- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-10796
----------------
VALLEN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
TEXAS 74-1366847
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
13333 NORTHWEST FREEWAY 77040
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
----------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 462-8700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.50 PAR VALUE
(TITLE OF CLASS)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statement 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 and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing:
$157,005,812 BASED ON THE CLOSING PRICE OF AUGUST 7, 1998
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date:
COMMON STOCK, $.50 PAR VALUE 7,218,658
(TITLE OF CLASS) (NUMBER OF SHARES OUTSTANDING AS
OF AUGUST 7, 1998)
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FROM 10-K
- -------- -----------------
Proxy Statement for the 1998 Annual Meeting of Shareholders Part III
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
Vallen Corporation, together with its subsidiaries, (the "Company" or
"Vallen") was incorporated under the laws of Texas in 1960 as the successor to
a business founded in 1947. The Company operates through various domestic
subsidiaries and international affiliates. Through a 50% owned Mexican
company, Proveedora de Seguridad Industrial Del Golfo, S.A. ("Proveedora"),
the Company engages in safety equipment distribution and providing training
services in Mexico. Additionally, the Company owns a 50% interest in an
industrial supply distribution company headquartered in Edmonton, Alberta,
Century Sales & Service, Limited ("Century"). The Company also operates
through various partnerships and other affiliated operations.
Vallen Safety Supply Company ("Vallen Safety") is a provider of industrial
safety and health products and services designed for the protection of the
individual worker and the workplace environment. Its customer base encompasses
the North American continent; major markets serviced include chemical
production, railroad and automotive transportation, petroleum refining,
utilities, pulp and paper products, primary metals extraction, general
manufacturing, various governmental agencies, business services,
transportation equipment, steel production, oil and gas extraction and
construction. Encon Safety Products, Inc. ("Encon") manufactures industrial
safety equipment and optical quality eyewear for sale through Vallen Safety
and other unaffiliated distributors. All Supplies, Inc. ("All Supplies") is a
Louisiana based distributor of industrial hardware and welding supplies to
industrial and commercial customers. During the past fiscal year, the
distribution and manufacturing segments contributed 75% and 25%, respectively,
of the Company's operating income before corporate general and administrative
expenses.
The table included in Note 11 to the Company's Consolidated Financial
Statements provides certain information regarding Vallen's distribution and
manufacturing industry segments for the Company's most recent three fiscal
years.
The Company's corporate headquarters are in Houston, Texas. Corporate
management has responsibility for overall organization, planning, business
development and control of Company operations, as well as specific oversight
in the areas of compensation and benefits, finance and accounting, data
systems, risk management, taxes and employee training and development.
DISTRIBUTION
Vallen Safety distributes a broad range of personal protective and other
safety and health related products and services, including sales and rental of
approved respiratory equipment and atmospheric hazard detection instruments to
meet specific safety and health needs of industrial customers. Respiratory
equipment and atmospheric hazard detection instruments are used where work is
performed in limited breathing environments, or where workers are exposed to
hazards associated with possible escape of toxic or combustible gases or to
carcinogens and other dangerous atmospheric particulates. The Company's fire
service division provides inspection and systems maintenance services, as well
as system installations. Through its Vallen Knowledge Systems product group,
Vallen Safety provides a wide variety of safety training and instruction
services, safety program staffing and onsite consulting services, including
safety programs and risk evaluation.
Supplied-air respiratory equipment includes both portable self-contained
units and air line respirators worn by industrial, fire fighting and other
personnel in environments where ambient conditions require a dependable,
alternative source of breathable air. Supplied-air respiratory equipment
contributed 4.9%, 5.1% and 6.5% of consolidated net sales for the years ended
May 31, 1998, 1997 and 1996, respectively. The organization distributes air
purifying equipment including gas masks, chemical cartridge and particulate
type respirators for protection against breathing dusts, mists, fumes and fogs
associated with certain industrial process environments.
A wide variety of personal protective equipment and other workplace
commodities is distributed, including eye protection devices, head and hearing
protection items, gloves, fall protection and emergency shower and eye-
2
wash products, as well as protective clothing and similar items. Vallen Safety
operates a program under which prescription safety eyewear service is provided
at specific customer sites. Markets served throughout North America include
many large manufacturing, governmental agency and process industry customers
with multiple locations. Due to the nature of their businesses and in order to
comply with supply contract requirements, Vallen Safety operates numerous
onsite or just in time locations which require holding significant amounts of
inventory stock to meet rapid delivery demands.
Vallen Safety sells or rents a series of portable digital electronic
instruments used to detect and measure the presence and levels of toxic and
combustible gases or oxygen deficient atmospheres. Portable devices used in
enforcing industrial pollution control programs are also marketed.
Other product lines include fire safety equipment, fire prevention systems
and fire control agents, ergonometric enhancing products, material handling
equipment, safety signs, lights and alarms.
Vallen Safety's "in-plant store" units are physically located on the
customers' premises in order to provide top quality products and services for
continuous operating schedules. The stores distribute a variety of products
directly to customer personnel, in addition to managing the safety inventory
stocks for the customer. The number of in-plant stores now totals 67.
Vallen Safety maintains service centers which inspect, repair and calibrate
respiratory equipment, fire protection equipment and electronic atmospheric
hazard detection instruments. Mobile respiratory service van units are staffed
by factory certified technicians who perform scheduled in-plant inspection and
repair work for customers.
Across the U.S. and Canada, Vallen Safety has seven regional hubs that use
their large distribution centers to ship products directly to customers and to
supply smaller branch locations and onsite and just-in-time locations. Sales
and operations employees receive training from Vallen Safety and certain of
its suppliers regarding appropriate applications and relevant regulatory and
industry standards for various kinds of safety and health equipment. Vallen
Safety also sponsors safety equipment and safety awareness training programs
and seminars for customer employees.
All Supplies, Inc., a wholly-owned subsidiary, is a Baton Rouge, Louisiana
based distributor of mill, safety and welding supplies, primarily to an
industrial customer base in Louisiana. All Supplies is generally subject to
the same competitive issues as Vallen Safety.
Vallen Safety owns 50% of the outstanding common stock of Proveedora, a
health and safety products distribution company headquartered in Tampico,
Mexico. Proveedora, a Mexican company, represents many of the same industrial
safety equipment suppliers that Vallen Safety does. It operates through 16
locations throughout Mexico, and is currently expanding service center
operations providing similar services to those noted above under Vallen
Safety.
Vallen Safety operates four branches in the Canadian province of Ontario.
Vallen Safety Supply Company, Limited (Limited), a company organized under the
laws of Canada, was formed to conduct those operations. The Canadian company
generally represents the same supplier groups as Vallen Safety's U.S.
operations. During the past fiscal year, Limited merged with Superior Safety
of Waterloo, Ontario. Limited is the surviving entity. Vallen Safety, the
parent company, owns 62% of the outstanding Common stock of Limited, with an
option to purchase the remaining 38% of Limited's outstanding stock, based
upon a purchase formula, at a future date. Sales for the merged company for
the year ended May 31, 1998 were approximately $7,844,000 (U.S. dollars).
Additionally, the Company owns a 50% share of the outstanding common stock
of Century Sales & Service Limited ("Century"), an Edmonton, Alberta based
Canadian corporation. Century is a distributor of mill supply industrial
hardware and safety equipment. The Company has the option to purchase the
remaining 50% of Century's outstanding stock, based upon a purchase formula,
at a future date. Century operates 12 distribution
3
sites in Alberta and Saskatchewan provinces, in addition to a central
distribution center at its Edmonton headquarters location. It employs over 250
people in its operations.
The Company's distribution subsidiaries sell to a diverse customer base. No
customer accounted for 10% or more of consolidated revenues for the year ended
May 31, 1998. Sales to Proveedora, Century and to domestic companies for
export purposes were less than 4% of distribution net sales during the year
ended May 31, 1998. Vallen Safety is unable to assess its overall market
position relative to other competing entities due to the overall fragmented
nature of its principal business.
All products sold by Vallen Safety are purchased through other manufacturers
and suppliers. Of the more than 1500 suppliers worldwide whose products are
regularly distributed by Vallen Safety, the top 10 accounted for approximately
34% for the year ended May 31, 1998. The Company, through its sales branches
and various catalogues stocks over 24,000 brand name and private label safety
products. The Company continuously evaluates sales and profit performance of
its stocking units to tailor its products and services to the needs of its
customers. All of the Company's arrangements with suppliers are terminable by
either party on short notice. The Company believes that competitive sources of
supply are available for substantially all the products it carries. Sales of
respiratory equipment purchased from Scott Aviation, a division of Figgie
International, Inc., comprised approximately 6.9% in dollar amount of all
products sold by Vallen Safety during the year ended May 31, 1998. Termination
of Vallen Safety's distribution of Scott equipment could have a materially
adverse effect on the Company's business. Vallen has been a distributor of
safety equipment manufactured by Scott continuously since 1953 and considers
its relations with this supplier to be satisfactory. No other supplier
accounted for as much as 6% in dollar amount of distribution products sold
during the year ended May 31, 1998.
The Company believes customers select their safety product and services
suppliers on the basis of ability to provide quality and product lines
availability, technical product knowledge as to applications, usage and
maintenance, service and repair capability in certain product lines, and
product pricing. The Company maintains adequate inventories in order to meet
rapid delivery requirements in many contractual situations. At May 31, 1998,
distribution inventories constituted approximately 29% of consolidated assets.
The Company engages in active competition with a large number of other safety
and health product distributors operating through direct distribution centers
such as Vallen Safety, as well as catalogue and mail order houses. Vallen
Safety also competes with more diverse MRO distributions in each of its
product lines and geographical markets. Most manufacturers of industrial
safety and health products sell through distributors because of the relatively
high direct marketing costs of a narrow product line to customers.
As of May 31, 1998 and 1997, backlog orders entered totaled $7,226,000 and
$5,526,000 respectively for the distribution business. It is expected that all
of the backlog orders as of the end of fiscal 1998 can be reasonably expected
to be filled within twelve months of the year end date.
MANUFACTURING
Encon Safety Products currently manufactures various lines of safety
equipment for use in industries where workers are exposed to potentially
hazardous conditions. Many components of its manufactured products are
fabricated by others, with Encon providing on-site tooling and assembly where
justified by logistics, cost and other factors.
Encon produces fixed and portable eyewash and face-wash equipment and
emergency drench and enclosed showers for use in plant areas where workers
risk contact with dangerous chemicals or other similar hazards. The
conventional model shower is designed to be utilized in a plumbed indoor or
outdoor environment targeted at a market which does not require freeze
protection or tepid water supply. The self-contained portable eyewash/drench
hose models are used in environments where no potable water sources are
available, and are moderately priced. The freeze-protected showers are for
environments where extreme cold temperatures exist, primarily for outdoor
applications, and are competitively priced. The tempered water showers are
used in both indoor and outdoor applications and are designed to provide both
freeze protection and a tepid water supply.
4
Encon produces a diverse line of non-prescription eyewear, primarily used to
protect people as they go about work and recreation activities. The recently
introduced Veratti line of lightweight, contemporary styled eyeglasses are
Encon's most rapidly growing eyewear line. The 1400 and 1900 series of high
impact performance eye protection spectacles offer value and protection at a
moderate price. Encon's 160 series goggles accommodate users who need its
protection while using hard hats, prescription eyeglasses and respirator units
in their workplace. The 500 series goggle provides an alternative product
line, offering regular and fog free lens composition in various lens colors at
moderate prices.
Encon manufactures a line of storage cabinets to protect safety, emergency
and industrial equipment located in hazardous or corrosive industrial
environments. The Encon wallcase product group holds and protects self-
contained breathing apparatus (SCBA), fire extinguishers, escape respirators,
gas masks and protective clothing. With high visibility appearance and
virtually air tight, durable design, Encon wallcases keep valuable customer
property and equipment in ready to use condition.
Encon Custom Plastics, a division of Encon, is a contract manufacturer of
vacuum formed and injection molded thermoplastic parts. Its primary product
line includes wall cases for emergency SCBA and fire extinguishers, Therma
Flow covers, AWARENESS shower signs and various other products manufactured by
vacuum forming and molding.
Encon manufactures cool air delivery systems for individual workers; and
provides engineering and service solutions for the planning and maintenance of
shower systems. Neither lines currently contribute materially to Encon's
revenue steam.
During the year ended May 31, 1998, 32.0% of manufacturing net sales were
made to the Company's distribution operations. The remaining 68.0% was made
primarily to unaffiliated regional distributors, industrial mail order catalog
firms, overseas sales representatives, and certain industrial users.
Manufactured products are marketed primarily under the "Encon" name. Other
than to the Company's distribution operations, no single customer accounted
for 6% of more of consolidated revenues for the manufacturing operations for
the year ended May 31, 1998.
Approximately $2,846,000 or 14.3% of manufacturing net sales for the year
ended May 31, 1998 were to foreign purchasers in various geographical regions.
The Company accepts payment only in United States dollars and makes sales
outside the United States only to established customers or against letters of
credit drawn on major money center banks.
As of May 31, 1998 and 1997, backlog orders entered totaled $1,949,000 and
$1,195,000 respectively for the manufacturing business. It is expected that
all of the backlog orders as of the end of fiscal 1998 can be reasonably
expected to be filled within twelve months of the year end date.
Encon competes with numerous other manufacturers, some of which have
substantially greater resources. The Company does not believe that its
manufactured products account for a significant share of any of its markets.
The Company does not consider that its manufacturing operations or its
business as a whole are materially dependent upon any one product or any
related group of products.
The Company's manufacturing operations are not dependent on one or a small
number of suppliers or fabricators for any raw materials or tooled components.
5
REGULATION
Marketability of the Company's distributed and manufactured products
depends, in many instances, upon compliance with manufacturing, quality
control, performance, test and other published standards of entities such as
the Occupational Safety and Health Administration ("OSHA"), the National
Institute for Occupational Safety and Health ("NIOSH"), the American National
Standards Institute ("ANSI"), the American Society of Testing Materials
("ASTM"), Underwriters' Laboratories ("UL"), Factory Mutual ("FM"), and the
Canadian Standards Association ("CSA"). To the extent applicable, the
Company's manufactured products currently meet or exceed such published
standards or criteria, and compliance of various other products marketed by
Vallen Safety, Limited and All Supplies are certified by their manufacturers.
Such standards could, however, change in the future so as to render one or
more of Vallen's products or product lines at least temporarily unmarketable.
The Company believes that the manufacturers of its products, including its
manufacturing subsidiary, should be able to adapt such products to any
reasonably foreseeable new standards which might be adopted in the future.
The Company believes that compliance by its customers with federal
regulations regarding occupational safety and health has been an important
factor in its past growth. The Company cannot predict the level of future
regulation.
INSURANCE
Failure of a safety product marketed or manufactured by the Company could
expose it to large damage claims. The Company is named as an additional
insured under the products liability policies maintained by certain of its
suppliers and maintains product liability and other insurance coverage in
amounts believed by the Company to be in accordance with industry practices.
Nevertheless, such insurance coverage may not be adequate to protect the
Company against all liability or loss which might arise from a product
failure.
EMPLOYEES
The Company employed 1091 full-time and part-time employees as of May 31,
1998. The manufacturing operations employed 161 of the total. The balance are
employed in the Company's distribution operations and Corporate offices. None
of the Company's employees are employed under collective borrowing agreements.
The Company considers its relationship with its employees to be satisfactory.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Consolidated operations for the Company included the U.S, and Canada.
Information herein relates solely to these consolidated entities:
YEAR ENDED MAY 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Sales to unaffiliated customers:
United States....................... $283,025,000 $247,875,000 $232,130,000
Canada.............................. 7,844,000 3,881,000 3,536,000
Export sales:
Mexico.............................. $ 2,892,000 $ 3,785,000 $ 1,376,000
Other............................... 1,102,000 2,245,000 --
Operating profit or loss:
United States....................... $ 11,437,000 $ 12,114,000 $ 12,098,000
Canada.............................. (277,000) (96,000) (245,000)
Identifiable assets:
United States....................... $134,950,000 $116,013,000 $110,167,000
Canada.............................. 1,619,000 1,389,000 1,496,000
6
ITEM 2. PROPERTIES
Vallen's corporate and distribution headquarters are located in a 50,000
square foot building in northwest Houston. The building and the five-acre
tract on which it is situated, are leased by the Company, following the sale
of the property near the end of the 1998 fiscal year. The Company is scheduled
to move into new quarters on an adjacent tract of land when a planned
commercial office building is completed in 1999. The Company owns a 65,000
square foot manufacturing facility in Houston, which also houses its
instrument servicing operations. The Company owns and operates a 10,000 square
foot manufacturing facility in Coudersport, Pennsylvania and leases a 15,000
square foot manufacturing facility in Houston. The Company owns branch-
warehouses for its distribution operations with an aggregate of 31,494 square
feet of space in Brazosport, Corpus Christi, and Odessa, Texas; it leases an
aggregate of 675,000 square feet of warehouse and office space in over 60
locations throughout the United States and Canada. During the fiscal year
ended May 31, 1998, the Company entered into a sale and leaseback transaction
covering six office/warehouse facilities for a period of ten years.
Aggregate rentals of real property during the year ended May 31, 1998 were
$2,278,000. Reference is made to Notes 4 and 9 of the Notes to Consolidated
Financial Statements for information regarding mortgages on real estate and
commitments under long-term operating leases. The Company considers all
property owned or leased by it to be well-maintained, adequately insured and
suitable for its purposes. Additional expansion of the Company's operations
may require new warehouse locations in existing or new geographical areas.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to incidental litigation in the ordinary course of
business, primarily related to silicosis claims in the State of Texas, none of
which individually or in the aggregate, is considered to be material to its
operations or financial condition. The Company maintains insurance coverage
against certain liabilities which may occur from time to time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no items submitted to a vote of security holders during the
fourth quarter of the year ended May 31, 1998.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded over-the-counter on the NASDAQ National
Market System under the symbol VALN. At August 7, 1998 there were
approximately 1,000 holders of the Company's common stock including individual
participants in certain security position listings. The Company has not paid
any cash dividends on its common stock since its organization. During the year
ended May 31, 1998, the Company purchased 60,000 shares of its Common stock in
open market transactions under a stock repurchase plan previously approved by
the Company's Board of Directors.
The following table sets forth for the periods indicated the high and low
sale prices for the Company's common stock as reported by the NASDAQ Stock
Market.
QUARTER HIGH LOW
------- ---- ----
Year Ended May 31, 1998
Fourth................................................. $21 $20
Third.................................................. 21 1/8 19 7/16
Second................................................. 22 3/8 18 3/4
First.................................................. 19 7/8 17 7/8
Year Ended May 31, 1997
Fourth................................................. $19 1/4 $15 1/2
Third.................................................. 20 1/8 16
Second................................................. 17 5/8 15 1/4
First.................................................. 19 1/2 16 3/4
ITEM 6. SELECTED FINANCIAL DATA
VALLEN CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
IN THOUSANDS (EXCEPT PER SHARE DATA)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
OPERATING RESULTS FOR THE YEAR
ENDED MAY 31,
Net sales....................... $294,863 $257,786 $237,042 $203,284 $185,751
Net earnings.................... $ 10,235 $ 8,764 $ 7,987 $ 7,142 $ 4,557
Diluted earnings per common
share.......................... $ 1.39 $ 1.19 $ 1.09 $ 1.00 $ .65
FINANCIAL POSITION AT MAY 31,
Total assets.................... $136,569 $117,402 $111,663 $ 90,654 $ 81,417
Working capital................. $ 77,793 $ 63,009 $ 56,554 $ 51,721 $ 44,301
Current asset ratio............. 4.7:1 5.3:1 4.3:1 5.5:1 5.0:1
Long-term debt, excluding
current maturities............. $ 12,733 $ 10,425 $ 10,705 $ 5,194 $ 3,817
Debt-to-equity ratio............ 0.1:1 0.1:1 0.1:1 0.1:1 0.1:1
SHAREHOLDERS' EQUITY AT MAY 31,
Shareholders' equity............ $100,870 $ 91,339 $ 82,317 $ 72,682 $ 65,532
Weighted average number of
common shares outstanding--
diluted........................ 7,365 7,335 7,337 7,108 7,062
Book value per share............ $ 13.70 $ 12.45 $ 11.22 $ 10.23 $ 9.28
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of certain aspects of the Company's
results of operations and financial conditions should be read in conjunction
with the Consolidated Financial Statements and the Selected Financial Data
included elsewhere herein.
RESULTS OF OPERATIONS
The table below is presented to assist in analyzing changes in operating
results for the fiscal years 1998, 1997 and 1996, indicating changes in
various items in the statement of earnings as a percentage of net sales, and
the increase (decrease) in such items in 1998, 1997 and 1996 compared to the
prior year.
YEARS ENDED MAY 31,
----------------------------------------
ITEMS IN
CONSOLIDATED
STATEMENT OF PERCENTAGE OF
EARNINGS AS A INCREASE
PERCENTAGE OF NET (DECREASE) FROM
SALES PRIOR YEAR
------------------- -------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- -----
Net sales............................ 100.0% 100.0% 100.0% 14.4% 8.8% 16.6%
Cost of sales........................ 75.3 75.3 74.4 14.4 10.0 17.5
Selling, general and administrative
expenses............................ 20.9 20.1 20.6 19.3 6.0 15.8
Other income (expense), net (1)...... 1.3 .6 .2 152.9 220.6 140.5
Income taxes......................... 1.6 1.9 1.8 .6 10.3 5.8
Net earnings......................... 3.5 3.4 3.4 16.8 9.7 11.8
- --------
(1) Includes the categories interest and dividend income, interest expense,
earnings from foreign affiliates, net and other income and expense, net.
Totals for the specific categories are noted in the Consolidated Statement
of Earnings in the attached financial statements.
The category "Earnings from foreign affiliates, net" contained herein
increased to $3,426,000 in 1998 from $1,453,000 in fiscal 1997 due to
increased earnings from Proveedora totaling $1,852,000 and increased earnings
from Century totaling $121,000.
The Company purchased a 50% interest in Proveedora, based in Tampico,
Mexico, on December 17, 1992, and purchased a 50% interest in Century, based
in Edmonton, Alberta (Canada), on June 6, 1995. The initial investments and
capital contributions were $2,767,000 and $4,472,000, respectively. Total
sales for the years ended May 31, 1998, in U.S. dollar equivalents, were
$27,269,000 for Proveedora and $52,008,000 for Century, respectively, compared
to $12,780,000 for Proveedora and $48,665,000 for Century in 1997.
NET SALES
Consolidated net sales increased $37,077,000 or 14.4% during fiscal 1998 as
compared to an increase of $20,744,000 or 8.8% in 1997. Sales increased 14.7%
in the distribution segment and 4.5% in the manufacturing segment during
fiscal 1998. The increase in distribution sales for fiscal 1998 and 1997 was
primarily due to acquisitions, operation of new distribution branches and
expansion of services revenues in fiscal 1998 and 1997. The increase in the
manufacturing sales level was primarily related to the introduction of new
non-prescription eyewear lines and increased instructional label in eyewear as
a whole during the period.
GROSS PROFIT
Consolidated gross profits as a percentage of net sales were 24.7%, 24.7%
and 25.6% for fiscal years 1998, 1997 and 1996, respectively. The
manufacturing subsidiary's overall gross profit margins decreased in 1998
primarily as a result of competition in its core shower and eyewash lines.
Eyewear lines margins remained strong compared to 1997. The distribution
subsidiaries' sales, which are at lower gross profit margins, accounted for
the significant percentage of total Company sales. Total distribution sales as
a percentage of consolidated sales
9
were 95% for 1998, 1997 and 1996, respectively. Gross profit margins for the
distribution operations were slightly higher in 1998 compared to 1997 and 1996
in part a result of the increasing percentage of total net sales attributable
to higher margin services business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, as a percentage of net sales,
were 20.9% in fiscal 1998, compared to 20.1% in 1997 and 20.6% in 1996. These
operating expenses in dollar terms increased 19.3% to $61,678,000 in fiscal
1998 and 6.0% to $51,708,000 in fiscal 1997. In fiscal 1998, the increase
resulted primarily from added expenses from companies acquired as well as
expenses related to bringing more services related business on line, including
fire service operations. Additionally, payroll increases, increases in
occupancy costs related to additional locations acquired and the result of a
significant sale-and-leaseback transaction in 1998 added to the higher
operating costs relative to sales levels in 1998 as compared to 1997. The
primary reason for the decrease in fiscal year 1997 was that fewer
acquisitions were completed in 1997 than in fiscal 1996, the year in which the
acquisition of the businesses of Safety Centers, Inc. and All Supplies
occurred.
NET EARNINGS
Consolidated net earnings as a percentage of net sales were 3.5%, 3.4% and
3.4% for fiscal years 1998, 1997 and 1996 respectively. Fiscal year 1998 net
earnings of $10,235,000, or $1.39 per diluted share, represented a 16.8%
increase compared to fiscal 1997. Fiscal year 1997 net earnings or $8,764,000,
or $1.19 per diluted share, represents a 9.7% increase over fiscal 1996.
The increase in 1998 over 1997 is primarily attributable to increased
earnings of foreign affiliates, higher overall sales, and in part related to
acquisitions and better operating results from the manufacturing segment's
eyewear business. Continued price competition in the Company's core domestic
distribution lines partially offset these gains in 1998.
EARNINGS FROM FOREIGN AFFILIATES, INTEREST AND DIVIDEND INCOME, AND OTHER
INCOME (EXPENSE)
Earnings from foreign affiliates, net to the Company, were $3,426,000 at May
31, 1998 versus $1,453,000 for the year ended May 31, 1997. The earnings are
from the Company's 50% equity position in its Mexican affiliate (Proveedora)
and Canadian affiliate (Century Sales). Through the recognition of an exchange
rate variance in 1998 related to the Mexican peso, the total investment in
foreign affiliates was reduced by $338,000. The earnings from the Mexican
affiliate were significantly enhanced in 1998 through completion of a large
services contract with government-owned Pemex. The earnings recorded from
Century Sales, whose functional currency is the Canadian dollar were
negatively impacted by the falling value of that currency versus the U.S.
dollar.
Interest and dividend income decreased in 1998 by $54,000 to $198,000 when
compared to fiscal year 1997 due to lower cash levels available for
investment. Interest expense increased in 1998 by $120,000 and in 1997 by
$15,000 primarily due to the increased levels of long-term debt added from
acquisition transactions in the Company's distribution operations, as well as
slightly higher rates in 1998 for the variable rate industrial development
bonds outstanding for Encon.
In 1998, other income, net increased to $1,085,000 due primarily to earnings
from the Lion-Vallen Limited Partnership of $771,000, and a gain on sale of
real estate of $574,000, offset by the loss on an equity accounting basis of
$131,000 in 1998 from Vallen's investment in Nuclear Utility Products, as well
as amortization of intangible assets including goodwill. Comparatively, in
1997, the earnings from the Lion-Vallen Partnership totaled $699,000, gains on
sale of real estate totaled $416,000 and equity loss from investment in
Nuclear Utility Products was $303,000. In 1996, other expense, net increased
$4,000 due primarily to increased amortization of intangibles from acquisition
activity and by the loss on an equity accounting basis of $169,000 from the
investment in Nuclear Utility Products, Inc.
10
INCOME TAXES
The effective tax rates for fiscal years 1998, 1997 and 1996 were 32.0%,
35.4% and 35.2%, respectively. The effective tax rate in 1998 was lower than
the previous two years primarily due to the increase in equity earnings
provided by foreign operation relative to overall taxable income from domestic
operations, as well as the results of tax savings strategy at the state
taxation level.
EFFECT OF IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share", which supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock. SFAS 128 was issued to simplify the computation of EPS
and replace the presentation of Primary EPS with Basic EPS and replace Fully
Diluted EPS with Diluted EPS. It also requires dual presentation of Basic EPS
and Diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the Basic EPS computation to the numerator and denominator of
the Diluted EPS computation. The Company adopted SFAS 128 beginning in fiscal
year 1998.
During 1997, the FASB issued SFAS No. 129, SFAS No. 130 and SFAS No. 131.
SFAS No. 129, "Disclosure of Information about Capital Structure,"
consolidates existing disclosure requirements and has no impact on the
Company's financial statements. SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and displaying the components of
comprehensive income and will be adopted by the Company in fiscal year 1999.
(The Statement requires additional disclosures, but has no impact on
consolidated net earnings.) SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," establishes standards for determining
operating segments and reporting segment information. SFAS No. 131 will be
adopted by the Company for its fiscal year 1999 annual report. The Company has
not completed its evaluation of the effects of SFAS No. 131 on its financial
statements, but it does not appear that the effects will be significant.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The net cash provided (used) by operations for fiscal years 1998, 1997 and
1996 was $(2,955,000), $2,998,000, and $9,549,000 respectively. The major
decrease in cash provided in 1998 related to the significant increase in
undistributed earnings of foreign affiliates, and the net increase in
receivables and inventories from expansion in the distribution business. Net
cash provided from investing activities totaled $1,236,000 for fiscal 1998,
compared to a net cash used position in 1997 of $2,831,000 and in 1996 of
$11,474,000. The primary increase in proceeds from investing in 1998 related
to the sale of real estate. Vallen entered into a 10 year sale and leaseback
transaction related to six previously owned distribution center sites in the
U.S. Additionally, the Company sold the Corporate office location for
approximately $1.8 million in May, 1998. This was partially offset by
increased spending in 1998 versus 1997 for capital asset acquisitions,
primarily for building improvements at regional hub centers and computer
hardware and software. Additionally, cash used in acquisition of businesses
totaled $3,384,000 in 1998. Net cash used in investing activities in 1997 was
significantly lower than in 1996, as business acquisition activity was
significantly higher in 1996.
Long-term debt increased in 1998 in the net amount of $2,663,000, resulting
from additional borrowings under bank lines of credit for acquisitions and
business expansion purposes, offset in part by debt repaid relative to
mortgages outstanding at the dates of sale of related real estate. Total long-
term debt, including current maturities, at May 31, 1998, 1997 and 1996,
respectively was $13,631,000, $10,968,000 and $11,169,000.
11
The Company's financial position remains strong with working capital of
$77.8 million, and a current ratio of 4.7 to 1. In addition to internal cash
flow sources, the Company has unused committed borrowing capacity through
major commercial banks. Management believes that its resources are more than
adequate to fund working capital and normal expansion plans, including planned
capital expenditure levels, at this time.
LONG-TERM OBLIGATIONS
On March 28, 1990, the Company issued $2,750,000 in industrial development
bonds (See Note 4 of Notes to Consolidated Financial Statements). The bonds
are secured by a letter of credit agreement and further secured by a lien upon
a manufacturing facility in Houston constructed with the proceeds.
On December 1, 1994, the Company signed a long-term loan with a bank for
$1,720,000. The loan is secured by a mortgage on the regional distribution
center and surrounding property in Bolingbrook, Illinois. The outstanding
balance was paid off in 1998 upon sale of the related real estate
On July 24, 1995, Vallen Safety entered into an unsecured facility with a
major bank. The facility has been subsequently amended so that borrowing
capacity under the facility is $12 million. The Agreement has been amended in
1996, 1997 and 1998 to extend the onset of the beginning amortization period
by one year. The impact of these amendments has been to reclassify $1,470,000
and $852,000 to non-current debt category in 1998 and 1997, respectively. As
of May 31, 1998, $9.8 million is outstanding under the facility. See further
details of the Agreement in Note 4 to the financial statements.
Concurrent with the purchase of a majority of the outstanding stock of
Superior Safety of Ontario, Canada in October 1997 and the simultaneous merger
of Superior into Vallen Safety Supply Company, Ltd., bank debt in the amount
of $831,000 (Canadian) was assumed. As of May 31, 1998, the outstanding debt
under this facility was equal to $1,080,000 (Canadian), or $753,000 (U.S.) See
note 4 to the fiscal year 1998 financial statements for further details.
Other long term debt relates to other obligations related to acquisition
payouts.
IMPACT OF INFLATION
Management of the Company believes that inflation has not significantly
impacted either net sales or net earnings during the three years ended May 31,
1998. The Company has generally been able to pass along price increases from
its manufacturing suppliers.
CAPITAL EXPENDITURES
During fiscal 1998 the Company invested $3,214,000 in capital assets for its
distribution segment and $986,000 for its manufacturing segment. The
distribution expenditures were primarily comprised of $559,000 for rental
equipment, $1,026,000 for buildings and improvements, $936,000 for new
computer hardware and software, $693,000 for fixtures and operating equipment.
The manufacturing expenditures were primarily for tools, dies and computer
equipment used in the manufacturing process.
The capital expenditure program for the 1999 fiscal year is expected to
total approximately $3,500,000. Of this total, expenditures for equipment and
molds for the manufacturing group are projected to be approximately
$1,800,000. The remainder is spread among warehouse fixtures and equipment,
vehicles and order processing equipment. Management anticipates funding its
commitments for capital expenditures with cash generated from operations
and/or its borrowing capacities.
YEAR 2000
The Company has conducted a comprehensive review of its internal computer
systems and applications to identify those that might be affected by the year
2000 issue and has developed an implementation plan to resolve
12
the year 2000 issue. The Company is in the process of correcting or replacing
those systems and applications which are not currently year 2000 compliant.
The Company believes it will be able to modify or replace its affected systems
and applications in time to avoid any material detrimental impact on its
operations.
The Company will incur internal staff costs as well as consulting and other
expenses related to infrastructure and facilities enhancements necessary to
prepare its systems and applications for the year 2000 issue. The preliminary
expense estimate for year 2000 corrective and replacement activities ranges
from $200,000-$500,000, a portion of which would have been incurred as part of
normal system and application upgrades.
It is anticipated that all year 2000 compliance efforts will be complete by
mid-fiscal year 1999, including testing. However, if such modifications and
conversions are not completed in a timely manner, the year 2000 issue may have
a material impact on the operations of the Company. The Company is also
working to ensure that products purchased by Vallen, as well as services
utilized by Vallen, will be year 2000 compliant. However, no assurance can be
given that such compliance will happen.
FORWARD LOOKING INFORMATION
The information discussed herein includes "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933 as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of
1934, as amended (The "Exchange Act"). All statements other than statements of
historical facts included herein regarding planned capital expenditures, the
Company's financial position, business strategy and other plans and objectives
for future operations, are forward looking statements. Although the Company
believes that such forward looking statements reasonably reflect expected
outcomes, certain risks and assumptions are involved, and there is no
conclusive evidence that such expectations will ultimately prove correct.
Factors which may come into play which could cause actual results to vary from
anticipated results include acquisition programs involved in expansion
strategies, market competition affecting operating margins, the Company's
ability to compete successfully with other competitors for the same markets
(some of whom may be larger and have greater resources than the Company),
ability to obtain products needed to remain competitive over long periods of
time, ability to continue to produce technically competitive products in its
manufacturing segment, possible exchange rate fluctuations related to
affiliates in other countries, and changes in regulatory requirements in its
geographic markets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VALLEN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
REFERENCE
---------
14 -- Report of KPMG Peat Marwick LLP, Independent Auditors.
15 -- Consolidated Balance Sheets-- May 31, 1998 and 1997.
16 -- Consolidated Statements of Earnings -- Years ended May 31, 1998,
1997 and 1996.
17 -- Consolidated Statements of Shareholders' Equity -- Years ended
May 31, 1998, 1997 and 1996
18 -- Consolidated Statements of Cash Flows -- Years ended May 31,
1998, 1997 and 1996.
19 -- Notes to Consolidated Financial Statements.
13
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Vallen Corporation
We have audited the consolidated balance sheets of Vallen Corporation and
subsidiaries as of May 31, 1998 and 1997 and the related statements of
earnings, shareholders' equity and cash flows for each of the years in the
three-year period ended May 31, 1998. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these consolidated 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 Vallen
Corporation and subsidiaries as of May 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 31, 1998, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Houston, Texas
July 20, 1998
14
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
MAY 31,
------------------
ASSETS 1998 1997
------ -------- --------
Current assets:
Cash and cash equivalents................................ $ 1,041 $ 801
Investment securities, at cost which approximates market. 3,000 2,050
Accounts receivable, less allowance for doubtful accounts
of $518 and $293 at May 31, 1998 and 1997, respectively. 48,382 35,168
Notes receivable, affiliate.............................. -- 650
Inventories (Note 2)..................................... 42,340 36,301
Prepaid expenses and other current assets................ 4,211 2,580
-------- --------
Total current assets................................... 98,974 77,550
-------- --------
Property, plant and equipment, at cost (Note 3)............ 37,825 43,916
Less accumulated depreciation and amortization........... 24,175 23,704
-------- --------
Net property, plant and equipment...................... 13,650 20,212
Notes receivable, non-current, affiliate................... 557 557
Investment in foreign affiliates, net (Note 8)............. 13,138 9,712
Intangibles, net of accumulated amortization of $2,506 and
$2,072 at May 31, 1998 and 1997, respectively............. 6,919 5,678
Other...................................................... 3,331 3,693
-------- --------
$136,569 $117,402
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Ccurrent liabilities:
Current maturities of long-term debt (Note 4)............ $ 898 $ 543
Accounts payable......................................... 14,316 11,469
Accrued liabilities...................................... 5,178 2,075
Income taxes payable..................................... 789 454
-------- --------
Total current liabilities.............................. 21,181 14,541
-------- --------
Long-term debt, excluding current maturities (Note 4)...... 12,733 10,425
Deferred income taxes (Note 6)............................. 973 1,097
Minority interest.......................................... (133) --
Other non-current liabilities.............................. 945 --
Shareholders' equity (Note 5):
Preferred stock, $1.00 par value; 1,000,000 shares
authorized and unissued at May 31, 1998 and 1997........
Common stock $.50 par value; 20,000,000 shares
authorized; 9,758,075 issued and 7,249,658 outstanding
at May 31, 1998 and 9,740,874 issued and 7,278,707
outstanding at May 31, 1997............................. 4,879 4,871
Additional paid-in capital............................... 6,544 6,076
Translation adjustment................................... (776) (773)
Retained earnings........................................ 94,014 83,779
-------- --------
104,661 93,953
Less cost of common shares held in treasury (2,508,417
and 2,462,167 shares at May 31, 1998 and 1997,
respectively)........................................... 3,791 2,614
-------- --------
Total shareholders' equity............................. 100,870 91,339
-------- --------
Commitments and contingencies (Notes 7 and 9)..............
$136,569 $117,402
======== ========
See accompanying Notes to Consolidated Financial Statements.
15
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(THOUSANDS OF DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED MAY 31,
----------------------------
1998 1997 1996
-------- -------- --------
Net sales........................................ $294,863 $257,786 $237,042
Cost of sales.................................... 222,025 194,060 176,396
-------- -------- --------
Gross profit..................................... 72,838 63,726 60,646
Selling, general and administrative expenses
(Notes 7 and 9)................................. 61,678 51,708 48,793
-------- -------- --------
Operating income................................. 11,160 12,018 11,853
Earnings from foreign affiliates, net (Note 8)... 3,426 1,453 1,056
Interest and dividend income..................... 198 252 542
Interest expense (Note 4)........................ (809) (689) (674)
Other income (expense), net...................... 1,085 526 (443)
-------- -------- --------
Earnings before income taxes..................... 15,060 13,560 12,334
Income taxes (Note 6)............................ 4,825 4,796 4,347
-------- -------- --------
Net earnings..................................... $ 10,235 $ 8,764 $ 7,987
======== ======== ========
Net earnings per common share:
Basic.......................................... $ 1.41 $ 1.21 $ 1.10
======== ======== ========
Diluted........................................ $ 1.39 $ 1.19 $ 1.09
======== ======== ========
Weighted average number of common shares
outstanding:
Basic.......................................... 7,273 7,269 7,242
======== ======== ========
Diluted........................................ 7,365 7,335 7,337
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
16
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(THOUSANDS OF DOLLARS, EXCEPT FOR SHARE AMOUNTS)
SHARES OF
COMMON ADDITIONAL TOTAL
STOCK, $.50 COMMON PAID-IN TRANSLATION RETAINED TREASURY SHAREHOLDERS'
PAR VALUE STOCK CAPITAL ADJUSTMENT EARNINGS STOCK EQUITY
----------- ------ ---------- ----------- -------- -------- -------------
Balance at May 31, 1995. 9,713,884 $4,857 $3,955 $(417) $67,028 $(2,741) $ 72,682
Net earnings............ -- -- -- -- 7,987 -- 7,987
Employee stock purchases
(Note 5)............... 12,991 7 171 -- -- -- 178
Exercise of stock
options (Note 5)....... -- -- 1,699 -- -- 127 1,826
Currency translation
adjustment............. -- -- -- (356) -- -- (356)
--------- ------ ------ ----- ------- ------- --------
Balance at May 31, 1996. 9,726,875 $4,864 $5,825 $(773) $75,015 $(2,614) $ 82,317
Net earnings............ -- -- -- -- 8,764 -- 8,764
Employee stock purchases
(Note 5)............... 13,999 7 223 -- -- -- 230
Stock transactions...... -- -- 28 -- -- -- 28
--------- ------ ------ ----- ------- ------- --------
Balance at May 31, 1997. 9,740,874 $4,871 $6,076 $(773) $83,779 $(2,614) $ 91,339
Net earnings............ -- -- -- -- 10,235 -- 10,235
Employee stock purchases
(Note 5)............... 14,201 7 226 -- -- -- 233
Exercise of stock
options (Note 5)....... 3,000 1 242 -- -- 17 260
Stock transactions...... -- -- -- -- -- (1,194) (1,194)
Currency translation
adjustment............. -- -- -- (3) -- -- (3)
--------- ------ ------ ----- ------- ------- --------
Balance at May 31, 1998. 9,758,075 $4,879 $6,544 $(776) $94,014 $(3,791) $100,870
See accompanying Notes to Consolidated Financial Statements.
17
VALLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEAR ENDED MAY 31,
---------------------------
1998 1997 1996
OPERATING ACTIVITIES: -------- ------- --------
Net earnings.................................... $ 10,235 $ 8,764 $ 7,987
Adjustments to reconcile net earnings to net
cash
Provided by operating activities:
(Gain) loss on disposition of property, plant &
equipment..................................... (583) (421) (60)
Depreciation and amortization.................. 3,744 3,421 3,439
Change in deferred income taxes................ (383) (230) 106
Undistributed earnings of foreign affiliates,
net........................................... (3,426) (1,453) (702)
Undistributed earnings from U.S. partnership,
net........................................... (480) (699) (65)
Loss from affiliate, net....................... 145 303 169
Change in minority interest of majority-owned
affiliate..................................... (133) -- --
Decrease (increase) in investment securities.... (950) (49) 5,254
(Increase) in accounts receivable............... (12,088) (2,166) (1,538)
(Increase) in inventories....................... (5,362) (1,273) (3,086)
Decrease (increase) in notes receivable,
current........................................ 650 (503) 265
(Increase) decrease in prepaid expenses & other
current assets................................. (1,280) 2,077 (1,992)
(Increase) decrease in other assets............. 651 (1,048) (1,003)
Increase (decrease) in accounts payable & other
current liabilities............................ 6,305 (3,725) 775
-------- ------- --------
Net cash provided by (used in) operating
activities..................................... (2,955) 2,998 9,549
INVESTING ACTIVITIES:
Proceeds from disposition of assets............. 8,316 841 --
Net additions to property, plant and equipment,
net of effects of acquisitions................. (4,200) (2,832) (1,628)
Payments for acquisitions of businesses......... (3,384) (1,234) (8,866)
Decrease (increase) in notes receivable, non-
current........................................ -- 1,042 --
Investment in affiliates........................ 504 (648) (980)
-------- ------- --------
Net cash provided by (used in) investing
activities..................................... 1,236 (2,831) (11,474)
FINANCING ACTIVITIES:
Additions to long term debt..................... 5,594 -- --
Reduction of long-term debt..................... (2,931) (427) (72)
Treasury stock transactions..................... (1,194) -- --
Stock option transactions....................... 260 -- --
Employee stock purchases........................ 233 230 178
-------- ------- --------
Net cash provided by (used in) financing
activities..................................... 1,962 (197) 106
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 243 (30) (1,819)
Effect of exchange rate changes on cash and cash
equivalents...................................... (3) -- (356)
Cash and cash equivalents at beginning of year.... 801 831 3,006
-------- ------- --------
Cash and cash equivalents at end of year.......... $ 1,041 $ 801 $ 831
======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest payments............................... $ 729 $ 760 $ 555
Income tax payments............................. $ 4,453 $ 4,600 $ 3,846
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company purchased assets or stock of Sheridan Safety, Inc. in fiscal year
1998. In fiscal year 1997, the Company purchased assets of Pagel Safety, Inc.
and the safety distribution division of Southeast Rubber & Safety, Inc. In
conjunction with the acquisitions, assets acquired, liabilities assumed and
cash paid are as follows:
1998 1997 1996
------ ------ -------
Fair value of assets acquired........................ $2,298 $2,132 $15,961
Cost in excess of net assets of companies acquired... 2,012 204 4,548
------ ------ -------
Total assets recorded................................ 4,310 2,336 20,509
------ ------ -------
Liabilities assumed.................................. (926) (1,102) (9,817)
Stock issued for common stock and assets............. -- -- (1,826)
------ ------ -------
Cash paid for common stock and assets................ $3,384 $1,234 $ 8,866
====== ====== =======
See accompanying Notes to Consolidated Financial Statements.
18
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of Vallen Corporation (the Company) and its consolidated
subsidiaries, Vallen Safety Supply Company (Vallen Safety), Encon Safety
Products, Inc. (Encon), Safety World, Inc., All Supplies, Inc. (All Supplies),
and Vallen Safety Supply Company, Limited. All significant inter-company
transactions and amounts have been eliminated in consolidation. Investments in
unconsolidated affiliates are included on the equity basis. Certain prior year
amounts have been reclassified to conform with current year presentation.
Investment Securities--The Company held only trading securities for
investment in 1998, 1997 and 1996. Cost and estimated fair value were
identical, therefore no unrealized gains or losses occurred in any year
presented. Trading securities consist of obligations of states and political
subdivisions and corporate issuers, and totaled $3,000,000 and $2,050,000 at
May 31, 1998 and 1997, respectively.
Inventory Valuation--Inventories are stated at the lower of cost (weighted
average) for Vallen Safety and All Supplies, and lower of cost (first in,
first out) for Encon, or market (replacement).
Property, Plant and Equipment--Property, plant and equipment are stated at
cost, less allowances for depreciation. Depreciation expense is computed using
the straight line method over the estimated useful lives of the related
assets. Estimated useful lives range from 5-30 years for buildings and
improvements, 3-7 years for furniture, fixtures and other equipment, and 3-5
years for data processing equipment and software.
Acquisitions--Acquisitions have been accounted for by the purchase method
and, accordingly, the acquired company's assets are recorded at fair value as
of the acquisition date. Results of operations are included from the date of
acquisition.
Intangibles--Goodwill, which represents purchase price in excess of fair
value of net assets of acquired businesses, is amortized on a straight line
basis over periods up to 40 years, and the related accumulated amortization
was $601,000 and $507,000 at May 31, 1998 and 1997, respectively. Other
intangibles are amortized over their statutory or estimated useful lives.
Accumulated amortization of these other intangibles was $1,905,000 and
$1,565,000 at May 31, 1998 and 1997, respectively.
Income Taxes--Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Uses of Estimates--Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Fair Value of Financial Instruments--The carrying values of cash and cash
equivalents approximates the fair value due to short term return of these
instruments. The carrying value of accounts receivable and payable, notes
receivable and accrued liabilities are considered to approximate fair value
due to the short term nature of these instruments. The carrying value of long
term debt is estimated to approximate fair value based on the company's
incremental borrowing rate for similar types of borrowing arrangements.
19
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long Lived Assets--In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). This statement establishes the
recognition and measurement standards related to the impairment of long-lived
assets. Effective June 1, 1995, the Company adopted SFAS 121. Accordingly, in
the event that facts and circumstances indicate that property and equipment,
and intangible or other non-current assets related to specifically acquired
assets may be impaired, an evaluation of the recoverability of currently
recorded costs would be made. If an evaluation is required, the estimated
future value of undiscounted cash flows associated with the asset is compared
to the asset's carrying value to determine if a write-down to market value or
discounted cash flow value is required. Adoption of this standard did not have
a material effect on the financial position or consolidated results of
operations of the Company.
Foreign Currency Translation--The appropriate functional currency is
determined for each consolidated entity and each entity accounted for on the
equity basis. The financial statements of entities for which the U.S. dollar
is determined to be the appropriate functional currency under the requirements
of SFAS 52, Foreign Currency Translation, are translated using appropriate
current and historic exchange rates; any gains or losses from currency
transactions for these entities are included in income for the current period.
Assets and liabilities of all other entities are translated into U.S. dollars
from their functional currencies using current exchange rates at the balance
sheet date, and income and expense accounts at the average exchange rates
during the year, with gains or losses from translation being accumulated in a
separate shareholders' equity account. Transaction gains and losses are
recognized in income for the current period.
Foreign currency effects are summarized as follows: ($000)
1998 1997 1996
---- ---- ----
Effect of translation adjustments on net income (increase) de-
crease in earnings............................................ $338 $59 $(56)
Currency translation losses charged directly to equity adjust-
ment account.................................................. $ 3 $-- $356
Earnings Per Common Share--Earnings per common share computations are based
on the weighted average number of shares of common stock outstanding during
the respective periods. In February 1997, the FASB issued SFAS 128, "Earnings
Per Share", which supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation, and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock. SFAS 128 was issued to simplify the computation of EPS
and replace the presentation of Primary EPS with Basic EPS and replace Fully
Diluted EPS with Diluted EPS. It also requires dual presentation of Basic EPS
and Diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the Basic EPS computation to the numerator and denominator of
the Diluted EPS computation.
Statements of Cash Flows--For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
20
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. INVENTORIES
Distribution subsidiaries including Vallen Safety Supply Company state
inventories at the weighted-average valuation method in order to provide a
better matching of inventory cost with the related revenues. The manufacturing
subsidiary continues to utilize the first-in, first-out (FIFO) method.
Inventory costs are summarized as follows:
MAY 31,
---------------
1998 1997
------- -------
(THOUSANDS OF
DOLLARS)
Raw materials............................................. $ 1,897 $ 1,329
Work in process........................................... 746 705
Finished goods............................................ 39,697 34,267
------- -------
Total inventories....................................... $42,340 $36,301
======= =======
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment costs are summarized as follows:
MAY 31,
---------------
1998 1997
------- -------
(THOUSANDS OF
DOLLARS)
Land and improvements.................................... $ 656 $ 2,875
Buildings and improvements............................... 4,966 12,486
Furniture, fixtures and other equipment.................. 20,231 17,720
Data processing equipment and software................... 11,972 10,835
------- -------
Total property, plant and equipment.................... $37,825 $43,916
======= =======
Maintenance and repairs are expensed as incurred. Gains and losses from
sales, and retirements are recognized at the time of disposal. Depreciation
provided for in selling, general and administrative expenses was $3,312,000,
$2,974,000 and $3,149,000 for the years ended May 31, 1998, 1997 and 1996
respectively.
21
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. LONG-TERM DEBT
Long-term debt is summarized as follows:
MAY 31,
---------------
1998 1997
------- -------
(THOUSANDS OF
DOLLARS)
Notes payable, bank (1)....................................... $ 9,800 $ 5,000
Variable rate, tax exempt, callable at par, industrial devel-
opment Bonds due March 1, 2020; interest rate resets weekly
(4.05% at May 31, 1998); secured by a letter of credit, fur-
ther secured by a manufacturing facility with a depreciated
cost of $2,033 at May 31, 1998............................... 2,750 2,750
Demand loan from a Canadian Bank ($1,080 Canadian) bearing in-
terest at the prime rate plus 1.25% (effective borrowing cost
was 7.28% as of May 31, 1998) secured by general assignment
of accounts receivable of Vallen Safety Supply Company, Lim-
ited......................................................... 753 --
9.9% mortgage note payable to a bank, due in equal monthly in-
stallments, final installment due December 1, 2020; secured
by land and building with a depreciated cost of $2,016 at May
31, 1997..................................................... -- 1,452
9 1/8% first mortgage note payable to an insurance company,
due in equal monthly installments, final installment due May
1, 2008; secured by land and building with a depreciated cost
of $916 at May 31, 1997...................................... -- 803
Other notes payable........................................... 328 963
------- -------
Total long-term debt........................................ 13,631 10,968
Less current maturities....................................... 898 543
------- -------
Long-term debt, less current maturities..................... $12,733 $10,425
======= =======
Debt maturities for the five fiscal years subsequent to May 31, 1998 are
$898,000, $1,578,000, $2,623,000, $2,405,000, and $3,377,000, respectively,
and $2,750,000 thereafter.
- --------
(1) On July 24, 1995, Vallen Safety entered into a working capital credit
facility with a major commercial bank. On October 24, 1997, the credit
facility was increased to $12 million. The unsecured revolving credit
facility provides, at Vallen Safety's option, interest at the prime rate
or LIBOR + .75%. Fees related to the facility are not material. The
interest rate at May 31, 1998 was 6.475% for $5 million drawn under the
facility, and 6.375% for an additional $4.8 million drawn under the
facility. Vallen Safety is required, under this agreement, to maintain
financial ratios and maintain a minimum tangible net worth of not less
than $20,000,000 at any time during the period of the Credit Agreement
plus 70% of the income added subsequent to October 24, 1997. On July 7,
1998 due dates for payments under the terms portion of the loan and final
principal payment dates were extended by one year, effectively
reclassifying $1,470,000 of the note balance at May 31, 1998 as non-
current.
NOTE 5. STOCK PLANS
The Company has a stock option plan for key employees, (the "Plan") and has
reserved for issuance 1,125,000 shares of its common stock. The Plan
authorizes the Company to grant to its key employees options to purchase
shares of common stock at prices per share equal to the fair market value of
such stock at the date of grant.
Under the stock option plan, options have been granted and are outstanding
as to 266,000 shares as of May 31, 1998. These options are exercisable in
increments of 33 1/3%, beginning in years after fiscal 1993, should the
Company achieve three specified consolidated earnings per share targets. The
Company achieved basic
22
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
earnings per share of $1.41 for the year ended May 31, 1998 and $1.21 for the
year ended May 31, 1997. These earnings levels resulted in vesting of 1/3 of
the options outstanding as of the end of fiscal years 1997 and 1998. Based
upon outstanding options as of May 31, 1998, 177,422 of the options are
exercisable as of that date.
In connection with the acquisition of 100% of the capital stock of All
Supplies in August, 1995, the Compensation Committee and the Board of
Directors of the Company approved the issuance of 100,000 options to the
former owner of All Supplies under terms of an employment agreement. These
options are exercisable in increments of 33 1/3%, beginning in fiscal year
1996, should the Company achieve these specified consolidated earnings per
share targets, and should All Supplies achieve certain sales and gross profit
levels for the same fiscal year. These levels were not achieved as of fiscal
year ended May 31, 1998.
Information relating to stock options is summarized as follows:
OPTIONS PRICE
SHARES RANGE PER SHARE
------- ---------------
Balance outstanding, at May 31, 1995................. 278,000 $12.75-$15.75
Expired.............................................. (21,000) $15.75
Granted in All Supplies acquisition (see above)...... 100,000 $14.75
-------
Balance outstanding, at May 31, 1996................. 357,000 $12.75-$15.75
Granted.............................................. 51,000 $18.20-$18.75
-------
Balance outstanding, at May 31, 1997................. 408,000 $12.75-$18.75
Exercised............................................ (16,000) $12.75-$18.75
Expired.............................................. (26,000) $12.75-$18.75
-------
Balance outstanding at May 31, 1998.................. 366,000 $12.75-$18.75
Options exercisable at May 31, 1998.................. 177,422 $12.75-$18.75
The Company's shareholders approved a non-employee director stock option
plan (the "Director Plan") effective October 12, 1993. The Company has
reserved for issuance 30,000 shares of its common stock to be used in the
plan. The Director Plan authorizes the Company to grant non-employee directors
options to purchase shares of common stock at prices equal to the average last
sale price of the Company's stock for the five most recent trading days on
which trades occurred including the date of grant. Each of the non-employee
directors was granted 5,000 options based upon a formula set forth in the
Director Plan. The options are exercisable ratably on the first, second and
third anniversary dates of the grant date. None of the options granted were
exercised on any of the three anniversary dates.
The Company adopted an employee stock purchase plan effective January 1,
1991. The Company has reserved for issuance 675,000 shares of its common stock
to be used in the plan. The plan allows eligible employees to purchase shares
at 85% of the lower of market value on January 1 or December 31. The
difference between the employees' actual purchase price and the price on
December 31 is compensation expense to the Company. Employee stock purchase
plan expense was $34,000, $35,000 and $24,000 for the years ended May 31,
1998, 1997 and 1996 respectively.
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock Based
Compensation" which established financial accounting and reporting standards
for stock-based employee compensation plans. Under this method compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period; however, SFAS No. 123 allows an entity to
continue to measure compensation cost in accordance with Accounting Principle
Board Opinion No. 25. The Company elected to continue to measure compensation
cost in accordance with APB No. 25 and therefore must comply with the
disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost
has been recognized for stock
23
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
option plans. If the Company had recognized compensation cost on its stock
option plan based on the fair value at the grant date for awards made after
1995, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
YEAR ENDED MAY 31,
---------------------
1998 1997 1996
------- ------ ------
(THOUSANDS OF
DOLLARS, EXCEPT FOR
PER SHARE AMOUNTS)
Net income--as reported............................ $10,235 $8,764 $7,987
Net income--pro forma.............................. $10,091 $8,602 $7,959
Basic earnings per share--as reported.............. $ 1.41 $ 1.21 $ 1.10
Basic earnings per share--pro forma................ $ 1.39 $ 1.19 $ 1.09
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes model with the following assumptions:
1997 1996
------- -------
Expected dividend yield................................... None None
Expected stock price volatility........................... 30% 32%
Risk-free interest rate................................... 5.86% 5.79%
Weighted average expected life of options................. 5 years 4 years
The weighted average fair value of stock options granted for 1997 and 1996
is $5.19 per share and $4.35 per share, respectively.
NOTE 6. INCOME TAXES
Income tax expense (benefit) consists of:
YEAR ENDED MAY 31,
----------------------
1998 1997 1996
------ ------ ------
(THOUSANDS OF
DOLLARS)
Current:
Federal......................................... $4,204 $4,464 $3,913
State........................................... 1,220 562 490
Foreign......................................... (66) -- --
------ ------ ------
5,358 5,026 4,403
Deferred:
Federal......................................... (533) (230) (56)
------ ------ ------
$4,825 $4,796 $4,347
====== ====== ======
The reasons for the differences between the amount of tax expense provided
and the amount of tax expense computed by applying the federal statutory
income tax rates in effect in 1998, 1997 and 1996, to earnings before income
taxes were as follows:
YEAR ENDED MAY 31,
-----------------------
1998 1997 1996
------- ------ ------
(THOUSANDS OF
DOLLARS)
Tax expense at statutory rates................... $ 5,230 $4,646 $4,217
State tax expense, net of federal benefit........ 793 371 323
Non-includable foreign earnings.................. (1,219) (471) (298)
Other, net....................................... 21 250 105
------- ------ ------
$ 4,825 $4,796 $4,347
======= ====== ======
24
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at May 31, 1998 and 1997
are presented below.
1998 1997
------ ------
(THOUSANDS OF
DOLLARS)
Deferred tax assets:
Inventories, principally due to additional costs inventoried
for tax purposes............................................. $ 951 $ 776
Other......................................................... 136 52
------ ------
Total deferred tax assets................................... 1,087 828
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation................................................. 497 745
Software development expensed for tax......................... 262 225
Accelerated property tax deduction............................ 214 127
------ ------
Total deferred tax liability................................ 973 1,097
------ ------
Net deferred tax liability (asset).......................... $ (114) $ 269
====== ======
There is no valuation allowance for the fiscal years ended May 31, 1998 or
May 31, 1997. It is the opinion of management that future operations will more
likely than not generate taxable income to realize the deferred tax assets.
Deferred tax assets are included in the prepaid expenses and other current
assets category on the Consolidated Balance Sheets.
NOTE 7. PROFIT SHARING, DEFERRED COMPENSATION AND BONUS INCENTIVE PLANS
The Company has established a profit sharing trust which covers
substantially all employees. The Company makes quarterly cash contributions of
10% of the net earnings of consolidated U.S, domestic operations, as defined
by the trust agreement. Total profit sharing expense for the years ended May
31, 1998, 1997 and 1996 was $712,000, $729,000 and $632,000, respectively.
During December 1990, the Company amended the profit sharing plan to include
a 401(k) deferred compensation plan covering a majority of the Company's
employees. Under the terms of the 401(k) plan, the Company makes matching
contributions equal to 25% of the participants' contributions subject to
certain participant vesting requirements. Total Company 401(k) contribution
expense for the years ended May 31, 1998, 1997 and 1996 was $341,000, $320,000
and $338,000, respectively.
The Company also has bonus incentive plans for its officers, managers and
other key employees. Cash bonuses are awarded based on incentive award
schedules which measure achievement of individual and corporate objectives,
among other factors. Bonus incentive plan expense was $1,115,000, $601,000 and
$729,000, for the years ended May 31, 1998, 1997 and 1996, respectively.
25
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. INVESTMENT IN FOREIGN AFFILIATES
The Company's investments in foreign affiliates includes a 50% ownership
interest in Proveedora de Seguridad Industrial del Golfo S.A. (Mexico), which
was acquired December 17, 1992; and a 50% ownership interest in Century Sales
and Service Limited (Canada), which was acquired June 6, 1995. A summary of
investment in foreign affiliates is as follows (dollars in thousands):
Amount of original investment......................................... $ 7,239
Translation adjustment (unrealized) adjusted in equity section of
balance sheet........................................................ (773)
Equity earnings since acquisition, net of goodwill amortization and
foreign currency translation amounts recognized in income............ 6,672
-------
Investment at May 31, 1998............................................ $13,138
=======
Under the terms of the Stock Purchase Agreement, the Company has the option
to elect to purchase the remaining 50% of the outstanding capital stock of
Century Sales at either five or six years from the date of the original stock
purchase transaction, based upon formulas contained in the Agreement.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company conducts certain operations from leased premises under
noncancellable operating leases. Under the terms of some of the leases, the
Company pays taxes, maintenance, insurance and certain other operating
expenses. Various computer, transportation and other equipment is also leased
under short-term operating leases. Where applicable, management generally
intends to renew leases that expire during the normal course of business.
Rental expense for the years ended May 31, 1998, 1997 and 1996 amounted to
$2,935,000, $2,367,000 and $1,689,000, respectively. Lease commitments for
noncancellable operating leases for the five fiscal years subsequent to May
31, 1998 are $3,481,000, $2,529,000, $2,032,000, $1,835,000 and $1,499,000
respectively.
Certain claims that result from litigation incurred in the ordinary course
of business have been asserted against the Company. Management believes that
the ultimate resolution of such matters will not materially affect the
financial position or results of operations of the Company.
NOTE 10. CONCENTRATION OF CREDIT RISK
The Company has a broad customer base, representing many diverse industries,
doing business in most regions of the United States and in Mexico and Canada.
The Company evaluates credit risks on an individual customer basis before
extending credit, and believes the allowance for doubtful accounts adequately
provides for losses on uncollectible accounts. In each of the years ended May
31, 1998, 1997 and 1996, no single customer accounted for more than 10% of
consolidated sales. Letters of credit are required on most foreign sales,
except to customers in Mexico and Canada. Consequently, in management's
opinion, no significant concentration of credit risk exists for the Company.
26
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. BUSINESS SEGMENTS
The Company operates in two business segments, distribution of a variety of
safety, health and maintenance products and services and the manufacturing of
industrial safety equipment. The following table summarizes, for the periods
indicated, the amounts of consolidated net sales, operating income,
identifiable assets, capital expenditures and depreciation and amortization
attributable to the Company's distribution and manufacturing operations.
Substantially all intersegment sales are based on published price lists, the
same as to unaffiliated customers. The Company does not derive 10% or more of
its net sales from any single customer, nor does the Company derive 10% or
more of its net sales from foreign sources. The effect of the Company's
operations in Mexico and Canada is immaterial on the amounts in the table
below.
YEAR ENDED MAY 31,
----------------------------
1998 1997 1996
-------- -------- --------
(THOUSANDS OF DOLLARS)
Net sales:
Distribution.................................... $281,185 $245,221 $223,722
Manufacturing................................... 19,925 19,066 20,411
-------- -------- --------
301,110 264,287 244,133
Intersegment sales.............................. (6,247) (6,501) (7,091)
-------- -------- --------
$294,863 $257,786 $237,042
======== ======== ========
Operating income:
Distribution.................................... $ 11,503 $ 11,305 $ 10,338
Manufacturing................................... 3,797 4,026 4,966
-------- -------- --------
15,300 15,331 15,304
Corporate general and administrative expenses... (4,140) (3,313) (3,451)
-------- -------- --------
Total......................................... $ 11,160 $ 12,018 $ 11,853
======== ======== ========
Identifiable assets:
Distribution.................................... $125,224 $107,413 $102,349
Manufacturing................................... 11,345 9,989 9,314
-------- -------- --------
Total......................................... $136,569 $117,402 $111,663
======== ======== ========
Capital expenditures:
Distribution.................................... $ 3,214 $ 1,516 $ 1,458
Manufacturing................................... 986 1,024 226
-------- -------- --------
Total......................................... $ 4,200 $ 2,540 $ 1,684
======== ======== ========
Depreciation and amortization:
Distribution.................................... $ 3,182 $ 3,066 $ 3,040
Manufacturing................................... 562 355 399
-------- -------- --------
Total......................................... $ 3,744 $ 3,421 $ 3,439
======== ======== ========
27
VALLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information for significant unconsolidated
subsidiaries: The Company uses the equity method of accounting for investments
in unconsolidated subsidiaries over which it exercises ownership of 20%- 50%.
The summarized balance sheet and income statement information presented below
includes amounts related to the following significant equity investees:
Proveedora de Seguridad Industrial Del Golfo, S.A. (Mexico) (50%), Century
Sales & Service Limited (Canada) (50%), Lion-Vallen Limited Partnership (LVI)
(Texas) (50%), and Nuclear Utility Products, Inc. (NUPRO) (Delaware) (50%).
The summarized financial information below includes 100% of the individual
companies' assets, liabilities, revenues, and expenses as of and for the years
ended May 31, 1998 and 1997.
YEAR ENDED MAY 31,
-------------------------------
1998 1997 1998 1997
------- ------- ------- -------
FOREIGN DOMESTIC
--------------- ---------------
(THOUSANDS OF DOLLARS)
Current assets................................. $31,713 $25,468 $ 6,872 $ 7,240
Non-current assets............................. 5,270 4,391 377 476
------- ------- ------- -------
Total assets................................... $36,983 $29,859 $ 7,249 $ 7,716
======= ======= ======= =======
Current liabilities............................ $14,668 $13,148 $ 1,376 $ 2,640
Non-current liabilities........................ 1,538 2,810 3,269 3,238
------- ------- ------- -------
Total liabilities.............................. $16,206 $15,958 $ 4,645 $ 5,878
======= ======= ======= =======
Net sales...................................... $79,277 $61,445 $19,060 $17,044
Gross profit................................... 21,981 16,995 3,358 2,967
Income from continuing operation............... 9,553 4,963 1,467 1,022
Net income..................................... $ 6,978 $ 3,475 $ 1,346 $ 835
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly operating results for 1998 and 1997 are summarized
as follows:
QUARTER ENDED
-----------------------------------------
AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31
--------- ----------- ----------- -------
(THOUSANDS OF DOLLARS,
EXCEPT FOR PER SHARE AMOUNTS)
1998
Net sales............................ $64,278 $75,138 $75,639 $79,808
======= ======= ======= =======
Gross profit......................... 15,775 18,326 18,309 20,428
======= ======= ======= =======
Net earnings......................... 1,819 2,524 2,444 3,448
======= ======= ======= =======
Net earnings per common share--basic. .25 .35 .33 .48
======= ======= ======= =======
1997
Net sales............................ $59,413 $63,797 $67,032 $67,544
======= ======= ======= =======
Gross profit......................... 14,875 15,757 16,049 17,045
======= ======= ======= =======
Net earnings......................... 1,604 2,148 2,078 2,934
======= ======= ======= =======
Net earnings per common share--basic. .22 .30 .29 .40
======= ======= ======= =======
28
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information as of August 1, 1998 regarding each
of Vallen's executive officers:
EXECUTIVE
NAME AGE POSITION WITH THE COMPANY OFFICER SINCE
---- --- ------------------------- -------------
Leonard J. Bruce........ 78 Chairman of the Board and Director 1960
James W. Thompson....... 47 President, C.E.O. and Director 1994
Robin R. Hutton......... 52 Executive Vice President, Sales 1981
Leighton J. Stephenson.. 50 Vice President--Finance, Secretary and 1993
Treasurer
Kent M. Edwards......... 50 Vice President--Human Resources, Assistant 1990
Secretary
David G. Key............ 42 Vice President and General Manager, Encon 1996
Safety Products, Inc.
David H. Dewey.......... 48 Vice President 1998
The terms of each officer will expire at the next annual meeting of
directors or when his successor is elected and qualified.
Mr. Bruce, who has over 50 years of experience in safety equipment
distribution, founded the Company in 1947. He has been Chairman of the Board
of Directors since 1960.
Mr. Thompson joined the Company in June 1994 as President and Chief
Operating Officer of Vallen Safety Supply Company. He was named President and
Chief Executive Officer of Vallen Corporation in December 1994. He was
formerly with Westburne Supply Company and Westinghouse Electric Supply
Company. Mr. Thompson was elected to the Board of Directors in June 1994.
Mr. Hutton has been with the Company since 1968. He was elected Vice
President--Southwest Region in 1981 and after serving in several sales and
managerial positions, including Marketing Manager of North Texas. He was named
Executive Vice President of Sales in 1989.
Mr. Stephenson has been employed with the Company since December 1993.
Before joining Vallen, he was with United Artists Entertainment and worked six
years with the audit firm of Coopers & Lybrand.
Mr. Edwards has been with the Company since 1974. He has served Vallen in a
variety of sales and staff positions including corporate level
responsibilities for Administrative Services and Human Resources. He was named
Vice President--Human Resources in 1990.
Mr. Key joined the Company in March 1996 as General Manager of Encon Safety
Products, Inc., the Company's manufacturing subsidiary. He was previously with
3M.
Mr. Dewey has been with the company since 1972. He has served Vallen in a
variety of sales and staff positions including Manager of the Southwest
Region. He was named Vice President in 1998.
PART III
In accordance with General Instruction G(3) to Form 10-K, items 10, 11, 12
and 13 have been incorporated by reference to the Company's definitive proxy
statement complying with Regulation 14A involving the election of directors
which will be filed with the Commission not later than 120 days after the
close of its fiscal year.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements are filed as part of this report.
1. Consolidated Financial Statements, as listed in the Index to Financial
Statements provided in response to Item 8 hereof. (see page 11 for Index)
2. Financial Statement Schedules, as listed in the Index to Financial
Statements provided in response to Item 8 hereof. (see page 11 for Index)
3. The following exhibits are filed as part of this report:
3i. Restated Articles of Incorporation as amended. Incorporated by
reference is Exhibit 3a to the Company's 1990 Form 10-K as filed with
the Securities and Exchange Commission on August 17, 1990 (the "1990
Form 10-K").
3ii. Bylaws of the Company as amended. Incorporated by reference is Exhibit
3ii to the Company's 1995 Form 10-K as filed with the Securities and
Exchange Commission on August 25, 1995 (the "1995 Form 10K".
10a. Vallen Corporation Stock Incentive Plan, specimen Non-qualified Stock
Option Agreement and specimen Stock Appreciation Rights Agreement.
Incorporated by reference is Exhibit 5.1 to the Company's Registration
Statement No. 2-65349 on Form S-1 as filed with the Securities and
Exchange Commission on August 27, 1979. *
10b. Vallen Corporation 1985 Stock Option Plan for Key Employees.
Incorporated by reference is Exhibit 10b to the Company's Form 10-K as
filed with the Securities and Exchange Commission on August 27, 1985. *
10c. Amendment to Vallen Corporation 1985 Stock Option Plan for Key
Employees, as amended. Incorporated by reference is Exhibit 10c to the
1995 Form 10-K. *
10d. Vallen Corporation 1990 Employee Stock Purchase Plan. Incorporated by
reference is Exhibit 10d to the 1990 Form 10-K. *
10e. Agreement dated June 6, 1994 between the Company and James W. Thompson.
Incorporated by reference is Exhibit 10f to the Company's 1994 Form 10-
K as filed with the Securities and Exchange Commission on August 17,
1994. *
10f. Vallen Corporation Executive Incentive Compensation Plan. Incorporated
by reference is Exhibit 10f to the Company's 1996 Form 10-K as filed
with the Securities and Exchange Commission on August 9, 1996 (the
"1996 Form 10-K"). *
21. Subsidiaries of the Company. Incorporated by reference is Exhibit 21 to
the Company's 1996 Form 10-K.
23. Consent of KPMG Peat Marwick LLP--attached.
27. Financial Data Schedule--attached.
- --------
* Management compensation agreement
4. The Company hereby agrees to furnish to the Commission, on request, a copy
of any instrument which defines the rights of holders of any long term
debt of the Company in excess of 10% of the total assets of the Company.
(b) No reports on Form 8-K were required to be filed by this registrant
during the last quarter of the fiscal year covered by this report.
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.
VALLEN CORPORATION
By: /s/ James W. Thompson
----------------------------------
James W. Thompson
President
Date: August 19, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME CAPACITY DATE
/s/ James W. Thompson President, Principal August 19, 1998
- ----------------------------------- Executive Officer
James W. Thompson and Director
/s/ Leighton J. Stephenson Vice President-- August 19, 1998
- ----------------------------------- Finance Principal
Leighton J. Stephenson Financial and
Accounting Officer
/s/ Kirby Attwell Director August 19, 1998
- -----------------------------------
Kirby Attwell
/s/ Leonard J. Bruce Chairman of the Board August 19, 1998
- ----------------------------------- and Director
Leonard J. Bruce
/s/ Darvin M. Winick Director August 19, 1998
- -----------------------------------
Darvin M. Winick
/s/ John Myser Director August 19, 1998
- -----------------------------------
John Myser
31
INDEX TO EXHIBITS
Exhibit numbers are in accordance with exhibit table in Item 601 of
Regulation S-K.
23. -- Consent of KPMG Peat Marwick LLP.
27. -- Financial Data Schedule.
32