Exhibit 13.1
INDEX TO PUROLATOR PRODUCTS COMPANY
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Report of Independent Public Accountants with respect to the
Consolidated Financial Statements of Purolator Products Company and
subsidiaries as of December 31, 1993.
2. Consolidated Balance Sheets as of December 31, 1993 and 1992.
3. Consolidated Statements of Operations for the years ended
December 31, 1993, 1992 and 1991
4. Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1992 and 1991
5. Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991
6. Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Purolator Products Company:
We have audited the accompanying consolidated balance sheets of Purolator
Products Company (a Delaware corporation) and subsidiaries as of December 31,
1993 and 1992, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1993,
1992 and 1991. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Purolator
Products Company and subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for the years ended December
31, 1993, 1992 and 1991 in conformity with generally accepted accounting
principles.
As explained in Note 5 to the consolidated financial statements, effective
January 1, 1991, the Company changed its method of accounting for
postretirement benefit costs other than pensions.
ARTHUR ANDERSEN & CO.
Tulsa, Oklahoma
February 11, 1994
PUROLATOR PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1993 1992
(Expressed in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 5,707 $ 3,411
Trade accounts receivable, net 63,766 63,834
Inventories, net 73,473 87,130
Other current assets 8,610 9,222
Total current assets 151,556 163,597
Land, buildings and equipment, net 75,551 72,239
Investments 11,905 7,767
Intangible assets, net 110,800 116,128
Other assets 9,255 4,735
Total assets $359,067 $364,466
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,243 $ 3,936
Accounts payable 32,387 31,465
Accrued liabilities 36,109 27,224
Total current liabilities 72,739 62,625
Long-term debt, less current maturities 38,971 69,039
Other noncurrent liabilities 73,745 74,548
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value
per share, 10,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $.01 par value per share,
30,000,000 shares authorized,
11,212,500 and 10,112,500 shares
issued and outstanding 112 101
Additional paid-in capital 326,944 311,437
Accumulated deficit (140,573) (151,230)
Additional minimum pension liability (10,424) (1,002)
Cumulative translation adjustment (2,447) (1,052)
Total stockholders' equity 173,612 158,254
Total liabilities and
stockholders' equity $359,067 $364,466
The accompanying notes are an integral part of these consolidated financial
statements.
PUROLATOR PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1993 1992 1991
(Expressed in thousands,
except per share amounts)
Net sales $435,821 $417,888 $401,690
Cost of sales 333,488 318,507 310,265
Gross Profit 102,333 99,381 91,425
Selling, general and
administrative expenses 84,577 83,349 82,157
Nonrecurring charges - 2,888 39,980
Operating Income (Loss) 17,756 13,144 (30,712)
Interest expense 4,119 8,475 9,059
Other income 2,182 3,661 2,191
Income (Loss) Before Income Taxes and
Equity in Income (Loss) of Affiliates 15,819 8,330 (37,580)
Income tax provision (benefit) 461 (1,966) (1,015)
Equity in income (loss) of affiliates 2,475 795 (1,445)
Income (Loss) Before Cumulative
Effect of Change in Accounting Principle 17,833 11,091 (38,010)
Cumulative effect of change in
accounting principle - - (17,317)
Net income (loss) $ 17,833 $ 11,091 $(55,327)
Earnings (loss) per share:
Income (Loss) Before Cumulative Effect of
Change in Accounting Principle $ 1.59 $ 1.29 $ (4.47)
Cumulative Effect of Change in Accounting
Principle - - (2.04)
Net Income (Loss) $ 1.59 $ 1.29 $ (6.51)
Weighted Average Shares Outstanding 11,182 8,550 8,500
The accompanying notes are an integral part of these consolidated financial
statements.
PUROLATOR PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Expressed in thousands, except share amounts)
Additional
Additional Minimum Cumulative
Paid-In Accumulated Pension Translation
Shares Amount Capital Deficit Liability Adjustment Total
Balance, January 1, 1991 8,500,000 $ 85 $263,831 $(106,994) $ (1,423) $ 1,318 $156,817
Changes in Additional
Minimum Pension Liability - - - - 92 - 92
Translation Adjustment - - - - - 462 462
Net Loss - - - (55,327) - - (55,327)
---------- ----- -------- ---------- -------- -------- ---------
Balance, December 31, 1991 8,500,000 85 263,831 (162,321) (1,331) 1,780 102,044
Translation Adjustment - - - - - (2,832) (2,832)
Changes in Additional
Minimum Pension Liability - - - - 329 - 329
Issuance of Stock, net 1,612,500 16 22,645 - - - 22,661
Environmental
Indemnification by Former
Parent - - 17,700 - - - 17,700
Capital Contribution by
Former Parent - - 7,261 - - - 7,261
Net Income - - - 11,091 - - 11,091
---------- ---- -------- -------- -------- ------- --------
Balance, December 31, 1992 10,112,500 101 311,437 (151,230) (1,002) (1,052) 158,254
Translation Adjustment - - - - - (1,395) (1,395)
Changes in Additional
Minimum Pension Liability - - - - (9,422) - (9,422)
Issuance of Stock, net 1,100,000 11 15,507 - - - 15,518
Dividends Paid ($0.64 per
share of Common Stock) - - - (7,176) - - (7,176)
Net Income - - - 17,833 - - 17,833
---------- ---- -------- --------- -------- ------- --------
Balance, December 31, 1993 11,212,500 $ 112 $326,944 $(140,573) $(10,424) $(2,447) $173,612
========== ===== ======== ========= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements.
PUROLATOR PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Cash flows from operating activities:
Net income (loss) $ 17,833 $ 11,091 $(55,327)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 13,567 14,651 14,732
Equity in (income) loss
of affiliates (2,475) (795) 1,445
Provision for losses
on receivables 1,142 1,604 1,537
Provision for inventory reserves 2,949 3,474 7,811
Interest accretion on
postretirement employee benefits
obligations 3,348 4,513 5,927
Amortization of debt
origination costs 611 - -
Nonrecurring charges - 2,888 39,980
Write-downs of buildings
and equipment - 426 4,085
Change in operating assets and
liabilities, net of effects
from acquisitions and dispositions:
(Increase) decrease in
receivables (1,217) (3,888) 12,980
(Increase) decrease in
inventories 10,708 (16,149) 2,638
(Increase) decrease in
other current assets 3,483 (2,407) (360)
(Increase) decrease in
other noncurrent assets (4,465) 1,012 1,675
Increase (decrease) in
accounts payable 922 (4,464) 4,731
Decrease in other
current liabilities (1,689) (7,166) (25,009)
Decrease in other n
noncurrent liabilities (489) (1,773) (1,211)
Increase (decrease) in
postretirement employee benefits
obligations (3,520) (3,472) 14,155
Other, net (1,363) (2,539) 1,437
Total adjustments 21,512 (14,085) 86,553
Net cash provided by
(used in) operating activities 39,345 (2,994) 31,226
Cash flows from investing activities:
Capital expenditures (13,552) (10,835) (7,905)
Other, net 177 830 122
Investment in Purodenso (2,000) (2,500) (2,500)
Net cash used in
investing activities (15,375) (12,505) (10,283)
Cash flows from financing activities:
Proceeds from note payable to
Former Parent - 67,000 46,000
Payments on note payable
to Former Parent - (142,044) (63,665)
Debt origination costs (272) (2,085) -
Proceeds from stock issuance 15,518 21,150 -
Proceeds from long-term debt 117,829 71,972 1,842
Payments on long-term debt (147,573) (3,878) (2,911)
Dividends paid (7,176) - -
Net cash provided by
(used in) financing activities (21,674) 12,115 (18,734)
Increase (decrease) in cash and
cash equivalents 2,296 (3,384) 2,209
Cash and cash equivalents,
beginning of period 3,411 6,795 4,586
Cash and cash equivalents,
end of period $ 5,707 $ 3,411 $ 6,795
Supplemental disclosures
of cash flow information:
Interest payments $ 3,125 $ 9,112 $ 8,760
Tax payments 4,818 907 369
The accompanying notes are an integral part of these consolidated financial
statements.
PUROLATOR PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Effective December 21, 1992, Pennzoil Company ("Pennzoil" or the "Former
Parent") together with Purolator Products Company, a Delaware corporation
("Purolator" or the "Company"), sold 10,000,000 shares of common stock of
Purolator in concurrent domestic and international public offerings.
Purolator did not receive any of the proceeds from the sales of shares held by
the Former Parent (8,500,000). As a result of the completion of the
offerings, the Former Parent does not own any shares of capital stock of the
Company. On January 11, 1993, the Company sold 1,100,000 shares of common
stock pursuant to the partial exercise of the over-allotment options granted
to the underwriters in connection with the public offerings.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Purolator and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Foreign Currency Translation
Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
Foreign Currency Translation. Assets and liabilities are translated to U.S.
dollars at the current exchange rate at the end of the period. Income and
expense accounts are translated using the weighted average exchange rate for
the period. Adjustments arising from translation of foreign financial
statements are reflected in the cumulative translation adjustment in the
equity section of the consolidated balance sheet. Transaction gains and
losses are included in net income (loss).
The Company enters into forward foreign exchange contracts to hedge the effect
of fluctuating currency rates on certain liabilities, such as accounts
payable, that are denominated in foreign currencies. The contracts typically
provide for the exchange of different currencies at specified future dates and
rates. The gain or loss due to the difference between the forward exchange
rates of the contracts and current rates offsets in whole or in part the loss
or gain on the liabilities being hedged.
Inventories
Substantially all inventories are reported at cost, using the first-in, first-
out (FIFO) method, which is lower than market.
Land, Buildings and Equipment
Land, buildings and equipment are stated at cost. Depreciation is provided
generally on a straight-line basis over the estimated service lives of the
respective classes of property. Estimated service lives are as follows:
Years
Land improvements 10-35
Leasehold improvements 3-30
Buildings and improvements 3-66
Machinery and equipment 3-18
Amortization of leasehold improvements is based upon the terms of the
respective leases. Maintenance, repairs and betterments, including
replacement of minor items of physical properties, are charged to expense;
major additions to physical properties are capitalized. The cost of the
assets retired or sold is credited to the asset accounts and the related
accumulated depreciation is charged to the accumulated depreciation accounts.
The gain or loss from sale or retirement of property, if any, is included in
net income (loss).
Investments
Common stock investments in entities in which the Company owns equity
interests ranging from 20 percent to 50 percent are accounted for under the
equity method, pursuant to which the Company's share of the affiliate's
operating results is included in net income (loss).
Intangible Assets
Intangible assets include goodwill which represents the excess of cost over
the amount ascribed to the net assets of ongoing businesses purchased and is
being amortized on a straight-line basis over a 40-year period.
The cost of internally developed patents is charged to expense as incurred.
Purchased patents are amortized over their estimated economic lives.
Interest Rate Swap Agreement
During 1993, the Company entered into an interest rate swap agreement which
involved the exchange of fixed and floating rate interest payments
periodically over the life of the agreement without the exchange of the
underlying principal amounts. The differential to be paid or received is
recorded as an adjustment to interest expense over the life of the agreement.
Federal, State and Foreign Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, Accounting for
Income Taxes, which uses the liability method of accounting for income taxes.
Under the liability 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.
The Company and its United States subsidiaries are included in the Former
Parent's consolidated United States federal income tax returns for the year
ended December 31, 1991 and the period from January 1, 1992 through December
21, 1992. The Company and the Former Parent previously entered into a tax
sharing agreement ("Tax Sharing Agreement") which was intended to put the
Company in the same position with regard to the amount of federal income taxes
that it would pay if it filed a separate tax return. The agreement also
provided that the Company would be reimbursed by the Former Parent for any tax
losses or credits of the Company utilized by the Former Parent consolidated
return group. The Tax Sharing Agreement was terminated effective September
30, 1992. The Company received no benefit for federal income tax losses
which were generated during the period October 1, 1992 through December 21,
1992. The Company filed a separate federal income tax return for the period
from December 22, 1992 through December 31, 1992.
Capitalized Leases
Assets and related obligations under certain long-term leases are capitalized.
The related depreciation and the imputed interest expense are charged against
income in lieu of lease rental expense.
Earnings (Loss) Per Share
Earnings (loss) per share are calculated by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. Stock options
have been excluded from the calculations as their dilutive effect is not
significant.
Cash Flows Information
For purposes of the consolidated statements of cash flows, all highly liquid
investments purchased with a maturity of three months or less are considered
to be cash equivalents. The effect of changes in foreign exchange rates on
cash balances is immaterial.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and Short-term Investments:
The carrying amount approximates fair value because of the short maturity
of those instruments.
Notes Receivable:
The carrying amount approximates fair value because interest rates are at
or close to a reasonable market rate.
Long-term Debt:
The carrying amount approximates fair value because of the frequent
repricing on revolving facilities.
Forward Foreign Exchange Contracts:
The fair value of forward foreign exchange contracts is estimated by
obtaining a quote from a commercial bank. The carrying amount
approximates fair value.
Interest Rate Swap Agreement:
The fair value of the Company's interest rate swap agreement is the
estimated amount that the Company would receive or pay to terminate the
agreement. Based on a quote from a commercial bank, the carrying amount
of the swap agreement approximates the fair value.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentations. These reclassifications have no impact on net income
(loss).
2. DETAILS TO CONSOLIDATED BALANCE SHEETS:
December 31,
1993 1992
(Expressed in thousands)
Trade accounts receivable:
Trade receivables $72,304 $72,124
Less allowances 8,538 8,290
Total, net $63,766 $63,834
Inventories:
Finished goods $41,271 $51,442
Work in progress 7,039 7,375
Raw materials and supplies 27,850 33,124
Total 76,160 91,941
Less reserves 2,687 4,811
Total, net $73,473 $87,130
Land, buildings and equipment:
Land and improvements $ 6,278 $ 6,292
Leasehold improvements 5,806 5,644
Buildings and improvements 23,752 23,265
Machinery and equipment 69,120 64,817
Construction in progress 14,878 9,230
Total 119,834 109,248
Less accumulated depreciation
and amortization 44,283 37,009
Total, net $75,551 $72,239
December 31,
1993 1992
(Expressed in thousands)
Intangible assets:
Goodwill (Note 4) $127,078 $130,308
Other 5,628 4,436
Total 132,706 134,744
Less accumulated amortization 21,906 18,616
Total, net $110,800 $116,128
Accrued liabilities:
Salaries and wages $ 4,856 $ 4,828
Employee pensions 12,885 5,469
Advertising 3,100 4,189
Other 15,268 12,738
Total $ 36,109 $ 27,224
Other noncurrent liabilities:
Postretirement employee
benefits obligations $64,280 $64,452
Other 9,465 10,096
Total $73,745 $74,548
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Allowance for accounts receivable:
Balance, beginning of period $ 8,290 $10,347 $13,032
Provision for losses on receivables 1,142 1,604 1,537
Receivables written off,
net of recoveries (894) (3,661) (4,222)
Balance, end of period $ 8,538 $ 8,290 $10,347
Allowance for inventories:
Balance, beginning of period $ 4,811 $ 9,148 $ 7,744
Provision 2,949 3,474 7,811
Inventories written off
and other adjustments (5,073) (7,811) (6,407)
Balance, end of period $ 2,687 $ 4,811 $ 9,148
Accumulated amortization
of intangible assets:
Balance, beginning of period $18,616 $13,853 $10,388
Provision 3,259 3,519 3,599
Retirements and other 31 1,244 (134)
Balance, end of period $21,906 $18,616 $13,853
3. DEBT:
December 31,
1993 1992
(Expressed in thousands)
Revolving credit facility
with a group of banks, interest at 6.1% $10,000 $30,000
Term credit agreement with a group
of banks, interest at 5.6% 31,000 40,000
Capital building lease obligation,
payable in quarterly installments
ranging from $14,600 to $56,750,
including interest, through
March 2036 2,047 2,129
Other debt and capital lease obligations 167 846
43,214 72,975
Less - current maturities 4,243 3,936
Total long-term amount $38,971 $69,039
The Company amended its credit facility with a group of banks and Texas
Commerce Bank National Association ("TCB"), as agent, (the "Credit Facility")
during the fourth quarter of 1993. The amended agreement expands the total
funds available under the revolving credit agreement by $20.0 million. The
Credit Facility provides the Company with the ability to make individual
acquisitions up to $20.0 million without the consent of the lenders under the
Credit Facility and up to $45.0 million in the aggregate ("permitted
acquisitions"). At December 31, 1993, the Credit Facility provided for a
$65.0 million revolving credit facility (the "Revolving Credit Facility") and
a $31.0 million term loan (the "Term Loan"). Up to $7.0 million of the
Revolving Credit Facility is available for the issuance of letters of credit.
The aggregate amount available for borrowing under the Revolving Credit
Facility is limited to an amount equal to a specified borrowing base
(generally consisting of 80 percent of certain accounts receivable balances
and 45 percent of certain inventory balances of the Company and certain
subsidiaries, with the inventory portion of the borrowing base not to exceed
50 percent of the borrowing base). At December 31, 1993, the Credit Facility
provided for quarterly principal payments on the Term Loan of $1.0 million
beginning on March 31, 1994, escalating to $1.44 million on March 31, 1996.
The final maturities of the Revolving Credit Facility and the Term Loan are
four years and seven years, respectively, from the establishment of the
original credit facility ("TCB Credit Facility") on December 14, 1992.
Interest on the Revolving Credit Facility is at a variable rate equal to, at
the option of the Company, LIBOR plus 1.75 percent, or the agent bank's "base
rate" plus one percent. Interest on the Term Loan is at a variable rate equal
to, at the option of the Company, LIBOR plus two percent, or the agent bank's
"base rate" plus one percent. The interest rates for both the Revolving
Credit Facility and the Term Loan are subject to reduction based upon the
ratio of the total committed debt under the Credit Facility to the Company's
earnings before interest, taxes, depreciation, obsolescence and amortization
("EBITDA").
Borrowings under the Credit Facility are collateralized by liens on
substantially all accounts receivable and inventory and certain patents and
trademarks of the Company and certain subsidiaries, together with a pledge of
all the capital stock of such subsidiaries, and are guaranteed by certain of
those subsidiaries. The terms of the Credit Facility require the Company to
meet certain financial covenants. The primary financial covenants require
that the company maintain (i) net worth; as defined, $175.1 million at
December 31, 1993; (ii) a current ratio greater than 1.5-to-1.0; and (iii) a
fixed charge coverage ratio greater than 1.25-to-1.0 (1.0-to-1.0 inclusive of
dividends).
Additionally, certain covenants contained in the Credit Facility, among other
things, generally (i) restrict the Company's incurrence of additional
indebtedness or contractual contingent obligations to an aggregate of $7.5
million; (ii) prohibit the encumbrance of the Company's assets and the
creation of negative pledges; (iii) restrict the transfer of the Company's
assets (including dispositions of capital stock of certain of the Company's
subsidiaries); (iv) prohibit the Company from engaging in any merger,
consolidation or asset disposition transaction (except for disposition of
previously scheduled non-producing assets); and (v) limit the Company's
investments, other than permitted acquisitions, and extensions of credit in
excess of $3.0 million.
The Company leases certain of its plant facilities and equipment under capital
leases. Lease payments are scheduled to coincide with the liquidation of the
related debt obligations of the lessors.
Future maturities of long-term debt and the minimum future annual obligations
on all capitalized leases in effect as of December 31, 1993 are presented in
the table below (expressed in thousands):
Aggregate
Maturities
1994 $ 4,358
1995 4,249
1996 15,987
1997 5,987
1998 5,985
Thereafter 8,820
Total future maturities and minimum payments 45,386
Less - amount representing interest on capital leases 2,172
Future maturities and present value of net
minimum payments 43,214
Less - current portion 4,243
$38,971
At December 31, 1993, the Company had available revolving credit facilities
aggregating $67.3 million with $10.1 million drawn under these facilities.
As required by the Credit Facility, the Company entered into an interest rate
agreement during 1993 to effectively fix or place a limit upon the interest
payable with respect to at least 50% of the principal amount of the Term Loan.
At December 31, 1993, the Company had outstanding an interest rate swap
agreement with a commercial bank. Under the interest rate swap agreement, the
Company pays an effective fixed interest rate of approximately 6.7% on a
notional principal amount of $17.0 million. The agreement expires in 1996.
4. INCOME TAXES:
Income (loss) before income taxes and equity in income (loss) of affiliates
consists of the following:
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Domestic $15,988 $ 9,352 $(37,005)
Foreign (169) (1,022) (575)
Total $15,819 $ 8,330 $(37,580)
Federal, state and foreign income tax provision (benefit) consists of the
following:
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Current:
U.S. federal and state $ 7,516 $(2,555) $(1,610)
Foreign 461 589 595
Total current provision (benefit) $ 7,977 $(1,966) $(1,015)
Deferred:
U.S. federal and state $(7,516) - -
Foreign - - -
Total deferred benefit $(7,516) - -
Total provision (benefit) $ 461 $(1,966) $(1,015)
A reconciliation of federal statutory and effective income tax rates is shown
below:
Year Ended December 31,
1993 1992 1991
STATUTORY RATE 35.0% 34.0% (34.0)%
INCREASES (REDUCTIONS) RESULTING FROM:
Nonrecognition of deferred tax assets - (58.7) 25.5
Recognition of previously
reserved tax assets (41.2) - -
Reimbursed tax losses from Former Parent - (31.0) 3.1
Amortization of goodwill 6.1 12.9 2.1
State income taxes - 1.9 0.1
Foreign income and losses 0.8 3.9 2.5
Foreign income taxes 2.5 6.5 1.1
Other, net (0.7) 8.9 (2.2)
EFFECTIVE RATE 2.5% (21.6)% (1.8)%
The Company adopted SFAS No. 109, Accounting for Income Taxes, effective
January 1, 1993. There was no cumulative effect of adopting SFAS No. 109 on
net income for the year ended December 31, 1993. Deferred income taxes
reflect the net tax effects of (i) temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes, and (ii) operating loss and tax credit
carryforwards. The effects of significant items comprising the Company's net
deferred tax asset are as follows:
December 31, January 1,
1993 1993
(Expressed in thousands)
Deferred tax liabilities:
Fixed asset basis differences $ (6,235) $ (6,156)
Other (8,265) (8,260)
Total deferred tax liabilities (14,500) (14,416)
Deferred tax assets:
Postretirement employee
benefits obligations $ 25,985 $ 26,004
Environmental reserve
not currently deductible 3,431 3,644
Inventory capitalization
under Section 263A of
the Internal Revenue Code 3,108 3,506
Reserves not currently deductible 9,119 9,887
Additional minimum pension liability 4,158 -
Other 13,362 11,609
Total deferred tax assets 59,163 54,650
Valuation allowance for deferred tax assets (37,147) (40,234)
22,016 14,416
Net deferred tax asset $ 7,516 $ -
Due to its recent history of losses, the Company applied valuation allowances
against all of its net deferred tax assets as of January 1, 1993. The net
change of $3.1 million in the valuation allowance was attributable to (i)
current year temporary differences, (ii) federal and state current income
taxes paid or payable, and (iii) utilization of pre-acquisition net operating
loss carryforwards to reduce goodwill.
At December 31, 1993, the Company had net operating loss carryforwards of $3.4
million available to offset future federal taxable income. The net operating
loss carryforwards expire as follows: $1.1 million in 2003 and $2.3 million
in 2004. The future utilization of these net operating loss carryforwards
will result in a reduction of goodwill. The Company has net state operating
loss carryforwards of $14.5 million available to offset future state taxable
income. The state net loss carryforwards begin to expire in 1999.
5. BENEFIT PLANS:
Stock Option Plans
In November 1992, the Company established the 1992 Stock Option Plan ("1992
Plan"). Awards under the 1992 Plan are to be made to those persons who hold
positions of responsibility and whose performance can have a significant
effect on the success of the Company and its subsidiaries. An award consists
of an option to purchase a specified number of shares of common stock at a
specified price that is not less than the fair market value of the common
stock on the date of grant of the option. All options granted under the 1992
Plan are ten-year non-qualified options and become exercisable in 33-1/3%
increments on each of the first, second and third anniversaries of the date of
grant. The Company has reserved 387,500 shares of common stock for awards
made under the 1992 plan.
In May 1993, the stockholders approved the 1993 Nonemployee Director Stock
Option Plan ("1993 Plan"). The 1993 Plan is intended as an incentive to
attract and retain, as independent directors of the Company, persons of
training, experience and ability, to encourage the sense of proprietorship of
such persons and to stimulate their active interest in the development and
financial success of the Company. Under the 1993 Plan, nonemployee members of
the Company's board of directors receive nondiscretionary automatic grants of
non-qualified options to purchase 500 shares of common stock upon becoming a
director of the Company (persons who were serving as nonemployee directors as
of May 20, 1993, the date of implementation of the plan, were granted their
500 share options as of that date). In addition, beginning in 1994, each
person serving as a nonemployee director on January 1 of each calendar year
will automatically be granted options to purchase an additional 1,000 shares
of common stock, subject to the availability for issuance of such shares under
the 1993 Plan. All options granted under the 1993 Plan have an exercise price
equal to the fair market value of the underlying common stock on the date of
the grant and become exercisable in increments of 50% on the first anniversary
of the date of grant and 25% on each of the second and third anniversaries of
the date of grant. The Company has reserved 50,000 shares of common stock for
awards made under the 1993 Plan.
Long-Term Incentive Plan
In February 1994, the Company adopted the 1994 Long-Term Incentive Plan ("1994
Plan"). The 1994 Plan is intended to provide an incentive that will allow the
Company to retain key executives and other selected employees and reward them
for making major contributions to the success of the Company and its
subsidiaries. Awards that can be made under the 1994 Plan include (i) stock
options (both non-qualified stock options and incentive stock options); (ii)
stock appreciation rights; (iii) stock; and (iv) cash. The exercise price of
stock options granted under the 1994 Plan may not be less than the par value
of the underlying common stock on the date of grant of the option. The
Company has reserved 500,000 shares of common stock for awards granted under
the 1994 Plan. All awards made under the 1994 Plan for the year ended
December 31, 1993 were in the form of non-qualified stock options with
exercise prices equal to the fair market value of the underlying stock on the
date of grant.
The number and option price of options granted under the Company's stock
option plans and long-term incentive plan were as follows:
Number of Price Per
Shares Share
Outstanding at January 1, 1992 - -
Granted 287,000 $15.00
Exercised - -
Cancelled - -
Outstanding at December 31, 1992 287,000 $15.00
Granted 132,430 $17.75 - $19.75
Exercised - -
Cancelled (4,910) $15.00
Outstanding at December 31, 1993 414,520 $15.00 - $19.75
Exercisable at December 31, 1993 94,030 $15.00
Shares of common stock reserved for future grants at December 31, 1993 and
1992 were 522,980 and 100,500, respectively.
Deferred Compensation Plan
In November 1993, the Company adopted the Deferred Compensation Plan (the
"Plan") as an incentive for certain employee directors, officers and other key
employees of the Company or its subsidiaries to encourage them to remain in
the employ of the Company or of its subsidiaries. The Plan, which is treated
as an unfunded non-qualified deferred compensation plan, enables eligible
employees to defer the receipt of a portion of their compensation for a fixed
period of years, until their employment terminates. Participants' account
balances are valued at the greater of the share value or the dollar value, as
defined in the Plan. The share value of a participant's account balance is
the market value of the number of shares of common stock that could have been
purchased by the participant with the deferral amounts, including dividend
reinvestment. The dollar value represents the value of the deferral amounts
adjusted for compound interest that would have been earned on the deferral
amounts assuming allocation of interest at the Applicable Interest Rate
established quarterly by the Internal Revenue Service. The Company accrued
no additional compensation expense related to the Plan for the year ended
December 31, 1993.
Retirement Plans
The Company and certain of its subsidiaries maintain three noncontributory
defined benefit pension plans (the Employees' Pension Plan, the Hourly
Employees' Pension Plan, and the Retirement Plan for Employees of UAW Local
604, Elmira, NY, the "Elmira Plan") covering certain salaried and hourly
employees, former employees and retirees. Under these plans, the Company
contributes an amount equal to or greater than the minimum funding
requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), where applicable, but not in excess of the maximum amount
that can be deducted for federal income tax purposes. Benefits under the
Employees' Pension Plan are generally based on the employees' years of service
and compensation during years of service. Benefits under the Hourly
Employees' Pension Plan are generally based on years of service multiplied by
a specified dollar amount. The Company previously maintained a defined
contribution plan, the Hourly Employees' Target Benefit Plan (the "Target
Plan"), and a defined benefit plan, the Hourly Employees' Supplemental
Retirement Plan (the "Supplemental Plan"). The Target Plan covered the
current hourly employees of the Motor Components Division of the Automotive
Products Segment and the former hourly employees of the Motor Components,
Filter Products and Fuel Devices Divisions who previously were covered by a
collective bargaining agreement with the United Automotive Workers Union. The
Supplemental Plan covered employees and former employees who were participants
of a defined benefit pension plan (the "Terminated Hourly Plan") that was
terminated by the Company in 1980 under the provisions of ERISA. The Target
Plan and Supplemental Plan were adopted in connection with the termination of
the Terminated Hourly Plan. Under the Target Plan, the Company was obligated
to make periodic contributions to a trust fund based on each covered
employee's credited hours of service to the Company. The Supplemental Plan
provided that the Company make periodic contributions sufficient to fund
benefits equal to the benefits that retirees (or their spouses) would have
received had the Terminated Hourly Plan not been terminated, less the sum of
the amounts paid to such persons (i) by the Pension Benefit Guaranty
Corporation with respect to the Terminated Hourly Plan and (ii) all amounts
paid under the Target Plan. Effective April 15, 1992, the Supplemental and
Target Plans were combined into a single defined benefit plan which is the
Elmira Plan.
Net periodic pension cost includes the following components:
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Service cost - benefits earned
during the period $1,793 $1,531 $ 1,364
Interest cost of projected
benefit obligations 4,317 4,079 3,874
Actual return on plan assets (4,744) (4,417) (12,044)
Net amortization and deferral 264 167 8,295
Net periodic pension cost $1,630 $1,360 $ 1,489
The funded status of the defined benefit plans as of December 31, 1993 and
1992 is reconciled to prepaid pension cost (pension liability) as follows:
December 31, 1993 December 31, 1992
Plans Where Plans Where Plans Where Plans Where
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
------------ ------------- ------------ -------------
(Expressed in thousands)
ACTUARIAL PRESENT VALUE
OF BENEFIT OBLIGATIONS:
Vested benefit obligation $ - $ 53,394 $ 41,914 $ 5,170
Accumulated benefit obligation - $ 55,570 $ 43,538 $ 6,957
Projected benefit obligation - $ 60,299 $ 48,904 $ 7,145
Plan assets at fair value - 42,932 45,947 1,488
Projected benefit
obligation (in excess of)
less than plan assets - (17,367) (2,957) (5,657)
Unrecognized prior service cost - 1,008 (688) 1,843
Unrecognized net loss - 16,851 7,079 1,075
Minimum liability adjustment - (13,377) - (2,730)
--------- --------- --------- -------
Prepaid pension cost
(pension liability)
recognized in the
consolidated balance sheet $ - $(12,885) $ 3,434 $(5,469)
======== ======== ======== =======
Assumptions used were:
Year Ended December 31,
1993 1992 1991
Discount rate 7.5% 8.5% 8.5%
Expected long-term rate of
return on plan assets 10.0% 10.0% 10.0%
Weighted average rates of
increase in compensation levels 4.5% 6.0% 4.5%-6.0%
Savings Plan
The Company has a voluntary savings and investment plan available to
substantially all non-union employees. Employee contributions of not less
than one percent of the employee's salary to not more than eight percent are
matched 75 percent by the Company. The cost of the Company's contributions
was $1.9 million, $1.8 million and $1.4 million for the years ended December
31, 1993, 1992 and 1991, respectively.
Postretirement Health Care and Life Insurance Benefits
The Company provides health care and life insurance benefits to certain
retirees. Health care coverage includes medical costs as well as prescription
drugs.
During 1991, the Company changed its method of accounting for postretirement
benefit costs other than pensions by adopting the requirements of SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
effective as of January 1, 1991. As a result, the Company recorded a charge
of $17.3 million to reflect the cumulative effect of the change in accounting
principle for periods prior to 1991.
Net periodic postretirement benefit cost includes the following components:
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Service cost -
benefits attributed to
service during the period $ 473 $ 548 $ 469
Interest cost on accumulated
postretirement benefit obligation 3,548 4,773 5,458
Amortization of accumulated gains (673) (808) -
Net periodic postretirement
benefit cost $3,348 $4,513 $5,927
The following table sets forth the plans' combined status reconciled with the
amounts included in the consolidated balance sheets:
December 31,
1993 1992
(Expressed in thousands)
Accumulated postretirement benefit obligation:
Retirees $47,110 $45,077
Fully eligible active plan participants 5,511 1,161
Other active plan participants 6,571 6,144
Total accumulated postretirement
benefit obligation 59,192 52,382
Unrecognized net gain from past
experience differences 5,088 12,070
Accrued postretirement benefit cost $64,280 $64,452
None of the future annual benefits of plan participants is covered by
insurance contracts issued by the Company or a related party.
For measurement purposes, an 11 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1994; the rate was
assumed to decrease gradually to six percent through the year 1999 and to
remain at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amount of the obligation and the periodic cost
reported. An increase in the assumed health care cost trend rates by one
percent in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1993 by $6.0 million and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year then ended by $0.5 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation as of December 31, 1993, 1992 and 1991 was
7.5 percent, 8.0 percent and 8.5 percent, respectively.
Postemployment Benefits
In November 1992, the Financial Accounting Standards Board issued SFAS No.
112, Employers' Accounting for Postemployment Benefits, which requires accrual
accounting for postemployment benefits, such as disability benefits, instead
of recognizing an expense for those benefits when paid. The Company currently
is accumulating the data necessary to comply with the new rules. Adoption of
SFAS No. 112 using the cumulative effect method is required in the first
quarter of 1994. Based on preliminary estimates, the cumulative effect of the
accounting change at January 1, 1994 is expected to range from approximately
$5.4 million to approximately $7.4 million. The Company does not expect 1994
postemployment expense under the new rules to differ significantly from
postemployment expense that would have been recognized under the pay-as-you-go
basis of accounting.
6. OPERATING LEASES:
Certain properties and equipment are leased for varying periods under long-
term, noncancellable agreements which are renewable in many instances. The
total rent expense amounted to $8.17 million, $8.04 million and $8.17 million
for the years ended December 31, 1993, 1992 and 1991, respectively. The
approximate annual minimum rentals under all noncancellable operating leases
as of December 31, 1993 are as follows (expressed in thousands):
1994 $ 6,918
1995 5,325
1996 4,756
1997 2,495
1998 723
Thereafter 752
$20,969
7. NONRECURRING CHARGES:
During the third quarter of 1991, the Company recorded provisions against
income to reflect losses due to certain identified liabilities and asset
impairments. In the fourth quarter of 1992, the Company recorded a charge
related to compensation of a key executive under the terms of an employment
contract. The following is a summary of the charges provided for (expressed
in thousands):
Year Ended December 31,
1993 1992 1991
Executive compensation $ - $2,888 $ -
Reserve for environmental
costs (see Note 8) - - 26,480
Other write-downs and charges - - 13,500
$ - $2,888 $39,980
8. COMMITMENTS AND CONTINGENCIES:
The Company had a remaining reserve of approximately $8.5 million at December
31, 1993 for estimated cleanup and compliance costs at certain waste disposal
areas, including those in which it has been alleged that the Company is a
potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), as amended, or similar
state legislation. Included in these sites is a plant operated by the Company
in Elmira, New York (the "Elmira Facility") that is the subject of an
Environmental Protection Agency ("EPA") Record of Decision dated September 4,
1992 (the "Elmira ROD") which delineates the actions to be taken to remediate
the contamination specified in the Elmira ROD.
The Company and the Former Parent have entered into an indemnification
agreement, which became effective December 14, 1992, with respect to the
Elmira Facility. Under the agreement, the Former Parent has agreed to
reimburse the Company for costs and expenses of certain remediation required
by the Elmira ROD and indemnify the Company against necessary costs and
expenses of certain remediation activities at one other site located near the
Elmira Facility and at a landfill site in Metamora, Michigan. The
indemnification provided by the Former Parent with respect to the Elmira
Facility will apply to all remediation required by the Company under CERCLA
that had been identified as of the date of the indemnification agreement at
the Elmira Facility, but will not extend to certain additional environmental
expenditures relating to the Elmira Facility or other sites for which the
Company is or may be held responsible. In connection with the
indemnification, the Company reduced its accrual for environmental costs and
credited additional paid-in capital for $17.7 million. Management believes
the accrual for environmental costs at December 31, 1993 is adequate.
The Company is a defendant in certain other litigation arising out of
operations in the normal course of business and is aware of certain litigation
threatened against the Company from time to time. In the opinion of
management, none of the other pending or threatened lawsuits and proceedings
should have a material adverse effect on the consolidated financial position
or results of operations of the Company.
9. INVESTMENT IN PURODENSO:
In 1989, the Automotive Products Segment formed the Purodenso manufacturing
joint venture with a unit of Nippondenso of Japan (with each joint venturer
owning a 50% interest) to exploit the combined engineering and technological
abilities of the two companies. Purodenso supplies highly specialized
automotive filters and injection molded filter housings to the Company for
distribution to domestic Original Equipment Manufacturers ("OEMs"), U.S.
manufacturing plants of Japanese OEM companies and the aftermarket. The
selected financial data presented below as of the dates and for the periods
indicated are derived from the audited financial statements of Purodenso.
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Income Statement Data:
Net sales $57,408 $41,019 $23,554
Cost of sales 51,972 38,143 24,771
Gross profit $ 5,436 $ 2,876 $(1,217)
Net income $ 3,672 $ 1,041 $(2,806)
Balance Sheet Data (at end of period):
Current assets $10,671 $ 7,037 $ 5,704
Noncurrent assets 22,904 21,117 21,159
Current liabilities 12,602 14,853 19,603
Partners' equity 20,973 13,301 7,260
10. DETAILS TO CONSOLIDATED STATEMENTS OF OPERATIONS:
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Expenses Included in Other Categories:
Maintenance and repairs $ 8,521 $ 7,217 $ 7,518
Depreciation and amortization
of land improvements,
buildings and equipment 10,308 11,132 11,133
Amortization of goodwill
and other intangibles 3,259 3,519 3,599
Taxes, other than payroll
and federal, state and
foreign income taxes:
Real and personal property 1,156 1,031 1,103
Miscellaneous 664 468 553
Rents 8,173 8,040 8,168
Advertising costs 12,404 13,408 11,956
Research and development costs 745 341 429
11. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (Unaudited):
1992
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(Expressed in thousands, except per share data)
Net sales $102,302 $105,284 $108,495 $101,807 $417,888
Cost of sales 79,183 79,340 82,693 77,291 318,507
-------- -------- -------- -------- --------
Gross profit $ 23,119 $ 25,944 $ 25,802 $ 24,516 $ 99,381
======== ======== ======== ======== ========
Net income (loss) $ 1,725 $ 4,717 $ 4,738 $ (89) $ 11,091
======== ======== ======== ======== ========
Earnings (loss) per share $ 0.20 $ 0.55 $ 0.56 $ (0.01) $ 1.29
1993
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(Expressed in thousands, except per share data)
Net sales $107,812 $109,287 $112,993 $105,729 $435,821
Cost of sales 83,065 82,381 87,016 81,026 333,488
-------- -------- -------- -------- --------
Gross profit $ 24,747 $ 26,906 $ 25,977 $ 24,703 $102,333
======== ======== ======== ======== ========
Net income $ 2,651 $ 5,119 $ 5,348 $ 4,715 $ 17,833
======== ======== ======== ======== ========
Earnings per share $ 0.24 $ 0.46 $ 0.48 $ 0.42 $ 1.59
12. BUSINESS SEGMENT INFORMATION:
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Net Sales:
Automotive Products $321,271 $301,077 $286,364
Air Filtration Products 57,082 55,055 52,898
Separation Systems 41,416 44,237 43,501
Filter Products 16,052 17,519 18,927
$435,821 $417,888 $401,690
Operating Income (Loss):
Automotive Products $ 20,964 $ 18,189 $(21,354)
Air Filtration Products 4,795 4,316 2,989
Separation Systems 2,691 1,448 1,801
Filter Products 906 2,367 3,130
Corporate (11,600) (13,176) (17,278)
$ 17,756 $ 13,144 $(30,712)
Identifiable Assets:
Automotive Products $254,510 $257,784 $244,427
Air Filtration Products 34,503 32,973 32,831
Separation Systems 26,348 28,828 33,295
Filter Products 16,494 17,198 16,586
Corporate 27,212 27,683 24,211
$359,067 $364,466 $351,350
Capital Expenditures:
Automotive Products $ 12,058 $ 8,847 $ 6,158
Air Filtration Products 485 450 343
Separation Systems 587 1,040 964
Filter Products 350 483 397
Corporate 72 15 43
$ 13,552 $ 10,835 $ 7,905
Depreciation and Amortization:
Automotive Products $ 9,942 $ 11,056 $ 11,048
Air Filtration Products 1,370 1,280 1,273
Separation Systems 949 994 1,083
Filter Products 536 506 459
Corporate 770 815 869
$ 13,567 $ 14,651 $ 14,732
Equity in Income (Loss) of Affiliates:
Automotive Products $ 1,893 $ 489 $ (1,428)
Air Filtration Products - - -
Separation Systems 19 62 (17)
Filter Products - - -
Corporate 563 244 -
$ 2,475 $ 795 $ (1,445)
FOREIGN AND DOMESTIC OPERATIONS
Year Ended December 31,
1993 1992 1991
(Expressed in thousands)
Net Sales:
Domestic $400,482 $383,058 $359,703
Foreign 35,339 34,830 41,987
$435,821 $417,888 $401,690
Operating Income (Loss):
Domestic $ 17,530 $ 14,422 $(31,264)
Foreign 226 (1,278) 552
$ 17,756 $ 13,144 $(30,712)
Identifiable Assets:
Domestic $334,491 $339,857 $315,956
Foreign 24,576 24,609 35,394
$359,067 $364,466 $351,350
Capital Expenditures:
Domestic $ 13,235 $ 10,612 $ 7,263
Foreign 317 223 642
$ 13,552 $ 10,835 $ 7,905
Depreciation and Amortization:
Domestic $ 13,168 $ 14,135 $ 13,838
Foreign 399 516 894
$ 13,567 $ 14,651 $ 14,732
Equity in Income (Loss) of Affiliates:
Domestic $ 2,475 $ 795 $ (1,445)
Foreign - - -
$ 2,475 $ 795 $ (1,445)
One customer accounted for 14 percent of the Company's net sales in the years
ended December 31, 1993, 1992 and 1991. These sales were made from the
Automotive Products Segment.
13. CONCENTRATIONS OF CREDIT RISK:
The Company extends credit to various companies in the retail,
wholesale/distributor, original equipment and export markets in the normal
course of business. Within these markets, certain concentrations of credit
risk exist. These concentrations of credit risk may be similarly affected by
changes in economic or other conditions and may, accordingly, impact the
Company's overall credit risk. However, management believes that consolidated
receivables are well diversified, thereby reducing potential credit risk to
the Company, and that allowances for doubtful accounts are adequate to absorb
estimated losses at December 31, 1993.
At December 31, 1993 and 1992, trade receivables related to these group
concentrations were:
December 31,
1993 1992
(Expressed in thousands)
Retail $ 28,796 $ 28,326
Wholesalers/Distributors 26,349 23,365
Original Equipment 8,994 10,962
Export 5,865 5,687
Other 2,300 3,784
Total $ 72,304 $ 72,124
14. SUBSEQUENT EVENT:
In January 1994, the Company made the decision to shut down the fiberglass
manufacturing process of the Air Filtration Products Segment's Henderson,
North Carolina plant, effective on or about April 15, 1994, in favor of
purchasing fiberglass from outside sources. The Company will reserve
approximately $950,000 in the first quarter of 1994 for the costs associated
with shutting down the process. There are no plans at the present time that
would adversely impact the remaining operations at the Henderson, North
Carolina plant.