 and 1995, respectively.
Research and Development Expenses: Included in selling, administration and
engineering expenses is $1,328,000, $1,259,000, and $977,000 for research and
development in the years 1997, 1996 and 1995, respectively. It is a policy of
the Company to expense research and development costs in the year incurred.
Warranty Expenses: The Company has a warranty reserve which has been
established at a percentage of cost of sales. This percentage, which is
subject to regular review, is based on the history of warranty expenses
incurred.
Earnings Per Share: In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share (SFAS 128). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements. (See Note B)
Statement of Cash Flows: For purposes of this statement, the Company considers
all highly liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.
Reclassification: Certain amounts in 1996 and 1995 have been reclassified to
conform to present classifications. These reclassifications have no effect on
previously reported shareholders' equity or financial results.
NOTE B - EARNINGS PER SHARE
<TABLE>
The following table set forth the computation of basic and diluted earnings
per share:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Numerator for basic and
diluted earnings per share:
Net income . . . . . . . . . . . . $ 2,051,000 $ 1,112,000 $ 2,303,000
Denominator:
Denominator for basic
earnings per share - weighted
average shares:. . . . . . . . . . 7,031,432 6,976,252 6,929,396
Effect of dilutive securities:
Employee stock options . . . . 147,539 172,256 240,654
Denominator for diluted
earnings per share - adjusted
weighted average shares and
assumed conversions. . . . . . . . 7,178,971 7,148,508 7,170,050
Basic earnings per share . . . . . . . $ 0.29 $ 0.16 $ 0.33
Diluted earnings per share . . . . . . $ 0.29 $ 0.16 $ 0.32
</TABLE>
<p>18
NOTE C - ACQUISITIONS
On August 30, 1996, the Company acquired 100% of the outstanding stock of
Herrmidifier Company, Inc. (Herrmidifier) located in Lancaster, Pennsylvania
for 500,000 shares of the Company's Common Stock. Related to this transaction,
the Company recognized approximately $414,000 in non-recurring transaction
costs. The transaction was accounted for by the pooling of interest method,
and accordingly, the 1996 and 1995 consolidated financial statements for the
periods presented were restated to include Herrmidifier.
On August 1, 1995 the Company acquired all of the outstanding common stock of
Envirco Corporation (Envirco), a manufacturer and distributor of ultra-clean
air systems and components located in Albuquerque, New Mexico for cash
consideration of approximately $7,986,000. The Company incurred costs of
approximately $516,000; consisting principally of a finders fee, accounting
and legal expenses. The acquisition was financed through a combination of cash
on hand and borrowings of $6,800,000. The details of the credit facility are
discussed in Note E.
In a related transaction, the Company and/or Envirco entered into employment
agreements and/or non-compete agreements with five key employees of Envirco.
These agreements have terms which vary from two to five years, maintain salary
levels previously in effect, and, in certain circumstances based upon company
performance, provide incentive payments and options to purchase the Company's
common stock at $6.00 per share.
The Envirco acquisition was accounted for using the purchase method, with the
assets and liabilities of the business recorded at their estimated fair value
at the acquisition date. The excess of total acquisition cost over the fair
value of the net assets acquired was classified as goodwill and is being
amortized on a straight line basis over 20 years. The results of operations of
Envirco are included in these consolidated statements of income as of the date
of the acquisition.
If Envirco had been acquired at the beginning of 1995, the unaudited pro forma
summary of consolidated results of operations would have been reported as: net
sales of $57,308,000; net income of $2,400,000; and basic earnings per share
of $0.35. These pro forma results do not purport to be indicative of the
results that would have actually been attained, or that will be attained in
the future.
NOTE D - INVENTORIES
(in thousands)
1997 1996
Raw materials . . . . . . . . . . . . . . . . $ 5,169 $ 4,939
Work in process and finished products . . . . 4,059 4,390
$ 9,228 $ 9,329
If the first-in, first-out method of accounting for cost had been used for
domestic inventories, inventories would have been approximately $364,000 and
$371,000 more at December 31, 1997 and 1996, respectively.
<p>19
NOTE E - LINE OF CREDIT/LONG-TERM DEBT
In September 1995, the Company obtained a master credit facility in the United
States which allows the Company to borrow up to $18,000,000 at the London
Interbank Offering Rate of interest plus 1.00% to 1.75%. The master credit
facility expires in September 1998. The Company is currently conducting
discussions with its lenders to replace the master credit facility and ensure
sufficient capital is available going forward, the result of which will be
finalized prior to September 1998. The structure of the master credit
facility includes an $8,000,000 thirty six (36) month revolving line of credit
and a $10,000,000 sixty (60) month declining balance term loan with 12.5% of
the balance as of March 1997 payable every six months beginning March 1997. As
of December 31, 1997 and 1996, the amount outstanding on the revolving line of
credit was $2,000,000 and $1,000,000, respectively.
Long-term debt for the periods is comprised of the following:
(in thousands)
1997 1996
Term Loan . . . . . . . . . . . . . . . . . . . . . . . $ 7,500 $ 8,800
Notes, Envirco Acquisition . . . . . . . . . . . . . . -- 458
Industrial Development Revenue Refunding Bonds, 1995. . 3,200 3,200
Other . . . . . . . . . . . . . . . . . . . . . . . . . 58 114
10,758 12,572
Less: Current portion of long-term debt . . . . . . . . 2,508 2,664
Total long-term debt . . . . . . . . . . . . . . . . . $ 8,250 $ 9,908
The weighted average interest rate paid on the master credit facility was 7.2%
and 6.9% in 1997 and 1996, respectively. As part of the purchase and sale
agreement associated with the acquisition of Envirco Corporation, the Company
issued a note for $458,000; due and paid in October of 1997, bearing interest
at the fixed rate of 6%.
The industrial development revenue refunding bonds, due in November of 2011,
bear interest, inclusive of fees for the letter of credit, remarketing, and
other financing charges, of approximately 5.5% and require no principal
payments until maturity. The bonds are secured by the Sanford facility,
including real property and equipment.
Maturities on long-term debt over the next five years are as follows: 1998 -
$2,508,000; 1999 - $2,550,000; 2000 - $2,500,000; 2001 - $0; and 2002 - $0.
In order to reduce the impact of fluctuations in interest rates on its
floating rate debt the Company entered into an interest rate hedge agreement.
On December 31, 1997, the Company had one interest rate hedge agreement
outstanding. It effectively fixes the rate of interest on $6,000,000 of debt
at a rate of 7.5% and expires in 1999.
NOTE F - LEASES
The Company leases manufacturing facilities in Albuquerque, New Mexico and
Lancaster, Pennsylvania. Both leases expire in 1998. At the Company's sole
option, the Albuquerque facility will be maintained for an indefinite period
of time while alternative arrangements continue to be evaluated. Effective
May 1998, the Company will consolidate all remaining Lancaster operations into
the Sanford, North Carolina facility. In addition, the Company leases a small
<p>20
amount of other equipment. Total lease payments were $548,000 in 1997,
$546,000 in 1996 and $302,000 in 1995. Future minimum lease payments in effect
at December 31, 1997 are as follows:
1998 $ 191,000
1999 30,000
2000 and thereafter 0
Total $ 221,000
NOTE G - INCOME TAXES
The liability method is used in accounting for income taxes as prescribed by
FASB Statement No. 109, Accounting for Income Taxes (SFAS 109). Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Income before income taxes consisted of the following:
(in thousands)
1997 1996 1995
Domestic . . . . . $ 2,127 $ 841 $ 3,575
Foreign . . . . . 586 773 94
$ 2,713 $ 1,614 $ 3,669
Federal, foreign and state income tax expenses (benefit) consisted of the
following:
(in thousands)
1997 1996 1995 _
Current Deferred Current Deferred Current Deferred
Federal .... $ 559 $ 18 $ 592 $ (48) $ 1,181 $ 42
Foreign..... (2) (70) 2 (131) 20 --
State ...... 159 (2) 91 (4) 113 10
$ 716 $ (54) $ 685 $ (183) $ 1,314 $ 52
Income tax payments were $565,000 in 1997, $772,000 in 1996, and $1,016,000 in
1995.
1997 1996
(in thousands)
Deferred tax liabilities:
Tax over book depreciation and amortization . . . $ 571 $ 506
Prepaid pension expenses . . . . . . . . . . . . 74 131
Total liabilities . . . . . . . . . . . . . . . . 645 637
Deferred tax assets:
Foreign operating loss carryforward . . . . . . 671 876
Product warranty reserve . . . . . . . . . . . . 172 156
Inventory reserve (including UCR) . . . . . . . . 277 241
Allowances for doubtful accounts . . . . . . . . 134 126
Other reserves . . . . . . . . . . . . . . . . . 347 415
Total assets . . . . . . . . . . . . . . . . . . 1,601 1,814
Valuation allowance . . . . . . . . . . . . . . . (470) (745)
Net deferred tax assets . . . . . . . . . . . . . 1,131 1,069
Net asset . . . . . . . . . . . . . . . . . . . . $ 486 $ 432
<p>21
At December 31, 1997, the Company had operating loss carryforwards of
$1,799,000 in England that are available indefinitely to offset future taxable
income of that subsidiary. For financial reporting purposes, a valuation
allowance has been recognized to offset the deferred tax assets related to the
carryforward. The change in the valuation allowance relates mainly to the
utilization of this carryforward.
A reconciliation of income tax expense (benefit) to the statutory rate
follows:
(in thousands)
1997 1996 1995
Statutory rate . . . . . . . . . . . . . . $ 923 $ 549 $ 1,247
Tax difference of foreign subsidiaries
primarily related to effect of tax
benefits on operating losses . . . . . . (201) (261) 31
Non-deductible acquisition expenses . . . . -- 141 --
Other . . . . . . . . . . . . . . . . . . . (60) 73 88
Total income tax expense . . . . . . . . . $ 662 $ 502 $ 1,366
NOTE H - STOCK OPTIONS
At December 31, 1997, the Company had two incentive stock option plans in
effect - the "1985 Plan" and the "1995 Plan." Under terms of both plans
options to purchase shares of common stock have been granted to officers and
other key executives at prices not less than the fair market value of the
stock on the date of grant. Options may be granted for a term of up to ten
years at the discretion of the Board of Directors. At December 31, 1997, there
were no shares available for future grants under the 1985 Plan and 198,062
shares available under the 1995 Plan.
A summary of transactions relating to options during 1997 and 1996 follows:
Shares Price Range Value
Balance December 31, 1995 . . . . . . . . 208,858 $2.50 - $5.63 $ 899,473
Granted . . . . . . . . . . . . . . . . . 46,483 $4.88 - $6.13 278,458
Exercised . . . . . . . . . . . . . . . . (41,596) $2.50 - $5.63 (143,228)
Expired . . . . . . . . . . . . . . . . . (8,000) $3.88 (31,000)
Balance December 31, 1996 . . . . . . . . 205,745 $2.88 - $6.13 $1,003,703
Granted . . . . . . . . . . . . . . . . . 42,530 $5.00 - $5.25 222,658
Exercised . . . . . . . . . . . . . . . . (67,000) $2.88 - $3.75 (242,500)
Cancelled . . . . . . . . . . . . . . . . (8,866) $4.81 - $6.13 (48,814)
Balance December 31, 1997 . . . . . . . . 172,409 $4.81 - $6.13 $ 935,047
Exercisable at December 31, 1996 . . . . 116,819 $2.88 - $5.63 $ 521,954
Exercisable at December 31, 1997 . . . . 91,242 $4.50 - $6.13 $ 491,558
As of December 31, 1997, the weighted average exercise price for all
outstanding options above is $5.42 and the weighted average remaining
contractual life is 2.5 years. All incentive stock options were granted for a
period of five years and one-third of the shares may be exercised in each year
following the date of grant. In addition, during 1993, non-qualified stock
options were granted for 100,000 shares at $2.50 per share, 75,000 shares at
$3.00 per share and 70,000 at $3.13 per share. The market value on the date of
<p>22
grant of 175,000 shares was $3.75 and the market value on the date of grant of
70,000 shares was $4.38. The options for 175,000 shares were granted for a
period of five years. Vesting of 100,000 of these shares is 25% per year
commencing in May 1993, and 75,000 of these shares vest at 33 1/3% per year
commencing May 1994. In 1995 and 1997, 43,300 and 56,700, respectively, of the
$2.50 per share options were exercised. The options for 70,000 shares are for
a period of ten years and were vested immediately. In 1996, non-qualified
stock options were granted for 8,000 shares at $6.00 per share and 20,000
shares at $6.00 per share. 4,000 of these shares were cancelled in 1997. The
per share market value on the date of grant of the remaining 4,000 shares was
$5.50 and the 20,000 shares was $6.13. The excess of market prices over grant
prices at the date of grant are charged to expense over the respective vesting
periods.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related Interpretations in accounting for
its employee stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123, Accounting for
Stock-Based Compensation (SFAS 123), requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB
25, because the exercise price of the Company's employee incentive stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31,1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for 1995, 1996 and 1997:
risk free interest rate of 6.25%; a weighted average dividend yield of 1.46%;
a volatility factor of .418; and an expected life of five years. The effects
of applying SFAS 123 for providing pro forma disclosure are not indicative of
future amounts until the new rules are applied to all outstanding awards.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
(in thousands, except per share amounts)
1997 1996 1995
Pro forma net income $ 1,994 $ 1,030 $ 2,282
Pro forma earnings per share - basic $ 0.28 $ 0.15 $ 0.33
Pro forma earnings per share - diluted $ 0.28 $ 0.14 $ 0.32
<p>23
The weighted average per share fair values of options granted in the year
ended December 31, 1997, 1996 and 1995 were $2.10, $2.47 and $1.93,
respectively.
NOTE I - STOCK TRANSACTIONS
Common Stock Additional
Shares Amount Paid-In Capital
Balance December 31, 1995 . . . . . . . 6,951,483 $3,475,741 $ 868,955
Board of Directors retainer fee . . . . 4,440 2,220 25,530
Exercise of stock options . . . . . . . 41,596 20,798 122,430
Balance December 31, 1996 . . . . . . . 6,997,519 3,498,759 1,016,915
Board of Directors retainer fee . . . . 7,578 3,789 32,207
Exercise of stock options . . . . . . . 123,700 61,850 398,474
Balance December 31, 1997 . . . . . . . 7,128,797 $3,564,398 $1,447,596
NOTE J - PENSION AND SAVINGS PLANS
The Company maintains a noncontributory defined benefit retirement plan for
substantially all Sanford employees. Benefits are based on earnings and years
of service. The Company's funding policy is to contribute annually the amount
required by the Employee Retirement Income Security Act. Assets of the Plan
are managed by a trustee and invested in marketable securities, bonds and
money market instruments. Based on actuarial studies as of January 1 of each
year, the contribution required was $0 for 1997 and 1996 and $191,000 for
1995.
On October 24, 1997, the Board of Directors approved a plan to freeze the Plan
effective December 31, 1997 and terminate the Plan, upon approval from the
Internal Revenue Service, no later than December 31, 1998. Upon termination,
all participants will become fully vested and will have the option to receive
a lump sum payment, an annuity or rollover of their accumulated benefit
balance. Currently, the Plan is overfunded and it is the intention of the
Company to distribute all excess assets to Plan participants, therefore no
material effect on the financial statements is expected to result from the
termination of the Plan.
The following table sets forth the plan status at December 31:
(in thousands)
1997 1996 1995
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $4,931,000 in 1997,
$5,239,000 in 1996 and $5,054,000 in 1995 . . $(4,931) $(5,524) $(5,091)
Projected benefit obligation for
service rendered to date . . . . . . . . . . . $(4,931) $(5,524) $(5,091)
Plan assets at fair market value . . . . . . . . 5,463 6,405 6,263
Plan assets in excess of projected
benefit obligation . . . . . . . . . . . . . . 532 881 1,172
Unrecognized prior service cost . . . . . . . . -- (19) (21)
Unrecognized net (gain) loss . . . . . . . . . . (381) (425) (765)
Unrecognized net asset . . . . . . . . . . . . . (174) (198) (223)
Net pension asset (liability). . . . . . . . $ (23) $ 239 $ 163
<p>24
Net pension cost included the following components:
1997 1996 1995
Service cost - benefits earned during
the period . . . . . . . . . . . . . . . . . . $ 342 $ 175 $ 304
Interest cost on projected benefit obligation. . 380 349 343
Actual return on plan assets . . . . . . . . . . (334) (373) (1,016)
Net amortization and deferral of unrecognized
net gain (loss) . . . . . . . . . . . . . . . (45) (9) 585
Amortization of unrecognized net asset . . . . . (24) (25) (25)
Amortization of prior service costs . . . . . . (2) (2) (2)
Net periodic pension cost. . . . . . . . . . $ 317 $ 115 $ 189
A weighted average discount rate of 7.0% in 1997, 1996 and in 1995 and a rate
of increase in future compensation levels of 0.0% in 1997, 5.5% in 1996 and
1995, were used in determining the actuarial present value of the projected
benefit obligation. The expected long-term rate of return on plan assets was
6.0% for 1997 and 1996 and 8.0% for 1995.
The Company also maintains defined contribution profit sharing plans as
described in Section 401(k) of the Internal Revenue Code of 1986. Participants
may elect to defer from 1% to 18% of their total cash compensation. The
maximum deferral allowed for income tax purposes was $9,500 in 1997 and 1996
and $9,240 in 1995. There are also other limitations placed upon highly
compensated employees, as defined in the plans.
The Company may make discretionary matching contributions to these plans.
During 1997, 1996 and 1995, the Company contributed $173,000, $131,000 and
$96,000, respectively, representing 25% to 50% of the employee's deferral up
to a maximum of 1.25% to 2.00% of total cash compensation.
Amounts deferred, including Company matching contributions, are invested by a
trustee in a variety of investment options as directed by the participant.
NOTE K - SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
Summary quarterly financial data for the years ended December 31, 1997 and
1996 are set forth below:
(in thousands, except per share data)
<CAPTION>
Earnings Earnings
(Loss) (Loss)
Cost of Net Income Per Share Per Share
Quarter Ended Net Sales Products Sold (Loss) -Basic -Diluted
1997:
<S> <C> <C> <C> <C> <C>
March 31 . . . . $13,572 $ 9,175 $ 6 $ 0.00 $ 0.00
June 30 . . . . 17,757 11,948 501 0.07 0.07
September 30 . . 15,708 10,422 534 0.08 0.08
December 31 . . 18,113 11,626 1,010 0.14 0.14
Year 1997 . . $65,150 $43,171 $ 2,051 $ 0.29 $ 0.29
1996:
March 31 . . . . $16,869 $11,408 $ 574 $ 0.08 $ 0.08
June 30 . . . . 16,922 11,175 702 0.10 0.10
September 30 . . 12,936 8,803 (600) (0.09) (0.09)
December 31 . . 15,674 10,101 436 0.07 0.07
Year 1996 . . $62,401 $41,487 $ 1,112 $ 0.16 $ 0.16
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with SFAS 128.
<p>25
NOTE L - FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
trade accounts receivable. The Company maintains cash with various financial
institutions. Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of entities comprising the
Company's customer base. However, as of December 31, 1997, the Company's
receivable from one customer was $1,318,000. The carrying amount reported in
the balance sheet for cash, accounts receivable, accounts payable and long-
term debt approximate their fair values.
NOTE M - INDUSTRY SEGMENT INFORMATION
The Company's operations are classified in three general industry segments:
Engineered Products; Consumer Products and European Operations.
North American Engineered Products include air quality products manufactured
for commercial, industrial and marine applications, equipment manufactured for
permanent installation in residential air handling systems, and equipment
designed to electrostatically distribute micro-thin films of lubricants,
corrosion inhibitors and other protective coatings to metal strips on high
speed process lines.
North American Consumer Products include portable room-size air cleaning
units, small appliance models and equipment and components sold to other
suppliers of air cleaners.
European Operations consists only of Trion Limited which functions in Europe
as a sales and distribution operation. U.S. manufacturing operations provide
products for resale.
Net sales by segment include only sales to unaffiliated customers as reported
in the Company's consolidated income statement. Segment income from operations
is net sales less cost of products sold and certain operating expenses. In
computing income from operations, other income, general corporate expenses,
domestic interest expense and taxes on income have been excluded.
The Company's Sanford manufacturing facility serves all segments; therefore,
specific identification of its property, plant and equipment and inventory is
not practicable. These assets and related depreciation were allocated to
segments based on estimates. General corporate assets were principally cash,
office equipment and engineering equipment.
Net sales of the Company in 1997 include approximately $1,237,000 of direct
and indirect sales to the United States Government ($1,033,000 in 1996 and
$1,466,000 in 1995). These sales are included in the Engineered Products
group. Sales to a significant customer in the Consumer Products group were
$5,343,000 in 1997; $3,553,000 in 1996; and $6,288,000 in 1995.
Export sales from the United States to unaffiliated customers were as follows:
(in thousands) 1997 1996 1995
Pacific Rim . . . . . . . . . . $ 7,499 $ 7,419 $ 3,947
Europe . . . . . . . . . . . . . 1,022 709 452
Other . . . . . . . . . . . . . 1,090 1,760 1,114
$ 9,611 $ 9,888 $ 5,513
<p>26
In June 1997, the Financial Accounting Standards Board issue Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131), which is effective for years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1998.
Management has not completed its review of SFAS 131, but does not anticipate
that the adoption of this statement will have a significant effect on the
Company's reported segments.
<TABLE>
Additional information on industry segments is set forth below:
(in thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net sales to unaffiliated customers:
North American Operations:
Engineered Products . . . . . . . $45,742 $45,598 $32,168
Consumer Products . . . . . . . . 12,479 9,949 11,939
European Operations . . . . . . . . 6,929 6,854 5,458
Total . . . . . . . . . . . . $65,150 $62,401 $49,565
Income (loss) from operations:
North American Operations:
Engineered Products . . . . . . . $ 5,627 $ 4,341 $ 4,617
Consumer Products . . . . . . . . 235 54 1,463
European Operations . . . . . . . . 265 458 (59)
Total . . . . . . . . . . . . 6,127 4,853 6,021
General Corporate:
Other income . . . . . . . . . . 146 106 113
Interest . . . . . . . . . . . . (978) (856) (578)
Other expenses . . . . . . . . . (2,582) (2,489) (1,887)
Total . . . . . . . . . . . . (3,414) (3,239) (2,352)
Income (loss) before income taxes . . $ 2,713 $ 1,614 $ 3,669
Identifiable assets:
North American Operations:
Engineered Products . . . . . . . $25,109 $25,694 $22,297
Consumer Products . . . . . . . . 6,850 4,910 9,015
European Operations . . . . . . . . 6,299 7,620 5,918
General Corporate . . . . . . . . . 3,934 2,572 3,234
Total . . . . . . . . . . . . $42,192 $40,796 $40,464
Depreciation and amortization:
North American Operations:
Engineered Products . . . . . . . $ 1,366 $ 1,229 $ 666
Consumer Products . . . . . . . . 368 213 273
European Operations . . . . . . . . 250 245 227
General Corporate . . . . . . . . . 113 238 124
Total . . . . . . . . . . . $ 2,097 $ 1,925 $ 1,290
</TABLE>
<p>27
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Trion, Inc.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheets of Trion, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income and retained earnings and cash flows for
each of the three years in the period ended December 31, 1997. 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 did not audit the 1995 financial statements of Herrmidifier
Company, Inc., which was combined with the Company in 1996 in a transaction
accounted for as a pooling of interest. Total revenues of Herrmidifier
Company, Inc. constituted 12% of consolidated revenues for 1995. Those
statements were audited by other auditors whose report has been provided to
us, and our opinion, insofar as it relates to amounts included for
Herrmidifier Company, Inc. is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Trion, Inc. and subsidiaries
at December 31, 1997 and 1996, and the consolidated results of their
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Raleigh, North Carolina
January 30, 1998
<p>28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The sections titled "Election of Directors", "Security Ownership" and "Section
16(a) Beneficial Ownership Reporting Compliance" of the annual Proxy Statement
dated March 13, 1998 are incorporated herein by reference.
See Part I of this report for the required information on executive officers.
Item 11. Executive Compensation.
The sections titled "Executive Compensation" (excluding the information under
the subheading "Compensation Committee Report on Executive Compensation"),
"Service Agreement" and the last paragraph in "Election of Directors" (which
contains information concerning Directors' compensation) of the annual Proxy
Statement dated March 13, 1998 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The section titled "Security Ownership" and the table included within section
"Election of Directors" (which contains information concerning Directors'
ownership) of the annual Proxy Statement dated March 13, 1998 are incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
The section titled "Service Agreement" of the annual Proxy Statement dated
March 13, 1998 is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Item 14. (a) (1) and (2)- The following consolidated financial statements of
Trion, Inc. and subsidiaries, included in the annual report of the Company to
its shareholders for the year ended December 31, 1997 are included in Item 8
beginning on page 13 hereof:
Consolidated Balance Sheets -- December 31, 1997 and 1996.
Consolidated Statements of Income and Retained Earnings -- years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows -- years ended December 31, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements -- December 31, 1997.
Report of Independent Auditors, Ernst & Young LLP -- January 30, 1998.
Independent Accountants' Report, Kuntz Lesher Siegrist & Martini LLP - October
2, 1996 is incorporated herein by reference to Exhibit 99.1 of this Form 10-K.
<p>29
Parent company financial statements are not included because restricted net
assets of subsidiaries after intercompany eliminations are less than 25% of
consolidated net assets.
Item 14. (a) (3) - See Index to Exhibits beginning on page 33 hereof including
the Report of Kuntz Lesher Siegrist & Martini LLP relating to the Herrmidifier
Company, Inc. included as Exhibit 99.1 of this Form 10-K.
Item 14. (b) - There were no reports on Form 8-K filed by the Registrant
during the last quarter of the period covered by this report.
Item 14. (c) - The Exhibits required by Item 601 of Regulation S-K are filed
herewith and incorporated by reference herein. See Index to Exhibits
beginning on page 33 hereof.
Item 14. (d) - The following consolidated financial statement schedule of
Trion, Inc. and subsidiaries is included on page 32 hereof:
Schedule II - Valuation and Qualifying Accounts and Reserves
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 not applicable and therefore have been
omitted.
<p>30
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.
TRION, INC.
By: /s/ Steven L. Schneider 3/12/98
Steven L. Schneider, Date
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.
/s/ Steven L. Schneider 3/12/98 /s/ James E. Heins 3/12/98
Steven L. Schneider, Date James E. Heins, Date
President, Chief Executive Director
Officer and Director
(Principal Executive Officer)
/s/ Calvin J. Monsma 3/12/98 /s/ F. Trent Hill 3/12/98
Calvin J. Monsma, Date F. Trent Hill, Date
Vice President and Director
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Hugh E. Carr 3/12/98 /s/ Grant R. Meyers 3/12/98
Hugh E. Carr, Date Grant R. Meyers, Date
Director Director
/s/ Joseph W. Deering 3/12/98 /s/ Samuel J. Wornom III 3/12/98
Joseph W. Deering, Date Samuel J. Wornom III, Date
Director Director
/s/ Seddon Goode, Jr. 3/12/98
Seddon Goode, Jr., Date
Director
<p>31
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
TRION, INC. AND SUBSIDIARIES
<CAPTION>
Col. A Col. B Col. C Col. D Col. E Col. F
ADDITIONS
Balance at Charged to Charged to Balance at
Beginning Costs and Other end of
of Period Expenses Accts. - Deductions Period
Describe Describe
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful (1)
accounts $ 448,000 $ 545,000 $ - $ 539,000 $ 454,000
Valuation allowance for (2)
deferred tax asset 745,000 - - 275,000 470,000
---------- ---------- ----------- ----------- ----------
$1,193,000 $ 545,000 $ - $ 814,000 $ 924,000
========== ========== =========== =========== ==========
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful (1)
accounts $ 346,000 $ 302,000 $ - $ 200,000 $ 448,000
Valuation allowance for (2)
deferred tax asset 1,141,000 - - 396,000 745,000
---------- ---------- ----------- ----------- ----------
$1,487,000 $ 302,000 $ - $ 596,000 $1,193,000
========== ========== =========== =========== ==========
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful (3) (1)
accounts $ 186,000 $ 148,000 $ 119,000 $ 107,000 $ 346,000
Valuation allowance for (4)
deferred tax asset 1,125,000 - 16,000 - 1,141,000
---------- ---------- ----------- ----------- ----------
$1,311,000 $ 148,000 $ 135,000 $ 107,000 $1,487,000
========== ========== =========== =========== ==========
(1) Uncollectible accounts written off, net of recoveries.
(2) Utilization of net operating loss carryforwards and valuation adjustment.
(3) Balance of Envirco Corporation as of August 1, 1995 acquisition.
(4) Book provision to tax return adjustment
</TABLE>
<p>32
INDEX TO EXHIBITS
The following Exhibits to this report are filed herewith or, if marked with an
asterisk (*), are incorporated herein by reference:
Exhibit
Number Description of Exhibits
3.1 Articles of Incorporation (incorporated herein by reference to
Exhibit 3.1 to Form 10-K for the year ended December 31, 1985,
file number 0-3108). (*)
3.2 Bylaws (incorporated herein by reference to Exhibit 3.2 to Form 10-Q
for the quarter ended September 30, 1997, file number 0-3108). (*)
4.1 $18,000,000 Credit Agreement dated September 8, 1995 (incorporated
herein by reference to Exhibit 4.1 to Form 10-K for the year ended
December 31, 1995, file number 0-3108). (*)
4.2 Amendment to $18,000,000 Credit Agreement dated September 8, 1995
(incorporated herein by reference to Exhibit 4.1 to Form 10-Q for
the quarter ended June 30, 1997, file number 0-3108). (*)
10.1 1998 Management Incentive Plan as adopted in December 1997. (**)
10.2 1985 Trion, Inc. Incentive Stock Option Plan as adopted and approved
by shareholders on April 16, 1985 (incorporated herein by reference
to Exhibit A to Proxy Statement dated April 16, 1985, file number
0-3108). (*) (**)
10.3 Form of option for the 1985 Trion, Inc. Incentive Stock Option Plan
(incorporated herein by reference to Exhibit 10.4 to Form 10-K for
the year ended December 31, 1986, file number 0-3108). (*) (**)
10.4 Trion Savings Plus Plan, effective January 1, 1987 as approved in
November 1986 (incorporated herein by reference to Exhibit 10.5 to
Form 10-K for the year ended December 31, 1986, file number 0-3108).
(*) (**)
10.5 Loan Agreement dated August 1, 1984 between The Lee County
Industrial Facilities and Pollution Control Financing Authority and
Trion, Inc. (incorporated herein by reference to Exhibit 10.1 to
Form 10-Q for the quarter ended September 30, 1984, file number
0-3108). (*)
10.6 Note dated September 11, 1984 from Trion, Inc. to The Lee County
Industrial Facilities and Pollution Control Financing Authority
(incorporated herein by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended September 30, 1984, file number 0-3108). (*)
10.7 Guaranty and Purchase Agreement dated as of August 1, 1984 from
Trion, Inc. to Wachovia Bank and Trust Company, N.A. (incorporated
herein by reference to Exhibit 10.3 to Form 10-Q for the quarter
ended September 30, 1984, file number 0-3108). (*)
<p>33
INDEX TO EXHIBITS
(continued)
10.8 Stock Option Agreement between Samuel J. Wornom III and Trion, Inc.
dated September 21, 1993 (incorporated herein by reference to
Exhibit 10.2 to form 10-Q for the quarter ended September 30, 1993,
file number 0-3108). (*) (**)
10.9 Stock Option Agreement between Steven L. Schneider and Trion, Inc.
dated March 31, 1993 (incorporated herein by reference to Exhibit
10.2 to form 10-Q for the quarter ended June 30, 1993, file number
0-3108). (*) (**)
10.10 Service Agreement dated October 30, 1992 between Trion, Inc. and
Hugh E. Carr, a director of Trion, Inc. (incorporated herein by
reference to Exhibit 10.8 to Form 10-K for the year ended December
31, 1992, file number 0-3108). (*) (**)
10.11 Trion, Inc. 1995 Stock Incentive Plan (incorporated herein by
reference to the Registrant's Registration Statement No.033-59095
on Form S-8 dated May 4, 1995). (*) (**)
10.12 Form of option for the Trion, Inc. 1995 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.14 to Form 10-K for
the year ended December 31, 1995, file number 0-3108). (*) (**)
10.13 First Amendment to Stock Option Agreement between Steven L.
Schneider and Trion, Inc. dated July 28, 1995 (incorporated herein
by reference to Exhibit 10.15 to Form 10-K for the year ended
December 31, 1995, file number 0-3108). (*) (**)
10.14 Amended and Restated Employment Agreement between Steven L.
Schneider and Trion, Inc. dated July 28, 1995 (incorporated herein
by reference to Exhibit 10.16 to Form 10-K for the year ended
December 31, 1995, file number 0-3108). (*). (**)
10.15 Trion, Inc. 1995 Non-Employee Director Stock Plan (incorporated
herein by reference to the Registrant's Registration Statement
No.033-58561 on Form S-8 dated April 12, 1995). (*) (**)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors; Ernst & Young LLP.
23.2 Consent of Independent Auditors; Kuntz Lesher Siegrist & Martini LLP
27 Financial Data Schedule.
99.1 Independent Accountants' Report; Kuntz Lesher Siegrist & Martini LLP
(**) Management Contract or Compensatory Plan.
<p>34
Exhibit 10.1
December, 1997
Trion, Inc.
1998 Management Incentive Plan
The Management Incentive Plan (MIP) is for Company officers and other key
staff residing in the United States. The Compensation Committee of the Board
of Directors (Committee) will administer the MIP with assistance from the
Chief Executive Officer.
The Committee shall determine annually those persons who will participate in
the MIP. It is anticipated that only those executives who have a significant
and recurring impact on the Company's annual operating results will be
eligible. Based on the present organizational structure, only officers and
other members of the management team will be eligible.
The MIP will be awarded if a minimum working capital hurdle rate is achieved
for the year. This hurdle rate is defined as the twelve-month average of
inventory plus accounts receivable less accounts payable divided by the sales
volume on a consolidated basis.
The targeted incentive, as a percentage of base salary, will vary by position
and responsibility and may be changed by the Committee from one year to the
next or for organizational changes during the year. Following are the current
relationships:
Target
Incentive Incentive Basis
--------- ------------------------------------
Percent Company Business Unit Individual
of Base Performance Performance Performance
President and CEO 50% 80% - 20%
Vice President and CFO 35% 80% - 20%
Vice Presidents; Sales/Marketing 50% - 80% 20%
Vice President Engineering 35% - 80% 20%
Vice President Finance 35% - 80% 20%
Other Key Management Employees 15%-35% - 80% 20%
Consolidated Company performance will be measured and weighted as follows:
Net sales 40%
Income before Taxes 60%
Business unit performance is measured on a similar basis using net sales and
operating income with the specific weighting determined by the individual
position.
Each target will be established annually at the beginning of the year.
<p>
December, 1997
Individual performance goals will be established by the officer responsible
and the participant after discussions and analyses of current requirements.
Individual goals will be set to enhance achievement of Company goals and will
be weighted accordingly.
The incentive related to each element of the Company's performance and
Business Unit performance will be earned as follows:
Percentage of
Attainment Incentive Earned
---------- ----------------
Threshold 0%
Target 100%
Maximum 150%
The amount of incentive earned will be prorated for actual performance between
the threshold and maximum levels.
Performance targets will be established annually at the discretion of the
Compensation Committee with the assistance of the Chief Executive Officer.
Acquisitions made in 1998 are not included.
Extraordinary or unusual events will be excluded from measurement of the
Company, Business Unit and Individual performances. The Committee will
determine the events considered extraordinary or unusual and will use
generally accepted accounting principles as a guideline in the determination.
It is anticipated that the incentive will be paid to participants annually
after completion of the audit by independent accountants. If employment is
terminated by reason of death, disability or retirement during the plan year,
the participant will receive a pro rata share of the incentive earned for the
year. For determining the pro rata share, months employed during the year
will be rounded up to the next highest full month. If a participant's
employment is terminated during the plan year for any other reason, pro rata
payment of the incentive will be at the sole discretion of the Committee.
Exhibit 21.1 Parents and Subsidiaries
The Company and its active subsidiaries as of December 31, 1997 are as
follows:
State/Country Percentage of
Name of Company of Incorporation Securities Owned
Trion, Inc. Pennsylvania Parent
Trion, Limited United Kingdom 100%
Envirco Corporation New Mexico 100%
Herrmidifier Company, Inc. Pennsylvania 100%
Exhibit 23.1 - Consent of Ernst & Young LLP
We consent to the use of our report dated January 30, 1998 included in
this Annual Report (Form 10-K) of Trion, Inc.
Our audits also included the financial statement schedule of Trion, Inc.
listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express and opinion on
the financial statement schedule based on our audits. We did not audit
the 1995 financial statements of Herrmidifier Company, Inc., which was
combined with the Company in 1996 in a transaction accounted for as a
pooling of interest. Total revenues of Herrmidifier Company, Inc.
constituted 12% of consolidated revenues for 1995. We have been
furnished with the report of other auditors with respect to the 1995
financial statements and schedules of Herrmidifier Company, Inc. In our
opinion, based on our audits and the report of the other auditors, the
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-4164) pertaining to the Trion, Inc. 1982 and
1985 Incentive Stock Options Plans, the Registration Statement (S-8 No.
33-69706) pertaining to the Stock Option Agreements between Trion, Inc.
and Steven L. Schneider dated March 31, 1993; Edwin V. Clarke, Jr. dated
September 17, 1993; and Samuel J. Wornom, III dated September 21, 1993,
the Registration Statement (Form S-8 No. 33-58561) pertaining to the
Trion, Inc. 1995 Non-employee Director Stock Plan, and in the
Registration Statement (Form S-8 No. 33-59095) pertaining to the Trion,
Inc. 1995 Stock Incentive Plan of our report dated January 30, 1998,
with respect to the consolidated financial statements included in this
Annual Report (Form 10K) of Trion, Inc., and our report included in the
preceding paragraph with respect to the financial statement schedule
included in this Annual Report (Form 10-K) of Trion, Inc.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 10, 1998
Exhibit 23.2 - Consent of Kuntz Lesher Siegrist & Martini LLP
We consent to the use of our report dated October 2, 1996, with respect
to the financial statements of Herrmidifier Company, Inc. (not presented
separately herein), included in this Annual Report (Form 10-K) of Trion,
Inc.
Our audit also included the financial statement schedule of Herrmidifier
Company, Inc. for the year ended December 31, 1995 titled Schedule II -
Valuation and Qualifying Accounts and Reserves (not presented separately
herein). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our
audit. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-4164) pertaining to the Trion, Inc. 1982 and
1985 Incentive Stock Options Plans, the Registration Statement (S-8 No.
33-69706) pertaining to the Stock Option Agreements between Trion, Inc.
and Steven L. Schneider dated March 31, 1993; Edwin V. Clarke, Jr. dated
September 17, 1993; and Samuel J. Wornom, III dated September 21, 1993,
the Registration Statement (Form S-8 No. 33-58561) pertaining to the
Trion, Inc. 1995 Non-employee Director Stock Plan, and in the
Registration Statement (Form S-8 No. 33-59095) pertaining to the Trion,
Inc. 1995 Stock Incentive Plan of our report dated October 2, 1996, with
respect to our report included in this Annual Report (Form 10-K) of
Trion, Inc.
/s/ KUNTZ LESHER SIEGRIST & MARTINI LLP
CERTIFIED PUBLIC ACCOUNTANTS
Lancaster, Pennsylvania
March 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,979,000
<SECURITIES> 0
<RECEIVABLES> 12,269,000
<ALLOWANCES> 454,000
<INVENTORY> 9,228,000
<CURRENT-ASSETS> 24,721,000
<PP&E> 25,316,000
<DEPRECIATION> 14,861,000
<TOTAL-ASSETS> 42,192,000
<CURRENT-LIABILITIES> 11,075,000
<BONDS> 3,200,000
0
0
<COMMON> 3,564,000
<OTHER-SE> 19,303,000
<TOTAL-LIABILITY-AND-EQUITY> 42,192,000
<SALES> 65,150,000
<TOTAL-REVENUES> 65,150,000
<CGS> 43,171,000
<TOTAL-COSTS> 61,605,000
<OTHER-EXPENSES> (146,000)
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 978,000
<INCOME-PRETAX> 2,713,000
<INCOME-TAX> 662,000
<INCOME-CONTINUING> 2,051,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,051,000
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
EXHIBIT 99.1
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Herrmidifier Company, Inc.
Lancaster, Pennsylvania
We have audited the balance sheet of Herrmidifier Company, Inc. as
of December 31, 1995 and the related statements of income and retained
earnings and cash flows for the year then ended (not presented
separately herein). 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 audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statement referred to above present
fairly in all material respects, the financial position of Herrmidifier
Company, Inc. as of December 31, 1995 and the results of operations and
its cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ KUNTZ LESHER SIEGRIST & MARTINI LLP
CERTIFIED PUBLIC ACCOUNTANTS
Lancaster, Pennsylvania
October 2, 1996
