UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES ACT OF 1934
For the fiscal year ended September 29, 1996 Commission File No. 0-24492
CITATION CORPORATION
(exact name of registrant as specified in its charter)
DELAWARE 63-0828225
(State of Incorporation) (IRS Employer I.D. No.)
2 OFFICE PARK CIRCLE, SUITE 204
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices)
(205) 871-5731
(Registrant's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
-------------------- ----------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common Stock, $.01 par value
-------------------------------
(Title of Class)
Indicate whether the registrant 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 has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the registrant's voting Common Stock held by non-
affiliates of the registrant was approximately $102,147,224 as of December 13,
1996 based on the NASDAQ National Market System closing price on that date.
As of December 13, 1996 there were 17,721,040 shares of the registrant's Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held on February 18, 1997 are incorporated by reference into
Part III of this Form 10-K.
TABLE OF CONTENTS
Item No. Page No.
-------- --------
PART I
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .13
4. Submission of Matters to a Vote of Security Holders. . . . . . . . .13
Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . .13
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . .14
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . .15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . .17
8. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . .25
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . . . . .51
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . *
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners and Management . . . *
13. Certain Relationships and Related Transactions . . . . . . . . . . . *
PART IV
14. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .52
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
* Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held on February 18, 1997 are incorporated by reference in
Part III of this Form 10-K.
2
CITATION CORPORATION
PART I
ITEM 1: BUSINESS
Citation Corporation is a manufacturer of cast, forged and machined
components for the capital and durable goods industries. At its 19 operations
in eight states, its approximately 5,600 employees produce aluminum, iron and
steel castings, steel forgings and machined and assembled components for
automobiles, light, medium and heavy trucks, off-highway construction equipment,
agricultural equipment, pumps, compressors and industrial valves, machine tools,
aircraft and other durable goods. The Company's stock is traded on the Nasdaq
National Market under the symbol CAST.
BUSINESS STRATEGY
For Citation, strategic change was necessitated by change in its
marketplace. Today, original equipment manufacturers which form the bulk of
Citation's customers are changing from vertically integrated manufacturing
companies to become design and marketing companies, assembling components, and
thus focusing on their strengths. As multi-national organizations come to
accept this concept, each is attempting to reduce costs by closing inefficient
captive operations such as internal foundries and forges and outsourcing
products that independent suppliers such as Citation produce more efficiently.
The reason for this is that parts operations such as foundries and forge
shops tend to be capital and labor intensive. Foundries and forges require
technology that is not common to almost any other type of manufacturing.
Therefore, in the decade of the 80's, large OEM's began to close their captive
foundries and forges and to outsource castings and forgings to independent
producers. This has allowed the OEM's to focus on their base businesses and
provides them components that are more cost efficient than they can produce
internally.
While the process of outsourcing is often associated with the automotive
manufacturers, numerous other large manufacturers of agricultural implements,
construction equipment, braking systems, heavy trucks and ship building also
operate captive facilities. Many of these are also outsourcing casting and
forging products.
In addition to outsourcing, the relationship between customer and supplier
also began to undergo change. OEM's now develop "partnerships" with their
vendors. This is usually defined as a long-term relationship where the supplier
provides design and engineering input in return for longer sourcing agreements
and a less adversarial negotiating structure.
3
As another means of improving efficiency, the OEMs set targets of dealing
with fewer suppliers, but the suppliers selected must have broader
capabilities - more ability to add value to the product and the ability to meet
stringent quality standards.
Given these trends in the marketplace, as well as competitive concerns,
the Company's strategy has changed from simply being a foundry and forge
company in three key ways. First, the Company intends to meet the demands of
outsourcing by its customers by growing capacity and capabilities as required
by those customers. Second, the Company seeks to add value to its products
by strengthening capabilities such as design on one hand, and machining and
assembly on the other. Thus, where appropriate and over time, the Company's
strategy is to become a components supplier to the durable goods industry
rather than only a foundry and forging producer. Third, the Company is
broadening its product capabilities to meet the requirements of its existing
and new customer base, seeking to provide the ranges of product size, volume,
metal, process and other materials demanded by its customers.
ACQUISITIONS
In order to accomplish its business strategy, Citation grew its internal
businesses and acquired companies which had capabilities needed by Citation.
The 1996 acquisitions included, in chronological order, Texas Steel Co.,
producing large steel castings and initial machining, Hi-Tech Corporation,
manufacturing medium volume machined castings and forgings, Southern Aluminum,
producing aluminum engine components, and Bohn Aluminum, producing aluminum
castings for the auto/light truck market.
Shortly after fiscal 1996 year end, the Company completed its largest
acquisition to date, Interstate Forging Industries, Inc., of Milwaukee,
Wisconsin and Navasota, Texas.
Each of these acquisitions broadened Citation Corporation in new processes,
new metals and/or new markets.
INTERNAL EXPANSION
In fiscal 1996, the Company was also completing its largest and most
ambitious programs for internal growth.
The largest was the completion of a project initiated in 1994 to
approximately double the high volume iron production capabilities of Texas
Foundries Company in Lufkin, Texas. This expansion included increasing melt,
molten metal holding and transfer capability as well as the addition of two
state-of-the-art 400 mold-per-hour vertical flaskless molding lines and
automatic iron pouring. Capital expenditures for the expansion were
approximately $32.3 million, of which approximately $2.4 million was spent in
1996.
4
The expansion increased Texas Foundries' iron production capability from
approximately 50,000 tons per year to 90,000 tons per year with a significant
part of the increased output planned for automotive and light truck antilock
braking system parts.
Equipment installation was completed in the fiscal first quarter with
startup in the second quarter. As of year end, the project was still ramping up
and, thus, performing at less than design criteria. The project is presently
expected to reach its design capability during the latter part of fiscal 1997.
Also in 1996, Iroquois Foundry Corp. in Browntown, Wisconsin, acquired in
1995, underwent a capital program to remove bottlenecks in melt operations and
sand cooling to enable second shift operations, thus doubling capacity from
approximately 15,000 tons to 30,000 tons per year. The cost of these and
related projects at Iroquois was approximately $2.0 million.
In addition, melt improvement at Citation's Southern Ductile Castings Co.
in Bessemer, Alabama increased melting capability by approximately 25 per cent.
Also, Citation Foam Castings Co. in Columbiana, Alabama was in the process of
adding a second foam molding line at fiscal year end, with completion scheduled
for the first quarter of fiscal 1997.
Although equipment installation was completed prior to acquisition,
Southern Aluminum Castings Co. was also in ramp up of a major expansion
including casting production, machining and component assembly for engine
applications for Ford Motor Company during 1996. Ultimately, these projects
will more than double Southern Aluminum's capacity. Ramp up will continue
through fiscal 1997.
Total capital spending in fiscal 1996 was approximately $30 million.
During the 1996 fiscal year, the Steel Division at Texas Foundries was
studied and the Company determined that this unit, which only represented
approximately 15 per cent of the sales of Texas Foundries, would require more
resources to become cost competitive than appeared to be appropriate. The unit
had lost substantial money in recent years and its market niche did not appear
to be defensible.
For these reasons, Citation decided to idle the unit, after informing
customers of the impending shutdown. Permanent employees of the operation were
absorbed by the expansion iron facilities at Texas Foundries, and by the end of
the fiscal year,the steel operation was phased out. Because the equipment and
facilities were largely capable of diversion to other uses, there were no
significant write-offs attributed to idling the division.
MARKETS AND CUSTOMERS
During fiscal year 1996, Citation's markets and customers showed initial
signs of the strategic changes being driven by the Company's growth.
5
CITATION - 1996 SHIPMENTS BY MARKET
1996 1995 1994
Automotive/Light Trucks 30.2% 30.5% 26.4%
Medium and Heavy Trucks 18.5% 23.5% 21.0%
Pumps, Valves and Compressors 10.8% 11.1% 10.1%
Construction Equipment 6.5% -- --
Internal Combustion Engines 5.8% 4.3% --
Agriculture 3.5% 2.6% 3.7%
Railroad Equipment 3.0% 3.7% 1.6%
Machine Tools 2.5% 2.4% 3.7%
Aircraft 2.4% 2.5% --
Electrical Equipment 2.2% 3.9% 12.2%
Waterworks 1.9% 2.8% 8.6%
Other Uses 12.7% 12.7% 12.7%
TOTAL 100.0% 100.0% 100.0%
While 1996 Automotive and Light Truck shipments stayed relatively equal to
the previous year due to internal expansion in the high volume divisions of the
company and the acquisition of Southern Aluminum Castings and Bohn Aluminum,
1996 Medium and Heavy Truck shipments, as a percentage of total shipments,
declined from 1995. This was due to sharp declines in overall sales of medium
and heavy trucks from the record sales of 1995.
Showing the most growth for Citation in 1996 were shipments to the
Construction Equipment markets. This was strongly affected by the acquisition
of Texas Steel Co. Texas Steel's largest customer is Caterpillar Tractor Co.
which is the world's leading producer of construction equipment. In addition,
both Berlin Foundry Corp. and Iroquois Foundry Corp., purchased in 1995, are
suppliers to Caterpillar.
Citation's exposure to Waterworks and Electrical Equipment markets, as a
percentage of total shipments, saw continuing reductions in 1996. While certain
parts in these markets such as electric motor frames and irrigation equipment
are long term opportunities, some castings supplied to these markets are
relatively low value added products.
Internal Combustion Engines (other than automotive and light truck) are
largely used in medium and heavy trucks. This was another growth area, largely
through Berlin Foundry Corp., which supplies Detroit Diesel Corporation, Onan
Corporation, Briggs and Stratton Corporation and Cummins Engine Co.
While Citation Corporation has a long-term commitment to the automotive,
light, medium and heavy truck markets, the Company also wants to maintain
approximately half of its shipments to industrial markets.
6
CITATION CUSTOMERS
As a consequence of changes in its markets, the percentage of total sales
of several of Citation's top ten customers changed substantially from 1995.
CITATION TOP 10 CUSTOMERS
1996 1995
% OF TOTAL % OF TOTAL
CUSTOMERS SHIPMENTS SHIPMENTS
- ------------ --------- -------------
Ford Motor Co. 5.8% 1.0%
Dana Corporation 5.2% 7.8%
Digitron Tool Company 4.5% 1.0%
Caterpillar 4.3% 0.7%
Chrysler 2.1% 1.7%
Simpson Industries 2.0% 1.9%
Hendrickson Suspension 2.0% 4.3%
Kelsey-Hayes Company 1.8% 1.8%
Jamesbury Corporation 1.8% 0.9%
Bosch Braking Systems 1.7% 0.6%
Ford is directly and indirectly the largest customer of Southern Aluminum.
In 1996, Southern Aluminum shipped direct to Ford more than $20 million of
engine components.
Digitron Tool Company, Inc. is a large customer of Castwell Products, but
is also supplied by Alabama Ductile Castings and Southern Ductile Castings.
Digitron machines castings for Ford and other automotive companies. Bosch
Braking Systems Corp. acquired the Bendix Brake Division of Allied-Signal. It
is supplied by Alabama Ductile and Texas Foundries.
The other significant change in Citation's markets, primarily due to
acquisitions in 1995 and 1996, is diversity of metals produced. In 1995, ductile
iron was almost three-fourths of metals shipped. In 1996, ductile iron
production was slightly over half of the metals shipped, with gray iron at 18
per cent, aluminum at 15 per cent, and steel at 13 per cent. Since Southern
Aluminum and Bohn Aluminum were only owned for part of 1996, the percentage of
aluminum shipped is expected to increase in 1997.
Citation is addressing changes in its marketplace by increasingly
broadening its product lines. Essentially, however, the Company is simply
following the lead of its customers and positioning itself to be a complete
supplier of metal components to durable and capital goods industries.
7
ORGANIZATIONAL CHANGE
With substantial growth in physical assets, the human resources of the
Company also were reorganized and augmented while maintaining the basic elements
of Citation's approach to managing.
Fundamentally, the Citation approach of operating with a very small
corporate staff of internal experts and establishing each operating division on
essentially a stand-alone basis helps maintain entrepreneurial management. This
is considered a key to future growth and profitability of the Company. In
addition, a strongly incentivized environment for employees is an element that
Citation strongly believes will continue to be significant in managing the human
resource.
Within this environment, however, growth developed needs for enhancing the
direct operations management and coordination, the collection and analysis of
operating and marketing data, and the addition of staff assistance in several
areas.
This was accomplished by slightly reorganizing Citation's grouping of
operations, each group headed by a group vice president. The High Volume Group
now primarily includes the automotive iron operations and machining. The Medium
Volume Group includes iron foundries that primarily focus on industrial markets.
The Specialty Foundry Group includes the steel and aluminum operations and the
high alloy iron castings division. A fourth group, the Forgings Group, was
added after the acquisition of Interstate Forgings Industries was concluded.
Frederick F. (Rick) Sommer was named President and COO of the Company in
the third quarter with all operating groups reporting to him. He also was
appointed to the Board of Directors.
Mr. Sommer has a strong background in operations and management of a multi-
division public corporation. Prior to joining Citation, he was President of the
Automotive Industries Division of Lear Corporation. Mr. Sommer had been
President and CEO of Automotive Industries, a $700 million interior components
manufacturer, prior to its acquisition by Lear. He also worked nine years in
various engineering, operating and staff roles at Nissan Motor Manufacturing Co.
and 17 years at Ford Motor Company in engineering and operations. He received
his master's degree from the Sloan School of Management at Massachusetts
Institute of Technology and a bachelor's degree in electrical engineering from
Brown University.
In addition to naming Mr. Sommer the President of Citation, a number of
realignments of general managers of the operating divisions to better match
experience and skills were made during the year. By year end, management had
been reassigned at Alabama Ductile Castings in Brewton, Alabama; Texas Foundries
Co. in Lufkin, Texas; Mansfield Foundry in Mansfield, Ohio; Oberdorfer
Industries in Syracuse, New York; Berlin Foundry in Berlin, Wisconsin; Iroquois
Foundry in Browntown, Wisconsin; and Foundry Service in Biscoe, North Carolina.
It is believed that these and other changes give Citation an extremely strong
operating management lineup.
8
In support of operations, positions on the staff were also added or
enhanced during the year. These include the additions of new positions for
technology and for quality assurance, both of which are directly involved with
strengthening divisions to better serve their customers.
To support both internal reporting systems and financial reporting, the
controller function was expanded with the addition of assistant controller,
director of division accounting, manager of internal audit, and information
service functions, as well as direct linkage of financial reporting systems.
By building on the current organization where appropriate, but utilizing
areas of human resource strategy which have worked well for Citation, management
and support teams are better able to assist the growth and improvement needs of
the Company.
RAW MATERIALS
The primary raw material used by the Company to manufacture iron and steel
castings is steel scrap. To produce aluminum castings the Company purchases
aluminum ingot to specified alloy grades. The ingot is purchased from primary
aluminum producers and in some cases from secondary smelters. Bohn and Southern
Aluminum produce part of their requirements by operating smelters which melt
scrap aluminum.
The Company purchases steel scrap from numerous sources, generally
regional scrap brokers, using a combination of spot market purchases and
contract commitments. The Company has no long-term contractual commitments
with any scrap supplier, and does not anticipate, nor has it experienced, any
difficulty in obtaining scrap because of the relatively large number of
suppliers and because of the Company's position as a major scrap purchaser.
The cost of steel scrap is subject to fluctuations, but the Company has
contractual arrangements with most of its customers allowing it to adjust its
casting prices to reflect fluctuations. In periods of rapidly rising steel
scrap prices, these adjustments will lag the current market price for steel
scrap because they are generally based on average market prices for prior
periods, which periods vary by customer but are generally no longer than one
quarter. This adjustment lag may have an adverse effect on the Company's
results of operations during such periods.
The price of aluminum ingot is also subject to fluctuations and in some
cases the Company has contractual arrangements to adjust its prices to
reflect fluctuations. In other cases, changes in aluminum ingot prices must
be recovered through casting price negotiations with the customer. Recovery
of cost increases in both cases may lag the aluminum ingot price increases by
a quarter or more.
BACKLOG
See the financial summary on page 16.
9
COMPETITION
The market for the Company's casting products is highly competitive. There
are estimated to be approximately 3,000 foundries and forge shops currently
producing ductile iron, gray iron, steel and aluminum castings and steel
forgings in the United States. The companies within the industry compete on the
basis of price, quality, service and engineering. The industry consolidation
that has occurred over the past two decades has resulted in a significant
reduction in the number of smaller foundry companies and a rise in the share of
production held by the larger foundry companies. Some of the foundries in this
industry are owned by major users of iron castings. For example, the three
largest automobile manufacturers operate foundries. Some of the Company's
competitors have greater financial resources than the Company, may have lower
production costs than the Company, or both.
EMPLOYEES
As of September 29, 1996, the Company had 5,155 full time employees, of
whom 4,360 were hourly employees and 795 were salaried employees. Approximately
1,919 of the Company's hourly manufacturing employees at nine of its 17 plants
are represented by unions under collective bargaining agreements expiring at
various times through October 2001.
The management of each division and corporate staff participate in a
management bonus pool equal to 15% of income before taxes and corporate
administrative charges. Divisional management's bonus compensation is based on
the financial performance of their respective divisions, while corporate
management's bonus compensation is based on overall Company profitability.
Hourly incentive plan programs and participants vary by division.
ENVIRONMENTAL MATTERS
Companies in the foundry industry must comply with numerous federal, state
and local environmental laws and regulations which address the generation,
storage, treatment, transportation and disposal of solid and hazardous waste,
and releases of hazardous substances to the environment. The Company's foundry
operations require compliance with these regulations, as well as regulations
concerning workplace safety and health standards. The Company believes it is in
substantial compliance with these laws and regulations.
The Company has implemented substantial record keeping, management
procedures and practices for the purposes of complying with environmental laws
and regulations. In seeking to comply with these laws and regulations, each
foundry has personnel responsible for environmental issues who work closely with
the Company's corporate director of environmental management. The corporate
director assists in supplying technical advice and guidance in interpreting
regulations, transfers of technology, procedures and obtaining permits.
10
The chief environmental issues for the Company's foundries are air
emissions and solid waste disposal. Air emissions, primarily dust particles,
are handled by dust collection systems. The solid waste generated by these
foundries is generally sand, which is recycled and reused in the foundry or
disposed of as non-hazardous waste in landfills on Company property or in
permitted off-site landfills. The Company has closed certain of the landfills
on its properties without incurring material expenditures and expects to close
other such landfills in the future without incurring material expenditures. The
Company has also begun beneficially reusing the excess sand as fill material and
as a raw material in other products such as cement and asphalt. However, there
can be no assurance that future regulations will not require the Company to
incur additional and potentially material costs related to its past or present
environmental practices.
Although the Company's practices have, in certain instances, resulted in
noncompliance with environmental laws and regulations and in non-material fines
related thereto, the Company currently does not anticipate any environmental
related costs that would have a material adverse effect on its operations.
However, it cannot be assured that the Company's activities will not give rise
to actions by governmental agencies or private parties, which could cause the
Company to incur fines, penalties, operational shutdowns, damages, clean-up
costs or other similar expenses. Also, the Company's foundries, capacity
levels, or increases thereof, are dependent upon the Company's ability to
maintain, or obtain increases in, such levels in its permits for air emissions.
However, it cannot be assured that the Company will be able to maintain its
current permits, or obtain appropriate increases in capacity levels under such
permits, so as to maintain its current level of operations or increase capacity
as it may desire in the future.
The Company is implementing a source removal and shallow groundwater
remediation project at Castwell Products for purposes of removing excessive
levels of trichloroethylene ("TCE") which were detected at this facility. These
excessive levels of TCE resulted from previous leakage into the groundwater from
a parts washing area located on the premises. The need for the remediation was
identified in connection with the Company's acquisition of Castwell Products,
and the Company assumed an accrued liability in the amount of $1.2 million
related to the estimated cost of the remediation. Of this amount, approximately
$700,000 is expected to be paid in fiscal 1995 through fiscal 1997 in connection
with soil removal, groundwater remediation measures and testing expenses.
Thereafter, the Company estimates that it will incur approximately $30,000
annually for an estimated 20 to 30 years for ongoing monitoring and periodic
sampling tests. There can be no assurance, however, that the costs and expenses
related to this remediation project will not be materially greater than
currently estimated.
The 1990 amendments to the Clean Air Act may have a major impact on the
compliance costs of many U.S. companies, including foundries. Many of the
regulations that will implement the Clean Air Act amendments have not yet been
promulgated. Until such regulations are issued, it is not possible to estimate
the costs the Company may need to incur to comply with them.
11
ITEM 2: PROPERTIES
The following table sets forth certain information concerning the foundries
owned and operated by the Company as of September 29, 1996
CAPACITY FLOOR SPACE
FACILITY(1) LOCATION (TONS PER YEAR)(2) (SQ.FT.)
---------------- --------- ------------------ -----------
Alabama Ductile Brewton, Alabama 45,000 135,000
Bohn Aluminum Butler, Indiana 12,500 135,000
Berlin Foundry Berlin, Wisconsin 25,000 229,000
Castwell Products Skokie, Illinois 32,000 286,000
Citation Foam Columbiana, Alabama 13,000 130,000
Foundry Service Biscoe, North Carolina 20,000 160,000
Hi-Tech Corporation Albion, Indiana $15,000,000(3) 45,000
Iroquois Foundry Browntown, Wisconsin 20,000 165,000
Mabry Foundry Beaumont, Texas 15,000 110,000
Mansfield Foundry Mansfield, Ohio 30,000 242,000
Oberdorfer Industries Syracuse, New York 3,500 250,000
Pennsylvania Steel Hamburg, Pennsylvania 3,000 250,000
(sold Nov. 1996)
Southern Aluminum Bay Minette, Alabama 14,000 255,000
Castings Company
Southern Ductile Bessemer, Alabama 15,000 108,000
Centreville, Alabama 2,400 32,000
Selma, Alabama 5,000 30,000
Texas Foundries(3) Lufkin, Texas 90,000 622,000
Texas Steel Corporation Forth Worth, Texas 21,750 450,000
------- ---------
367,150 3,634,000
------- ---------
------- ---------
(1) All of the Company's properties are subject to liens pursuant to the
Company's bank credit facilities.
(2) Reflects maximum capacity of each facility based on six days of operation
per week with two ten-hour shifts per day, except for Iroquois which is
based on one ten hour shift per day.
(3) High-tech corporation performs contract machining. Capacity, therefore,
is stated in sales revenue rather than tons.
The Company's headquarters are located in Birmingham, Alabama and consist
of approximately 10,660 square feet of leased space. Citation Automotive Sales
Corp. leases office space which the Company utilizes as a sales office in
Detroit, Michigan.
12
ITEM 3: LEGAL PROCEEDINGS
The Company is party to several pending legal proceedings, all of which are
deemed by management of the Company to be routine litigation incidental to the
business, and none of which is believed likely to have a material adverse effect
on the Company, its financial position or operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year covered by this
report, no matter has been submitted to a vote of security holders, through the
solicitation of proxies or otherwise.
EXECUTIVE OFFICERS
The executive officers of the Company as of the end of fiscal 1996 were as
follows:
NAME POSITION
- ---- --------
T. Morris Hackney Chairman of the Board and Chief Executive Officer
Frederick F. Sommer President and Chief Operating Officer
R. Conner Warren Executive Vice President of Finance and Administration,
Treasurer and Chief Financial Officer
Virgil Reid Group Vice President - Medium Volume Foundries
Rodney C. Paulette Group Vice President - High Volume Foundries
Timothy L. Roberts Group Vice President - Special Foundry Group
Thomas W. Burleson Vice President - Controller and Assistant Secretary
T. MORRIS HACKNEY founded the Company in 1974 and has served as its Chief
Executive Officer since that time. Prior to establishing the Company, Mr.
Hackney served as President of Hackney Corporation, a chain-link fence
manufacturer, for nine years.
FREDERICK F. SOMMER joined the Company as its President and Chief Operating
Officer in July of 1996. Mr. Sommer was formerly employed by Automotive
Industries, Inc. as its President and Chief Operating Officer from 1992 until
his appointment as President and Chief Executive Officer in 1994. He remained
in this position after the company was acquired by Lear Corporation in 1995, and
also served as a Senior Vice President of Lear Corporation.
R. CONNER WARREN joined the Company in 1975, shortly after its founding.
Since that time, Mr. Warren has served the Company in various capacities and is
currently its Executive Vice President of Finance and Administration and
Treasurer. Mr. Warren is the Company's senior administrative and financial
officer. Prior to joining the Company, Mr. Warren was an employee of Hackney
Corporation. He is a past president of the American Foundryman's Society and of
the American Cast Metals Association and is currently the U.S. representative to
the International Association of Foundry Technical Associations and a member of
its executive board.
13
VIRGIL C. REID joined the Company in 1981 and has served as Group Vice
President - Medium Volume Foundries since October 1992. Prior to attaining his
current position, Mr. Reid served as General Manager of Alabama Ductile, and
General Manager, Sales Administrator and Controller of Foundry Service. From
1974 to 1981, Mr. Reid served in various capacities for GTE, including
Divisional Cost Accounting Manager of its Metal Laminates Division.
TIMOTHY L. ROBERTS joined the Company in May 1995 as Group Vice President -
Special Foundry Group. He served as Director of Manufacturing Operations at
Intermet Corporation, an iron castings company, from 1994 to 1995, and
previously served ten years at Wheland Foundry where he advanced to the position
of Director of Operations and General Manager.
RODNEY C. PAULETTE joined the Company in 1986 and served as Group Vice
President - High Volume Foundries from October 1992 to December 1994. From
January 1995 to September 1995, Mr. Paulette served as Senior Vice President -
Sales and Product Development. In October 1995, Mr. Paulette resumed the
position of Group Vice President - High Volume Foundries. Prior to attaining
his current position, Mr. Paulette served as General Manager of Texas Foundries
and Alabama Ductile and Operations Manager of Foundry Service. Prior to the
Company's acquisition of Texas Foundries, Mr. Paulette served Texas Foundries in
several manufacturing and management positions.
THOMAS W. BURLESON joined the Company in 1992 as Corporate Controller and
became Vice President - Controller in August 1994. Prior to joining the
Company, Mr. Burleson was Corporate Controller of Marvin's, a regional building
products chain, from 1990 to 1992, and was an accountant with Coopers & Lybrand
from 1980 to 1990. Mr. Burleson is a certified public accountant.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock first began trading on the NASDAQ National
Market System on August 2, 1994. The stock is quoted in the NASDAQ National
Market System under the symbol CAST. The following table sets forth, for the
fiscal periods indicated, the high and low bid prices reported on the NASDAQ
National Market System.
FISCAL 1995 HIGH LOW
-------- --------
First Quarter $ 13 $ 10 1/2
Second Quarter $ 15 1/8 $ 12 1/8
Third Quarter $ 17 5/8 $ 13 1/8
Fourth Quarter $ 18 3/8 $ 15
14
FISCAL 1996
First Quarter $19 $9 1/4
Second Quarter $13 $9 3/4
Third Quarter $15 7/8 $11 1/2
Fourth Quarter $14 3/4 $10 3/8
As of December 15, 1996, there were approximately 3,500 holders of the
Company's Common Stock, including shares held in "street" names by nominees
who are record holders.
The Company has never declared or paid a cash dividend, except for
dividends paid to the Company's former S corporation shareholders discussed
elsewhere in this annual report. It is the present policy of the Board of
Directors to retain all earnings for the development of the Company's business.
Any payment of dividends in the future will depend upon the Company's earnings,
capital requirements, financial condition and such other factors as the Board of
Directors may deem relevant.
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and
should be read in conjunction with the financial statements and notes related
thereto included elsewhere in this report. The selected financial data as of
and for the five years ended September 29, 1996 have been derived from the
Company's consolidated financial statements, which were audited by Coopers &
Lybrand L.L.P., the Company's independent accountants.
15
FISCAL YEAR ENDED (1)
------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
September 27 October 3 October 2 October 1 September 29
1992 1993 1994 1995 1996
------------ --------- ---------- --------- ------------
STATEMENT OF OPERATIONS DATA:
Sales $125,735 $150,318 $191,566 $307,681 $487,753
Cost of sales 104,726 123,733 151,921 243,493 404,961
-------- -------- -------- -------- --------
Gross profits 21,009 26,585 39,645 64,188 82,792
Selling, general and administrative
expenses 16,381 17,545 19,650 32,697 45,844
-------- -------- -------- -------- --------
Operating income 4,628 9,040 19,995 31,491 36,948
Interest expense, net 2,959 2,513 2,813 3,974 7,866
Other expense (income) (409) 382 (24) (581) 1,178
-------- -------- -------- -------- --------
Income (loss) before provision for
income taxes 2,078 6,145 17,206 28,098 27,904
Provision for income taxes(2) 883 2,568 6,538 11,019 11,162
-------- -------- -------- -------- --------
Net income (loss) (pro forma
through October 2, 1994)(2) $ 1,195 $ 3,577 $ 10,668 $ 17,079 $ 16,742
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Pro forma net income per share (3) $ 0.36 $ 1.02 $ 1.27 $ 0.95
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of shares
outstanding (in thousands)(3) 9,933 10,486 13,438 17,694
OTHER DATA (UNAUDITED):
Backlog (in dollars) $17,406 $25,535 $ 48,051 $ 78,262 $ 84,596
Tons shipped 93,219 110,481 131,984 206,295 231,618
Capital expenditures $ 3,708 $ 7,921 $ 17,228 $ 29,844 $ 31,166
Depreciation and amortization 7,476 5,468 7,089 10,638 20,151
EBITDA(4) 12,104 14,508 27,084 42,129 57,099
Gross margin 16.7% 17.7% 20.7% 20.9% 17.0%
BALANCE SHEET DATA (AT END OF
PERIOD):
Current assets $ 30,623 $ 34,990 $ 46,713 $ 94,591 $ 135,359
Current liabilities 32,032 39,654 31,213 56,015 72,855
Working capital (1,409) (4,664) 15,500 38,576 62,504
Net property, plant and equipment 38,088 41,910 63,203 143,425 199,367
Total assets 69,751 82,223 113,449 271,871 383,557
Short-term debt, including current
portion of long-term debt 16,357 18,332 579 6,553 2,654
Long-term debt, excluding current
portion 25,794 24,387 29,703 71,254 140,946
Stockholders' equity 11,870 15,041 43,631 132,476 149,319
(1) The Company operates on a 52- or 53-week fiscal year ending on the Sunday
closest to September 30. Fiscal years 1992, 1994, 1995 and 1996 were 52-
week fiscal years and fiscal year 1993 was a 53-week fiscal year.
(2) The Company terminated its status as an S Corporation on the completion of
its initial public offering
16
in August 1994 and became subject to corporate income taxation.
Accordingly, pro forma net income through October 2, 1994 reflects federal
and state income taxes as if the Company had been a C Corporation based on
the statutory tax rates that were in effect during the periods reported.
(3) The weighted average number of shares outstanding for the year ending
October 2, 1994 gives effect to the number of shares (1,002,500) of Common
Stock that would have been required to be sold (at the initial public
offering price of $8.00 per share) to fund a $8.0 million S Corporation
distribution to the former S Corporation stockholders effected at the
closing of the Company's initial public offering in August 1994.
(4) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents operating income plus depreciation and amortization. EBITDA
should not be considered as an alternative measure of net income or cash
provided by operating activities (both as determined in accordance with
generally accepted accounting principles), but it is presented to provide
additional information related to the Company's debt service capability.
EBITDA should not be considered in isolation or as a substitute for other
measures of financial performance or liquidity.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto, included
elsewhere in this annual report.
The Company operates on a 52- or 53- week year, ending on the Sunday
closest to September 30. Fiscal years 1992, 1994, 1995 and 1996 consisted of 52
weeks, and fiscal 1993 consisted of 53 weeks. The next 53 week year will be the
fiscal year ending October 3, 1999.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage
of sales for the periods indicated, and the percentage change in such operating
results between periods.
17
Percentage of Sales Period-to-Period Percentage
Fiscal Year Ended Increase (Decrease)
---------------------------------------- ------------------------------
1995 1996
October 2, October 1, September 29, compared to compared to
1994 1995 1996 1994 1995
---------- ---------- ------------- ----------- -----------
Sales . . . . . . . . . . . . . . . 100.0 100.0 100.0 60.6 58.5
Cost of sales . . . . . . . . . . . 79.3 79.1 83.0 60.3 66.3
----- ----- -----
Gross profit . . . . . . . . . . . 20.7 20.9 17.0 61.9 29.0
Selling, general and
administrative expenses . . . . 10.3 10.6 9.4 66.4 40.2
----- ----- -----
Operating income . . . . . . . . . 10.4 10.3 7.6 57.5 17.3
Interest expense, net . . . . . . . 1.5 1.3 1.6 41.3 97.9
Other expense (income) . . . . . . 0.0 (0.1) 0.3 -- 302.8
----- ----- -----
Income before
income taxes . . . . . . . . . 9.0 9.1 5.7 63.3 (0.7)
FISCAL YEAR ENDED SEPTEMBER 29, 1996 COMPARED TO FISCAL YEAR ENDED OCTOBER 1,
1995
SALES. Sales increased 56.5%, or $180.1 million to $487.8 million in
1996 from $307.7 million in 1995. Of this increase, approximately $190.2
million resulted from sales by the Company's 1995 and 1996 acquisitions.
These include the Company's Texas Steel, Hi-Tech, Southern Aluminum and Bohn
Aluminum operations, each acquired during the fiscal year 1996, and the
increase resulting from the full-year's sales of the Company's Oberdorfer,
Iroquois, Berlin, Pennsylvania Steel and Castwell operations which were
acquired during fiscal year 1995. There was a $10.1 million sales decrease
for the operations owned prior to 1995 due to general declines in the economy
affecting the demand for the Company's products, particularly products
utilized in the Heavy Truck market which decreased 15-20% from 1995 to 1996.
For fiscal 1996, average selling prices remained approximately the same as in
fiscal 1995 at all operating units. Tons shipped increased 17.8% for the
year ended September 29, 1996.
GROSS PROFIT. Gross profit increased 29.0% or $18.6 million to $82.8
million in 1996 from $64.2 million in 1995. Gross profit margins decreased to
17.0% in 1996 from 20.9% in 1995, due to the lower gross margins from the
majority of the 1995 and 1996 acquisitions, the impact of lower sales volume on
units owned prior to 1995, and the lower operating efficiencies due to a major
expansion of Texas Foundries operations which was delayed and suffered major
equipment downtime. Of the increase in the gross profit, $30.9 million resulted
from the 1995 and 1996 acquired companies. The remaining $12.3 million decrease
resulted from the impact of the economy on units owned prior to 1995 and the
inefficient operations at Texas Foundries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased by 40.2% or $13.1 million to $45.8
million in 1996 from $32.7 million in 1995. Expenses increased by $15.6 million
as the result of SG&A expenses attributable to companies acquired in 1995 and
1996. Expenses from operations owned prior to 1995 declined
18
by approximately $2.5 million as a result of reductions in sales representative
commissions and spreading corporate administrative costs over a larger sales
base. For fiscal 1996, SG&A expenses, as a percentage of sales, declined to
9.4% from 10.6% in fiscal 1995.
OPERATING INCOME. Operating income increased by 17.3% or $5.4 million to
$36.9 million in 1996 from $31.5 million in 1995. Approximately $15.3 million
of the operating income resulted from the Company's 1995 and 1996 acquisitions,
while operating income from the pre-acquisition units declined approximately
$9.9 million in 1996. The decline was primarily attributable to lower revenues
of the units owned prior to 1995, inefficiencies at the Mansfield Foundry
operation, the impact of the delayed "ramp-up" of the Texas Foundries' iron
division, and excess losses attributed to maintenance shut-downs of a number of
the units in July and August 1996. The operating margin in 1996 declined to
7.6% from 10.3% in 1995, attributable to the preceding factors and the generally
lower operating margins of the acquired operations.
INTEREST EXPENSE. Interest expense, net of interest income, increased
97.9% or $3.9 million to $7.9 million in 1996 from $4.0 million in 1995.
Interest expense increased because of higher debt balances to fund acquisitions
and slightly higher average interest rates. Additionally, the Company
capitalized interest on the Texas Foundries expansion project until it was
substantially complete. The Company capitalized interest of $453 thousand in
1996 as compared to $1.0 million in 1995.
The Company's debt increased from $77.8 million at October 1, 1995 to
$143.6 million at September 29, 1996. The increase was primarily
attributable to the completion of the acquisitions of Texas Steel, Southern
Aluminum, Bohn Aluminum and Hi-Tech Corporation during the current fiscal
year. See further discussion of the Company's current credit facility under
"Liquidity and Capital Resources."
OTHER EXPENSE (INCOME). In fiscal year 1996, the Company established a
$1.8 million pre-tax allowance for the anticipated loss on the sale of
Pennsylvania Steel, which occurred subsequent to the fiscal year end.
Pennsylvania Steel was sold for approximately $9.0 million which was less
than net book value. The Company also had approximately $600 thousand in
other income in both fiscal 1996 and 1995.
NET INCOME. Net income declined 2.0% or $400 thousand to $16.7 million in
1996 from $17.1 million in 1995. As a percentage of sales, 1996 net income
declined to 3.4% as compared to 5.6% in 1995.
FISCAL YEAR ENDED OCTOBER 1, 1995 COMPARED TO FISCAL YEAR ENDED OCTOBER 2, 1994
SALES. Sales increased 60.6%, or $116.1 million, to $307.7 million in 1995
from $191.6 million in 1994. Of this increase, approximately $83.4 million
resulted from sales at the Company's Mansfield, Oberdorfer, Iroquois, Berlin,
Pennsylvania Steel and Castwell Products operations (collectively the
"Acquisitions"), each acquired on or after October 2, 1994. The
19
remaining $32.8 million increase resulted from a general increase in volume and
higher average selling prices. Management believes these increases were
primarily attributable to the general strength of the underlying economy and its
positive impact on the Company's customers, as well as capacity expansions at
selected Company facilities. Tons shipped increased 56.3% for the year ended
October 1, 1995.
GROSS PROFIT. Gross profit increased 61.9% or $24.5 million, to $64.2
million in 1995 from $39.6 million in 1994. Gross margin increased to 20.9% in
1995 from 20.7% in 1994, primarily due to the absorption of fixed costs over a
larger volume of sales and a shift in product mix to higher margin products and
higher average selling prices, partially offset by costs associated with the
integration of the Acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased 66.4%, or $13.0 million, to $32.7
million in 1995 from $19.7 million in 1994. Approximately $8.6 million of this
increase resulted from the addition of the Acquisitions' SG&A expenses. The
remaining increase relates primarily to higher sales commissions and
administrative costs and related staffing resulting from the Company's rapid
growth. As a percentage of sales, SG&A expenses increased to 10.6% in 1995 from
10.3% in 1994.
OPERATING INCOME. Operating income increased 57.5%, or $11.5 million, to
$31.5 million in 1995 from $20.0 million in 1994. Operating margin decreased to
10.2% in 1995 from 10.4% in 1994.
INTEREST EXPENSE. Interest expense, net of interest income, increased
41.3%, or $1.2 million, to $4.0 million in 1995 from $2.8 million in 1994. This
increase is primarily attributable to significantly higher average debt balances
and higher interest rates in the last nine months of 1995 as compared to the
same period in the prior year. The Company capitalized $1.0 million of interest
costs in 1995 as compared to $120 thousand in 1994.
Bank debt increased from $27.0 million on October 2, 1994, to $73.4 million
on July 2, 1995. This increase is primarily due to the completion of the
Oberdorfer, Iroquois, Berlin and Pennsylvania Steel acquisitions during the nine
months ended July 2, 1995. On August 1, 1995, the Company completed the
acquisition of Castwell Products which increased bank borrowings an additional
$47.8 million to a total outstanding balance of approximately $125.0 million.
On September 22, 1995, secondary offering proceeds of $69.2 million were
received and applied against outstanding bank debt. On October 1, 1995,
outstanding bank borrowings were $62.6 million. See further discussion of the
Company's current credit facility under "Liquidity and Capital Resources."
NET INCOME AND PRO FORMA NET INCOME. Net income increased 60.1%, or $6.4
million, to $17.1 million in 1995 from pro forma net income of $10.7 million in
1994. As a percentage of sales, 1995 net income and 1994 pro forma net income
were each 5.6%. Pro forma amounts are used for 1994 for comparative purposes to
reflect the results of operations as if the Company had been taxed as a C
corporation for the entire 1994 fiscal year.
20
SUPPLEMENTAL QUARTERLY INFORMATION
The following table presents selected unaudited quarterly results for
fiscal years 1995 and 1996. The Company's sales are generally lower in its
first fiscal quarter due to plant closings by major customers for vacations,
holidays, and model changeovers. In addition, the Company's operations usually
take normal one-week shut-downs during July. The units lose production for the
week (or weeks) they are down, and also incur heavier than normal maintenance
expenses during this period. These events negatively affect gross margins at
operating units in both the first and fourth fiscal quarters.
Fiscal Quarters Ended
-------------------------------------------------------------------------------------------------
Jan. 1, Apr. 2, July 2, Oct. 1, Dec. 31, Mar. 31, June 30, Sept. 29,
1995 1995 1995 1995 1995 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share amounts)
(Unaudited)
Sales . . . . . . . . . . . . $59,331 $74,124 $82,130 $92,096 $91,761 $120,955 $143,420 $131,617
Gross profit . . . . . . . . 11,649 16,454 17,402 18,683 15,860 22,345 26,253 18,334
SG&A expenses . . . . . . . . 6,214 8,292 8,828 9,363 9,956 11,776 12,326 11,786
Operating income . . . . . . 5,435 8,162 8,574 9,320 5,904 10,569 13,927 6,548
Income before taxes . . . . . 5,203 7,522 7,542 7,831 5,214 8,826 11,509 2,355
Net income . . . . . . . . . 3,122 4,514 4,640 4,803 3,128 5,296 6,905 1,413
Net income per share . . . . $0.24 $0.34 $0.35 $0.34 $0.18 $0.30 $0.39 $0.08
AS A PERCENTAGE OF SALES % % % % % % % %
Gross profit . . . . . . . . 19.6 22.2 21.2 20.3 17.3 18.5 18.3 13.9
SG&A expenses . . . . . . . . 10.5 11.2 10.7 10.2 10.8 9.7 8.6 9.0
Operating income . . . . . . 9.2 11.0 10.4 10.1 6.4 8.7 9.7 5.0
Income before taxes . . . . . 8.8 10.1 9.2 8.5 5.7 7.3 8.0 1.8
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund capital
expenditures for existing facilities and to fund new business acquisitions.
Historically, the Company has used cash generated by operations, bank financing
and proceeds from public equity offerings to fund its capital requirements.
Additionally, the Company requires capital to finance accounts receivable and
inventory.
Net cash provided by operating activities primarily represents net income
plus non-cash charges for depreciation, amortization and deferred income taxes
and changes in working capital positions. Because of the capital intensive
nature of the business, non-cash charges for depreciation and amortization are
substantial. Net cash provided by operating activities was $19.6 million, $22.6
million, and $21.8 million in 1994, 1995 and 1996, respectively.
Net cash used in investing activities in 1994, 1995 and 1996 was $24.1
million, $97.0 million and $67.9 million, respectively. Substantially all of
the above investment activities were for capital expenditures and acquisitions.
In addition, the Company had non-cash transactions of
21
$1.0 million in 1994, $14.9 million in 1995, and $320 thousand in 1996 related
to investment in acquisitions. These transactions are described more fully in
the notes to the financial statements included elsewhere in this annual report.
In order to meet or exceed customer expectations, the Company historically
has made significant capital investment in its plant and equipment. The Company
has spent $78.2 million during the three fiscal years ended September 29, 1996
for the purpose of improving production efficiency, expanding capacity and
technological capability, reducing costs and complying with regulatory
requirements. The Company believes that on average it needs to spend amounts at
least equal to its annual depreciation charge in order to maintain its
facilities in competitive working order, and in years when substantial new
capacity is added, capital expenditures may significantly exceed the Company's
depreciation charge. The most significant capital project has been the
modernization of the Texas Foundries division. The purpose of the capital
expenditure was to provide Texas Foundries with two new high speed molding lines
and additional melt capacity. The project was substantially completed in the
second fiscal quarter of 1996 and increased Texas Foundries' ductile iron
capacity by approximately 80.0%.
The Company had net cash provided by financing activities of $3.9 million,
$83.2 million and $38.5 million, for 1994, 1995 and 1996 respectively. The
Company's initial public offering provided $31.1 million of cash during 1994.
The 1995 secondary public offering provided $69.5 million of cash. During 1994,
$15.9 million of cash was required for the net reduction of bank debt, capital
lease obligations and other financing arrangements. For 1995 and 1996, net cash
of $17.2 million and $30.1 million, respectively, was provided from these
sources. Cash distributions to the Company's original stockholders (pre IPO)
were $11.3 million and $3.5 million during 1994 and 1995, respectively.
Dividends paid in fiscal year 1994 represent a distribution of previously
undistributed S corporation taxable income. Of the amounts paid in 1994, the
former S corporation stockholders recontributed $5.6 million to the Company to
repay outstanding stockholder loans aggregating $5.4 million plus accrued
interest. The $3.5 million paid in January 1995 represented the final payment
of such previously undistributed S corporation taxable income. The Company has
no current plans to pay dividends, as future earnings of the Company are
expected to be retained for use in the business.
At September 29, 1996, the Company had outstanding borrowings and remaining
availability under existing loan agreements as follows:
Balance outstanding Remaining availability
Description Interest Rate September 29, 1996 September 29, 1996
----------- ------------- ------------------- ----------------------
Note payable 8.25% $ 3,055 --
Notes payable LIBOR + 1.25% $130,000 $96,945
Industrial Various ranging from
development bonds 75%-80% of prime $ 1,085 0
Other Various $ 9,460 0
-------- --------
$143,600 $ 96,945
-------- --------
-------- --------
22
During 1996, the Company negotiated a new primary credit facility with a
consortium of banks represented by the National Bank of Detroit (NBD) to
increase the amount available to borrow from $135 million to $230 million.
The increased credit facility bears interest at rates ranging from LIBOR plus
1.0% to LIBOR plus 2.5% depending on the Company's leverage ratios at
the end of each quarter. The Company's borrowing rate at September 29, 1996
was LIBOR plus 1.25%, which was approximately 7.5%. The facility is a
revolver, with interest payable quarterly, and all principal due July 31,
1998. At September 29, 1996, $133,055 was outstanding and $96,945 was
available to borrow under this facility.
The Company's new credit facility contains certain restrictive covenants
which require the maintenance of minimum consolidated tangible net worth, funded
debt to earnings before income tax, depreciation and amortization (EBITDA)
ratio; specified fixed charge coverage ratio and cash flow ratio; places a
maximum debt to total capital leverage ratio and places limitations on dividends
and other borrowings.
During the fourth quarter of 1996, the Company entered into interest
rate swap agreements with NBD establishing fixed interest rates for
approximately $80 million of the total outstanding debt. The agreements have
fixed interest rates ranging from 6.85% to 7.09% plus 1.0% to 2.0% depending
on the Company's leverage ratios on the effective date of the agreements,
which expire every 90 days. Each of the swap agreements are for a period of
five years and mature in the years 2001 and 2002. The Company is exposed to
credit risk in the event of non-performance by the counterparty to the
interest rate swap agreement. The Company mitigates credit risk by dealing
only with financially sound U.S. banks. Accordingly, the Company does not
anticipate loss for nonperformance.
The Company anticipates that its cash flow from operations and amounts
expected to be available for borrowing from lending institutions will be
adequate to fund its capital expenditure and working capital requirements for
the next two years.
CYCLICALITY, SEASONALITY AND INDUSTRY CONCENTRATION
The Company has had and expects to have a significant concentration of
its sales in the automotive/light truck and heavy truck industries. The
Company's sales are generally lower in its first and fourth fiscal quarters
due to plant closings by major customers for vacations, holidays and model
changeovers. As a result, the inherent cyclicality and seasonality of these
industries may affect the Company's future sales and earnings, particularly
during periods of slow economic growth or recession. In addition to the
above industries, the Company also has significant sales to substantially all
major industrial sectors of the economy. Management believes the differing
cycles of these sectors will provide protection against periodic down cycles
in any particular industrial sector.
23
INFLATION
Management believes that the Company's operations have not been
materially adversely affected by inflation because the Company is generally
able to pass through to its customers inflationary cost increases. However,
in periods of rapidly rising steel scrap prices, the Company will lag behind
the market on the amount it can pass through to customers, and its results of
operations may be adversely affected during these periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
Footnote 2 of the consolidated financial statements included elsewhere in
this report describes recently issued accounting standards.
RECENT ACQUISITIONS
The Company has completed four acquisitions during fiscal 1996, as follows:
Texas Steel Corporation Ft. Worth, TX January 1996
Hi-Tech Corporation Albion, IN February 1996
Southern Aluminum
Castings Company Bay Minette, AL March 1996
Bohn Aluminum Corporation Butler, IN April 1996
In addition to the above acquisitions completed during the fiscal year, the
Company completed the acquisition of Interstate Forging Industries, Inc. of
Milwaukee, Wisconsin and Navasota, Texas on October 29, 1996. Additionally, the
Company completed the sale of its Pennsylvania Steel Foundry subsidiary on
November 1, 1996, and recorded a pre-tax loss of $1.8 million in 1996 related to
the sale. These transactions are described more fully in the notes to the
consolidated financial statements included elsewhere in this annual report.
ITEM 8: FINANCIAL STATEMENTS
The following financial statements and supplementary data are contained
in this report.
Page
----
Report of Independent Certified Public Accountants 25
Consolidated Financial Statements for Years Ended September 29, 1996,
October 1, 1995 and October 2, 1994
Consolidated Balance Sheets 26
Consolidated Statements of Income 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 30
Report of Independent Certified Public Accountants on Supplementary Information 65
Schedule II - Valuation and Qualifying Accounts 66
24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
Citation Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Citation
Corporation and subsidiaries (the Company) as of September 29, 1996 and October
1, 1995 and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended September 29,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citation
Corporation and subsidiaries as of September 29, 1996 and October 1, 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 29, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
November 19, 1996
25
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 1, 1995 AND SEPTEMBER 29, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
October 1, September 29,
1995 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,812 $ 2,267
Accounts receivable - trade, less allowance for doubtful
accounts of $771 and $1,421 in 1995 and 1996, respectively 52,994 77,931
Inventories 23,903 39,478
Income tax refund receivable 489 3,655
Deferred income taxes 2,689 4,411
Prepaid expenses and other assets 4,704 7,617
------------- ------------
Total current assets 94,591 135,359
Property, plant, and equipment, net of accumulated depreciation 143,425 199,367
Intangible assets, net of accumulated amortization 33,052 47,802
Other assets 803 1,029
------------- ------------
Total assets $ 271,871 $ 383,557
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 8,328
Current portion of other long-term debt $ 6,553 2,654
Accounts payable 24,605 33,668
Accrued wages and benefits 5,455 6,122
Accrued benefit plan contributions 1,608 3,051
Accrued vacation 3,683 4,219
Accrued insurance reserves 3,961 4,508
Accrued interest 2,170 2,014
Other accrued expenses 7,980 8,291
------------- ------------
Total current liabilities 56,015 72,855
Note payable 62,638 133,055
Other long-term debt, less current portion above 8,616 7,891
Deferred income taxes 9,296 15,725
Other liabilities 2,830 4,712
------------- ------------
Total liabilities 139,395 234,238
Commitments and contingencies (Notes 12, 16, and 18)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized,
none issued and outstanding -- --
Common stock, par value $0.01 per share; 30,000,000 shares
authorized, 17,675,540 shares issued and outstanding in 1995
and 17,715,540 shares in 1996 177 177
Additional paid-in capital 106,986 107,087
Retained earnings 25,313 42,055
------------- ------------
Total stockholders' equity 132,476 149,319
------------- ------------
Total liabilities and stockholders' equity $ 271,871 $ 383,557
------------- ------------
------------- ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 2, 1994, OCTOBER 1, 1995, AND SEPTEMBER 29, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Year Ended
------------------------------------------------
October 2, October 1, September 29,
1994 1995 1996
------------- ------------- -------------
Sales $ 191,566 $ 307,681 $ 487,753
Cost of sales 151,921 243,493 404,961
------------- ------------- -------------
Gross profit 39,645 64,188 82,792
Selling, general, and administrative expenses 19,650 32,697 45,844
------------- ------------- -------------
Operating income 19,995 31,491 36,948
Other expenses (income):
Interest expense, net of amounts capitalized of $1,003
and $453 in 1995 and 1996, respectively 2,813 3,974 7,866
Other, net (24) (581) 1,178
------------- ------------- -------------
2,789 3,393 9,044
------------- ------------- -------------
Income before provision for income taxes 17,206 28,098 27,904
Provision for income taxes 6,141 11,019 11,162
------------- ------------- -------------
Net income $ 11,065 $ 17,079 $ 16,742
------------- ------------- -------------
------------- ------------- -------------
Pro forma (unaudited):
Income before provision for income taxes $ 17,206
Pro forma provision for income taxes 6,538
------------
Pro forma net income $ 10,668
------------
------------
Earnings per average common share (Pro forma
and unaudited through October 2, 1994) $ 1.02 $ 1.27 $ 0.95
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding 10,485,474 13,437,900 17,693,974
------------- ------------- -------------
------------- ------------- -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 2, 1994, OCTOBER 1, 1995 AND SEPTEMBER 29, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
Number Additional Stockholders'
of Par Paid-In Notes Retained
Shares Value Capital Receivable Earnings Total
---------- ----- ---------- ------------ ---------- ---------
Balance, October 3, 1993 8,930,000 $ 89 $ 4,194 $ (5,369) $ 16,127 $ 15,041
Repayment of stockholders'
notes receivable 5,369 5,369
Distribution to stockholders (18,958) (18,958)
Capital contributions 221 221
Contribution of subsidiary (223) (223)
Issuance of common stock 4,312,500 43 31,073 31,116
Net income 11,065 11,065
----------- ------ ---------- ----------- --------- ---------
Balance, October 2, 1994 13,242,500 132 35,265 0 8,234 43,631
Issuance of common stock
under Incentive Award Plan 41,500 332 332
Issuance of common stock
for the acquisition of:
Berlin Foundry Corporation 61,540 1 999 1,000
Pennsylvania Steel Foundry
and Machine Company, Inc. 80,000 1 1,309 1,310
Issuance of common stock 4,250,000 43 69,133 69,176
Subscriptions under employee
stock purchase plan (52) (52)
Net income 17,079 17,079
----------- ------ ---------- ----------- --------- ---------
Balance, October 1, 1995 17,675,540 177 106,986 0 25,313 132,476
Issuance of common stock
under Incentive Award Plan 40,000 320 320
Subscriptions under employee
stock purchase plan (219) (219)
Net income 16,742 16,742
----------- ------ ---------- ----------- --------- ---------
Balance, September 29, 1996 17,715,540 $ 177 $ 107,087 $ 0 $ 42,055 $ 149,319
----------- ------ ---------- ----------- --------- ---------
----------- ------ ---------- ----------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 2, 1994, OCTOBER 1, 1995 AND SEPTEMBER 29, 1996
(IN THOUSANDS)
October 2, October 1, September 29,
1994 1995 1996
------------- ----------- ------------
Cash flows from operating activities:
Net income $ 11,065 $ 17,079 $ 16,742
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 171 461 584
Provision for loss on sale of Penn Steel 1,807
Depreciation expense 6,419 8,944 17,080
Amortization expense 670 1,694 3,071
Deferred income taxes, net 4,905 1,866 3,444
Gain on sale of property, plant, and equipment (22) (200) (38)
Changes in operating assets and liabilities, net:
Accounts receivable - trade (5,048) (2,823) (7,294)
Inventories (130) (572) (3,138)
Prepaid expenses and other assets (2,280) (6,789) (2,135)
Income tax refund receivable -- (489) (3,166)
Income taxes payable 1,236 (1,236) --
Accounts payable 649 (29) 198
Accrued expenses and other liabilities 1,989 4,698 (5,374)
------------- ----------- ------------
Net cash provided by operating activities 19,624 22,604 21,781
------------- ----------- ------------
Cash flows from investing activities:
Property, plant, and equipment expenditures (17,228) (29,844) (31,166)
Proceeds from sale of property, plant, and equipment 338 367 258
Cash paid for acquisitions (7,750) (67,500) (36,130)
Other nonoperating assets, net 516 (820)
------------- ----------- ------------
Net cash used in investing activities (24,124) (96,977) (67,858)
------------- ----------- ------------
Cash flows from financing activities:
Cash overdraft 8,328
Issuance of capital stock 31,116 69,456 101
Short-term note, net change (10,155)
Repayments of other financing arrangements (1,347) (6,386)
Repayments of acquired debt (16,750) (33,662)
Note payable, cash borrowings 17,067
Note payable, principal repayments (22,245)
Capital lease payments (532) (323) (266)
Note payable, net change 35,634 70,417
Distributions to stockholders (11,330) (3,466)
------------- ----------- ------------
Net cash provided by financing activities 3,921 83,204 38,532
------------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (579) 8,831 (7,545)
Cash and cash equivalents, beginning of year 1,560 981 9,812
------------- ----------- ------------
Cash and cash equivalents, end of year $ 981 $ 9,812 $ 2,267
------------- ----------- ------------
------------- ----------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,800 $ 2,154 $ 8,434
------------- ----------- ------------
------------- ----------- ------------
Income taxes $ 4 $ 10,249 $ 10,797
------------- ----------- ------------
------------- ----------- -----------
See Notes 15 and 16 for additional supplemental disclosures of cash flow
information
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
CITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND OPERATIONS
Citation Corporation and subsidiaries (the Company) is a metal components
producer for the capital goods and durable goods industries. The Company
owns and operates businesses in Alabama, Illinois, Indiana, New York, North
Carolina, Ohio, Pennsylvania, Texas, and Wisconsin which function as
separate divisions or subsidiaries. References herein to Alabama Ductile
Casting Company (ADCC), Berlin Foundry Corporation (BFC), Bohn Aluminum
Corporation (Bohn), Castwell Products (CP), Citation Foam Casting Company
(CFCC), Foundry Service Company (FSC), Hi-Tech Corporation (Hi-Tech),
Iroquois Foundry Corporation (IFC), Mabry Foundry (Mabry), Mansfield
Foundry Corporation (MFC), Oberdorfer Industries (Oberdorfer), Pennsylvania
Steel Foundry and Machine Company, Inc. (Penn Steel), Southern Ductile
Casting Company (SDCC), Southern Aluminum Castings Company (SACC), Texas
Foundries (TF), and Texas Steel Company (TSC) refer to operations of these
divisions or subsidiaries. The Company also has a wholly owned subsidiary,
Citation Automotive Sales Corp. (CAS), which operates a sales and
engineering office in Detroit, Michigan.
The consolidated financial statements and notes to consolidated financial
statements include the accounts of Citation Corporation and its divisions
and wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The Company sells castings to customers in various industries and
geographic regions of the U.S. To reduce credit risk, the Company performs
ongoing credit evaluations of its customers' financial condition and does
not generally require collateral. Significant volumes of sales to customers
in specific industries during fiscal years 1994, 1995, and 1996 were as
follows:
1994 1995 1996
Automotive/light truck 26% 31% 30%
Heavy truck 21% 24% 19%
--- --- ---
47% 55% 49%
--- --- ---
--- --- ---
The Company sold 4,312,500 shares of common stock for $8 per share on August 2,
1994 in connection with the initial public offering (IPO) of its stock. In
anticipation of the IPO, the Company increased the number of common shares
authorized to 30,000,000, effected an 893 for 1 common stock split and reduced
the par value per common share to $.01 per share. All references to the number
of common shares authorized, issued, and outstanding and par value per common
share have been adjusted to reflect the common stock split on a retroactive
basis.
30
Concurrent with the IPO, the Company terminated its election to be taxed as a
Subchapter S corporation under the Internal Revenue Code. Therefore, beginning
August 2, 1994, the Company became taxable as a C corporation and has accounted
for income taxes in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109. This change in tax status resulted in deferred income taxes of
approximately $4,900. Additionally, the Company accrued a final distribution to
the previous S corporation stockholders of approximately $3,466 based on
estimated taxable income for the fiscal year ended October 2, 1994 prorated
using the days method. In addition, on July 10, 1994, the previous S corporation
stockholders of the Company, who were also the stockholders of CAS, contributed
the stock of CAS to the Company. This contribution resulted in a decrease of
additional paid-in capital of $223. The results of operations of CAS have been
included in the Company's consolidated results of operations since the date of
the contribution.
On September 19, 1995, the Company completed a secondary offering of 4,250,000
shares of common stock at $17.375 per share. The net proceeds after deducting
applicable issuance costs and expenses were $69,176. The net proceeds were used
to reduce amounts outstanding under the Company's note payable agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR - The Company operates on a fifty-two/fifty-three week fiscal
year which ends on the Sunday nearest to September 30. Fiscal years 1994,
1995, and 1996 each consisted of fifty-two weeks.
REVENUE RECOGNITION - The Company records sales upon shipment of the
related products, net of any discounts.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less at the date of
purchase to be cash equivalents.
CASH OVERDRAFT - In conjunction with the new credit facility discussed in
Note 6, the Company entered into a consolidated cash management system with
the administrative agent and lead bank of the new credit facility. As a
result of maintaining this consolidated cash management system, the Company
maintains a zero balance at the lead bank resulting in a book cash
overdraft. Such overdrafts are included in current liabilities.
INVENTORIES - Raw materials inventories are stated at the lower of cost
(principally first-in, first-out basis) or market. Supplies and containers
inventories are stated primarily at the lower of cost (principally average
cost) or market. Castings inventories are stated primarily at the lower of
cost (as determined principally at standard cost or under the retail
method) or market.
31
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is carried
at cost, less accumulated depreciation, and includes expenditures that
substantially increase the useful lives of existing assets. Maintenance,
repairs, and minor renovations are charged to expense as incurred. Upon
sale, retirement, or other disposition of these assets, the cost and
related accumulated depreciation are removed from the respective accounts
and any gain or loss on the disposition is included in net income.
The Company provides for depreciation of property, plant, and equipment
using primarily the straight-line method designed to depreciate costs over
estimated useful lives as shown below:
Item: Estimated Useful Life
---------------------
Buildings 10-50 years
Plant equipment 7-12 years
Office equipment 2-10 years
Transportation equipment 3-5 years
Property, plant, and equipment acquired under capital lease agreements are
carried at cost less accumulated depreciation. These assets are depreciated
in a manner consistent with the Company's depreciation policy for purchased
assets.
INTANGIBLE ASSETS - Goodwill, the excess of purchase price over the fair
value of net assets acquired in purchase transactions, is being amortized
on a straight-line basis primarily over a 20-year period but with various
amounts ranging from 7 to 40 years. The Company assesses the recoverability
and the amortization period of the goodwill by determining whether the
amount can be recovered through undiscounted net income of the businesses
acquired, excluding interest expense and goodwill amortization, over the
remaining amortization period. Amounts paid or accrued for noncompetition
and consulting agreements are amortized using the straight-line method over
the term of the agreements. Bond and other financing expenses are amortized
using the straight-line method, which approximates the effective interest
method, over the term of the related debt issues.
LONG-LIVED ASSETS - The Company recognizes impairment losses on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. There were no such losses recognized
during fiscal years 1994, 1995, and 1996.
INCOME TAXES - The Company's deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by currently
enacted tax laws. Prior to the change in the Company's taxable status in
connection with its IPO on August 2, 1994, the Company had elected to be
taxed as a Small Business Corporation under Subchapter S of the Internal
Revenue Code and under similar state laws. Under Subchapter S, taxable net
income of the Company is included in the tax returns of the individual
stockholders. The provision
32
for income taxes included in the financial statements for periods prior
to August 2, 1994 relates to state income taxes for states which do not
recognize Subchapter S status.
RECLASSIFICATIONS - Certain reclassifications have been made in the
previous years' financial statements in order to conform them to the
current year classifications, with no effect on previously reported net
income.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS - In October 1995, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. The Company is required to adopt this statement
no later than fiscal year 1997. The Company anticipates continuing to
account for its stock-based compensation plans in accordance with APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, as permitted by
SFAS No. 123. When this statement becomes applicable, the Company intends
to provide the appropriate pro forma net income and net income per share
disclosures required by SFAS No. 123.
3. INVENTORIES
A summary of inventories is as follows:
October 1, September 29,
1995 1996
----------- ------------
Raw materials $ 6,600 $ 8,872
Supplies and containers 5,398 9,817
Castings 11,905 20,789
----------- ----------
$ 23,903 $ 39,478
----------- ----------
----------- ----------
33
4. PROPERTY, PLANT, AND EQUIPMENT
Balances of major classes of assets and accumulated depreciation are as
follows:
October 1, September 29,
1995 1996
------------- -------------
Land and improvements $ 5,921 $ 7,166
Buildings 28,945 37,316
Plant equipment 125,277 195,370
Office equipment 5,813 9,230
Transportation equipment 6,297 8,788
Construction in progress 22,343 8,403
------------- -------------
194,596 266,273
Less accumulated depreciation (51,171) (66,906)
------------- -------------
$ 143,425 $ 199,367
------------- -------------
------------- -------------
5. INTANGIBLE ASSETS
The Company's intangible assets, net of accumulated amortization, consist
of the following:
October 1, September 29,
1995 1996
------------- -------------
Goodwill $ 29,495 $ 45,704
Consulting and noncompetition agreements 3,224 1,893
Other 333 205
---------- ---------
$ 33,052 $ 47,802
---------- ---------
---------- ---------
The annual amount of amortization expense related to the Company's
intangible assets as of September 29, 1996 is as follows for fiscal
years:
1997 $ 3,179
1998 3,018
1999 2,740
2000 2,650
2001 2,513
Thereafter 33,702
-----------
$ 47,802
-----------
-----------
34
6. NOTE PAYABLE, OTHER LONG-TERM DEBT, AND PLEDGED ASSETS
At October 1, 1995, the Company's note payable consisted of a bank credit
facility which provided for borrowings up to a total of $135,000 and
expired on July 31, 1998. The credit facility bore interest at a rate equal
to LIBOR plus 1% to LIBOR plus 2.5%, depending on the Company's leverage
ratio, as defined in the agreement. At October 1, 1995, LIBOR ranged from
5.875% to 5.938%, and the Company's interest rates ranged from 6.756% to
9.0%. The balance outstanding under the credit facility was $62,638 and
$72,362 was available for borrowing at October 1, 1995.
On July 1, 1996, the Company executed a new primary credit facility with a
consortium of banks, led by the National Bank of Detroit (NBD), to increase
the amount available to borrow up to $230,000 to be used for working
capital purposes and to fund future acquisitions. The new facility expires
on July 31, 1998 and is collateralized by substantially all of the assets
of the Company as well as the stock of its subsidiaries. The new facility
consists of a swing line of credit bearing interest at prime and revolving
credit borrowings which bear interest at LIBOR plus a margin based on the
Company's leverage ratio, as defined in the credit agreement, at the time
of the borrowing. The facility calls for a commitment fee payable
quarterly, in arrears, of .25% based on the daily unused portion. At
September 29, 1996, the total balance outstanding under this new credit
facility was $133,055 and $96,945 was available for borrowing.
As of September 29, 1996, the Company had $3,055 outstanding under the
swing line of credit at the prime rate of 8.25%. The remaining $130,000
outstanding under this facility related to four revolving loans. At
September 29, 1996, the Company had $30,000 and $60,000 outstanding under
these loans at interest rates of 7.31% and 7.14% which reprice on January
2, 1997 and February 3, 1997, respectively. The Company has entered into
two $20,000 five-year interest rate swaps establishing fixed interest rates
for the remaining $40,000 of debt outstanding under the credit facility at
September 29, 1996. These agreements are repriced every 90 days and
expire in August 2001. The agreements have fixed interest rates plus a
margin of 1.0% to 2.0%, based on the Company's leverage ratio on the date
the agreements are priced. The Company's fixed interest rates were 8.34%
and 8.16% under these two agreements at September 29, 1996. The Company has
entered into an additional $40,000 swap agreement which will commence on
February 3, 1997 to establish the interest rate at 6.845% plus a margin.
The Company is exposed to credit risk in the event of nonperformance by the
counterparty to the interest rate swap agreements. The Company mitigates
credit risk by dealing only with financially sound U.S. banks. Accordingly,
the Company does not anticipate loss for nonperformance by these
counterparties.
The Company's new credit facility contains certain restrictive covenants
that require the maintenance of minimum consolidated tangible net worth;
funded debt to earnings before income tax, depreciation, and amortization
(EBITDA) ratio; specified fixed charge
35
coverage ratio and cash flow coverage ratio; places a maximum debt to total
capital leverage ratio, and places limitations on dividends and other
borrowings.
Long-term debt consists of the following:
October 1, September 29,
1995 1996
----------- ----------
Note payable $ 62,638 $ 133,055
Industrial development bonds 693 1,085
Other financing arrangements 14,476 9,460
----------- ----------
77,807 143,600
Less current portion of other long-term debt 6,553 2,654
----------- ----------
$ 71,254 $ 140,946
----------- ----------
----------- ----------
The Company has industrial development bond issues which are for expanded
production facilities. One of the bonds bears interest at 80% of prime (6.96%
and 6.56% at October 1, 1995 and September 29, 1996, respectively). The
remaining bonds bear interest at fixed rates of 5.75% and 8.25% and mature
through 2003. Amounts due under these bond issues are collateralized by
property, plant, and equipment having a net book value of $6,787 and $7,506
at October 1, 1995 and September 29, 1996, respectively.
Other financing arrangements are as follows:
October 1, September 29,
1995 1996
--------- -------------
Notes payable for the purchase of Mabry, guaranteed by
the Company's majority stockholder, requiring quarterly
payments of $18 each, including principal and interest
at 8% through April 1998, at which time the rate will
be determined annually based on rates charged by banks
to large corporations until final payment in May 2003 $ 839 $ 757
Note payable for the purchase of MFC, payable in two
equal annual installments beginning October 2, 1995,
including interest at 7% 525
Note payable for the purchase of Oberdorfer requiring
four quarterly payments of $150 beginning April 30,
1995 300
Notes payable for the purchase of BFC requiring twelve
combined quarterly payments of $167 beginning August 1,
1995, including interest at 8% 1,833 1,166
Note payable for the purchase of IFC, payable on
February 24, 1996 with interest payable quarterly at 9% 1,000
Note payable for the purchase of CP requiring a payment
of $3,000 on January 1, 1996 and 22 quarterly payments
of approximately $273 beginning April 1, 1996 9,000 5,455
Note payable for the purchase of Hi-Tech, bearing
interest at 8%, payable on December 30, 1996 320
Bank note bearing interest at 6.5%, payable in monthly
payments of interest and principal through February
1996 46
Note payable to Small Business Administration, bearing
interest at 9.23%, payable in monthly payments of
interest and principal through July 2011 676 656
36
Note payable to Small Business Administration, bearing
interest at 6.625%, payable in monthly payments of
interest and principal through September 2006, and
collateralized by equipment with no remaining
carrying value 251 238
Miscellaneous capital lease obligations for equipment,
requiring monthly payments ranging from $1 to $5,
including principal and interest at rates ranging from
9.3% to 10.75% and maturing at dates ranging from 1998
through 2000 6 476
Various other notes, requiring monthly payments ranging
from $1 to $50, including principal and interest at
rates ranging from 9.25% to 15.5%, and maturing at
dates ranging from 1997 through 2001 392
-------- ---------
$ 14,476 $ 9,460
-------- ---------
-------- ---------
Aggregate maturities of long-term debt at September 29, 1996 are as follows for
fiscal years:
1997 $ 2,654
1998 135,146
1999 1,502
2000 1,463
2001 1,482
Thereafter 1,353
-----------
$ 143,600
-----------
-----------
7. COMMON STOCK PLANS
The Company's 1994 Incentive Award Plan (Award Plan) provides for the grant
of incentive stock options, non-qualified stock options, stock appreciation
rights, and restricted stock or a combination thereof, to be determined by
the compensation committee of the board of directors at the time of grant,
to officers and certain employees. Under the Award Plan, 750,000 shares of
the Company's common stock have been reserved for issuance. Options granted
under the plan provide for purchase of the Company's common stock at not
less than the fair market value on the date the option is granted. In
conjunction with the Company's IPO, options for 538,000 shares of common
stock were granted at $8 per share. The options expire on August 2, 1999
and portions of the options granted became exercisable beginning December
1, 1994 at varying times through fiscal year 1998. Options granted
subsequently generally become exercisable over a two-year period and have
terms of five years.
37
Transactions under the Award Plan are summarized as follows:
October 2, October 1, September 29,
1994 1995 1996
---------- ---------- ------------
Outstanding at beginning of year -0- 538,000 555,500
Granted (at $8 per share) 538,000
Granted (at $13.375 per share) 10,000
Granted (at $16.06 per share) 99,000
Granted (at $12.06 per share) 100,000
Exercised (at $8 per share) (41,500) (40,000)
Canceled (50,000)
---------- ---------- ----------
Outstanding at year end 538,000 555,500 615,500
---------- ---------- ----------
---------- ---------- ---------
Exercisable at year end -0- 346,500 445,500
---------- ---------- ----------
---------- ---------- ----------
Remaining shares reserved for issuance at year end 212,000 153,000 53,000
---------- ---------- ----------
---------- ---------- ----------
On May 25, 1995, the Board of Directors approved the Non-Qualified Stock
Option Plan for Non-Employee Directors (Non-Employee Directors Stock Option
Plan) which provides for the grant of stock options to the non-employee
directors of the Company. Under this plan, 100,000 shares of the Company's
common stock have been reserved for issuance. Options granted under the
plan provide for the purchase of the Company's common stock at not less
than the fair market value on the date the option is granted. The options
issued under this plan are exercisable six months after the date of grant
and expire five years after the date of grant. As of September 29, 1996,
options for 50,000 shares of the Company's stock have been issued under
this plan and 50,000 shares are available for grant. All of the 50,000
options issued to date were granted at $15.25 per share, became exercisable
in January 1996, and expire in June 2006. None of these options had been
exercised as of September 29, 1996.
On January 1, 1995, the board of directors approved the Employee Stock
Purchase Plan (Stock Purchase Plan) that allows eligible employees to
purchase, through payroll deductions, shares of the Company's common stock
at specified dates at no less than 85% of the fair market value of the
stock as of the offering date. All active employees are eligible to
participate. Shares of common stock under the Stock Purchase Plan are to be
purchased in the open market or issued from treasury stock. The maximum
number of shares currently available under the Stock Purchase Plan is
250,000 shares. Subscriptions were outstanding for approximately 40,000
shares of common stock at $15.42 per share at October 1, 1995 and
approximately 49,000 shares of common stock at $9.55 per share were
outstanding at September 29, 1996.
On December 15, 1994, the board of directors approved the Stock Plan for
Non-Employee Directors (Directors Stock Plan) to enable its non-employee
directors to have all or part of their directors' fees used to purchase
shares of the Company's common stock. As of
38
September 29, 1996, 5,013 shares have been issued under this plan. No
shares were issued prior to fiscal year 1996.
8. PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized for
issuance. The preferences, powers, and rights of the preferred stock are to
be determined by the Company's board of directors. None of these shares
are issued and outstanding.
9. INCOME TAXES
The Company changed its tax status from a nontaxable entity (S Corporation)
to a taxable entity (C Corporation) in connection with the Company's
initial public offering on August 2, 1994 and began accounting for the
effect of income taxes under SFAS 109 on that date. Taxable income for
fiscal year 1994 is calculated on the days method whereby the previous S
Corporation stockholders are responsible for the tax liability generated
through August 2, 1994.
The components of the provision for income taxes consist of the following:
October 2, October 1, September 29,
1994 1995 1996
---------- ---------- -------------
Current income tax expense:
Federal $ 921 $ 7,522 $ 6,192
State 90 1,001 1,526
------- ------- ------
1,011 8,523 7,718
------- ------- ------
Deferred income tax expense:
Federal 143 1,824 3,054
State 14 672 390
------- ------- ------
157 2,496 3,444
------- ------- ------
Effect of change in taxable status 4,973
-------
Total provision for income taxes $ 6,141 $11,019 $11,162
------- ------- ------
------- ------- ------
39
Temporary differences which give rise to deferred tax assets and
liabilities are as follows:
October 1, September 29,
1995 1996
---------- -----------
Deferred tax assets:
Allowance for doubtful accounts and returns $ 671 $ 980
Accrued insurance liabilities 1,506 1,719
Accrued vacation and other 512 1,712
-------- --------
Total deferred tax assets $ 2,689 $ 4,411
-------- --------
-------- --------
Deferred tax liabilities:
Basis differences of property, plant, and equipment $ 8,682 $ 15,685
Other 614 40
-------- --------
$ 9,296 $ 15,725
-------- --------
-------- --------
Total provision for income taxes differs from the amount which would be
provided by applying the statutory federal income tax rate to pretax
earnings as indicated below:
October 2, October 1, September 29,
1994 1995 1996
---------- ----------- ------------
Provision for income taxes at statutory federal
income tax rate $ 6,022 $ 9,837 $ 9,766
Increase (decrease) resulting from:
Officers' life insurance 29 27 7
Nondeductible meals and entertainment expenses 42 107 133
State income taxes 860 1,075 1,245
Other, net 43 (27) 11
Effect of earnings as an S Corporation
(5,828)
--------- -------- ---------
1,168 11,019 11,162
Effect of change in tax status 4,973
--------- -------- ---------
Total provision for income taxes $ 6,141 $ 11,019 $ 11,162
--------- -------- ---------
--------- -------- ---------
10. DEFINED BENEFIT PLANS
BFC's employees are covered by a defined benefit pension plan sponsored by
the union which represents the employees. Minimum contributions are
determined in accordance with provisions of the negotiated labor contract,
but the Company's funding policy is to contribute amounts which are
actuarially determined to provide the plan with sufficient assets to meet
future benefit payment requirements consistent with the funding
requirements of federal laws and regulations.
40
Bohn maintains a defined benefit pension plan covering employees subject to
a collective bargaining agreement. Benefits under the plan accrued at a
rate of $14.50 per month per year of credited service during 1996.
Oberdorfer maintains a defined benefit pension plan covering employees
subject to a collective bargaining agreement. Benefits under the plan
accrued at a rate of $16 per month per year of service during 1995 and
1996.
Penn Steel has two defined benefit pension plans which cover its salaried
and hourly employees, respectively. The plans provide pension benefits
based on a percentage of average final compensation multiplied by years of
credited service for its salaried employees and benefits based on
predetermined monthly amounts multiplied by years of credited service for
its hourly employees. The Company's policy is to make minimum annual
contributions that are required by applicable regulations, plus such
amounts as the Company may determine to be appropriate from time to time.
SDCC has two defined benefit pension plans for employees covered by a
collective bargaining agreement. The plans provide pension benefits based
on a multiple of years of continuous service before age 65. The Company's
policy is to make annual contributions to the plans equal to the maximum
amount allowed as deductible by the Internal Revenue Service.
The components of net pension costs of the plans are as follows:
Assets Exceed
Accumulated Benefits Accumulated Benefits Exceed Assets
------------------------ -------------------------------------
Year Ended Year Ended
------------------------ -------------------------------------
October 1, September 29, October 2, October 1, September 29,
1995 1996 1994 1995 1996
---------- ------------- ----------- ---------- -------------
Service cost $ 95 $ 217 $ 79 $ 307 $ 306
Interest cost 240 442 56 529 514
Return on plan
assets (313) (443) 51 (518) (674)
Net amortization
and deferral 84 (27) (88) 115 290
------- -------- ------- ------- -------
Net pension expense $ 106 $ 189 $ 98 $ 433 $ 436
------- -------- ------- ------- -------
------- -------- ------- ------- -------
41
The measurement dates for the plan assets and obligations for fiscal years
1995 and 1996 are July 2, 1995 and September 29, 1996, respectively. The
reconciliation of the funding status of the plans combined is as follows:
Assets Exceed
Accumulated Benefits Accumulated Benefits Exceed Assets
-------------------------- --------------------------------------------
Year Ended Year Ended
-------------------------- --------------------------------------------
October 1, September 29, October 2, October 1, September 29,
1995 1996 1994 1995 1996
---------- ------------- ----------- ---------- -------------
Present value of
accumulated plan
benefits:
Vested $ 2,892 $ 5,970 $ 776 $ 6,476 $ 6,406
Nonvested 210 574 101 501 379
---------- ----------- ----------- ---------- -----------
$ 3,102 $ 6,544 $ 877 $ 6,977 $ 6,785
---------- ----------- ----------- ---------- -----------
---------- ----------- ----------- ---------- -----------
Projected benefit
obligation $ 3,102 $ 6,544 $ 877 $ 7,472 $ 7,287
Fair value of plan assets 3,266 6,988 695 6,511 6,384
---------- ----------- ----------- ---------- -----------
Projected benefit
obligation less than (in
excess of) plan assets 164 444 (182) (961) (903)
Unrecognized net (gain)
loss 614 299 33 (243) (145)
Prior service cost not yet
recognized in net
periodic pension cost 112 320 290 718 261
Unrecognized net assets
at date of initial
application (158) (210) (61) 380 705
Additional minimum
liability (262) (532) (78)
---------- ----------- ----------- ---------- -----------
(Accrued) prepaid
pension liability
$ 732 $ 853 $ (182) $ (638) $ (160)
---------- ----------- ----------- ---------- ----------
---------- ----------- ----------- ---------- ----------
The settlement (discount) rates used to measure the projected benefit
obligations for all plans ranged from 6.25% to 8.5% for 1995 and from 7.25%
to 8.5% for 1996. The expected long-term rates of return on all plan assets
ranged from 7.5% to 8.5% for 1995 and 1996.
ADCC's union employees are covered by a multi-employer defined benefit
pension plan sponsored by the union which represents the employees. The
Company makes contributions to the plan in accordance with the collective
bargaining agreement between the Company and the union. The Company
contributed $68, $70, and $63 to this plan in fiscal years 1994, 1995, and
1996, respectively.
42
The actuarial present value of accumulated plan benefits at January 1,
1996 (the most recent valuation date) for the multi-employer union plan as
a whole determined through an actuarial valuation performed as of that date
was approximately $107,092. The market value of the union plan's net assets
available for benefits on that date was approximately $131,189.
11. DEFINED CONTRIBUTION PLANS
The Company maintains separate, divisional or subsidiary defined
contribution 401(k) plans covering substantially all employees (other than
those covered by collective bargaining agreements). Company contributions
are based upon a multiple of operating income as a percentage of sales on a
divisional or subsidiary basis.
In addition, BFC maintains two 401(k) plans which cover substantially all
salaried employees and all hourly employees subject to a collective
bargaining agreement. Company contributions to the salaried plan match up
to 50% of the employees' contribution, up to 5% of the employees'
compensation. Company matching contributions to the hourly plan are equal
to the amount required by the collective bargaining agreement. Unless
otherwise specified, the Company matching contributions shall equal 10% of
each employee's contribution or, if less, five cents for each hour of
service worked by the employee.
Bohn maintains a 401(k) plan covering substantially all salaried employees.
The Company will match 35% of the first 6% of the employees' contribution.
Additionally, the Company contributes 3% of all salaried employees' annual
compensation to the plan without regard for employee contribution.
MFC maintains two 401(k) plans which cover its salaried and hourly
employees. Company contributions to the salaried plan are 50% of the
first 6% of the employee contribution. Company contributions to the
hourly plan are equal to $.05 per regular hour worked by the employee.
Previously, Oberdorfer maintained a 401(k) plan for all eligible employees
who were not governed by the terms of a collective bargaining agreement.
Effective June 30, 1995, Oberdorfer terminated its 401(k) plan and funded
all outstanding contributions due to the plan.
Penn Steel maintains a 401(k) plan for all eligible employees. All
employees who are at least 21 years old and have completed one year of
service are eligible to participate in the plan. Company contributions are
discretionary based on a percentage of the employees' contribution, as well
as an additional contribution determined by the Company. There were no
additional contributions made in 1995 and 1996.
SACC maintains a 401(k) plan covering substantially all employees. The
Company match is based on the employees' contribution to the plan during
the year and is limited to 6%
43
of the total compensation of all participants. The Company may also make a
non-elective contribution which is made at the discretion of the board of
directors.
TSC maintains two 401(k) plans which cover substantially all salaried
employees and all hourly employees subject to a collective bargaining
agreement. Company contributions to the salaried plan are based upon a
multiple of operating income as a percentage of sales. Company
contributions to the hourly plan are discretionary.
Contribution expense recognized by the Company under the 401(k) plans
totaled $1,098, $1,550 and $2,068 in fiscal years 1994, 1995, and 1996,
respectively.
On August 17, 1995, the board of directors approved the nonqualified
deferred compensation plan which allows certain members of management and
highly compensated employees to defer a portion of their compensation. The
deferred compensation, which together with Company matching amounts and
accumulated interest, is distributable in cash after retirement or
termination of employment. The Company recognized expense related to this
plan of $98 in fiscal year 1996. No amounts were contributed in fiscal
year 1995.
12. COMMITMENTS AND CONTINGENT LIABILITIES
On July 8, 1993, the Company entered into a consulting and noncompetition
agreement with respect to the iron lost foam casting business of Robinson
Foundry, Inc. (Robinson). The agreement consists of Robinson transferring
existing business and orders to CFCC, providing technical and sales
assistance to CFCC, and agreeing not to compete with the Company in the
iron lost foam casting business for a period of five years. The agreement
requires the Company to make payments to Robinson in the amount of $300 at
the closing of the agreement and upon each of the next four anniversary
dates of the agreement. The agreement also requires the Company to pay
commissions to Robinson, at a rate of 6%, for all CFCC sales arising from
this agreement in excess of $5,000 and to pay an additional 5% commission
for all sales to new customers established by Robinson during the term of
the agreement. There were no commissions paid under this agreement during
fiscal years 1994, 1995, and 1996. In conjunction with the agreement,
the Company entered into a noncompetition agreement with Robinson's
principal owner requiring the Company to make annual payments of $100 to
this owner concurrent with the payments to Robinson. The liabilities and
corresponding intangible assets associated with these noncompetition
agreements are reflected in the Company's consolidated balance sheets.
The intangible assets are being amortized over the terms of the
agreements.
The Company leases offices and equipment under operating lease agreements
expiring in various years through 2001. Rent expense under various
operating leases was approximately $190, $505, and $1,277 in fiscal years
1994, 1995, and 1996, respectively. Minimum future rental payments under
operating leases having remaining terms in excess of one year are as
follows:
44
1997 $ 1,003
1998 712
1999 523
2000 310
2001 80
----------
$ 2,628
----------
----------
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the consolidated financial position or results of operations of the
Company.
The Company is subject to numerous federal, state, and local environmental
laws and regulations. Management believes that the Company is in material
compliance with such laws and regulations and that potential environmental
liabilities, if any, are not material to the consolidated financial
statements.
The divisions and subsidiaries are primarily self insured for workman's
compensation claims and health plans. Stop loss insurance agreements are
utilized to limit the Company's liability on both a specific and aggregate
basis for the period of coverage. The liability for unpaid claims includes
an accrual for an estimate of claims incurred but not reported.
13. RELATED PARTY TRANSACTIONS
Prior to fiscal year 1995, the Company advanced amounts to its stockholders
in the form of notes receivable which accrued interest at the applicable
Federal long-term rate, as prescribed by the Internal Revenue Code, ranging
from 8.20% to 8.56%. The notes were due October 1, 1999 through October 1,
2001 and were collateralized by the stock of the Company. The Company
classified these notes in a contra equity account. The stockholders' notes
receivable were settled in full through a distribution to the stockholders
effective March 31, 1994.
The Company made payments totaling $125, $234, and $542 in fiscal years
1994, 1995, and 1996, respectively, to a law firm in which one of the
Company's stockholders is a partner.
45
14. FINANCIAL INSTRUMENTS
Financial instruments consisted of the following at October 1, 1995 and
September 29, 1996:
OCTOBER 1, 1995 September 29, 1996
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- --------- ---------
Accounts receivable - trade, net $ 52,994 $ 52,994 $ 77,931 $ 77,931
Accounts payable $ 24 605 $ 24,605 $ 33,668 $ 33,668
Note payable $ 62,638 $ 62,638 $ 133,055 $ 134,684
Other long-term debt, including current portion $ 15,169 $ 12,580 $ 10,545 $ 8,940
Interest rate swaps $ -0- $ (830)
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, and accounts payable approximate
fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amounts reported for the note payable
and a portion of the other long-term debt approximates fair value
because the underlying instruments are at variable interest rates which
reprice frequently. Fair value for fixed rate long-term debt was
estimated using either quoted market prices for the same or similar
issues or the current rates offered to the Company for debt with similar
maturities.
As discussed in Note 6, the Company is party to two interest rate swap
agreements with durations of five years to hedge against interest rate
exposures on $40,000 of long term debt. The fair values of the
Company's interest rate swaps are estimated based on valuations from its
lead bank.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following represent noncash financing and investing activities:
Year Ended
-------------------------------------------
October 2, October 1, September 29,
1994 1995 1996
------------ ------------ -------------
Accrual of distributions to stockholders $ 3,466
Reduction of stockholders' notes receivable through
a distribution to the stockholders $ 5,369
Stockholder contribution related to interest charges on
stockholder's receivable $ 221
Contribution of subsidiary $ 223
Issuance of common stock in acquisitions $ 2,310
Debt incurred in connection with acquisitions $ 1,050 $ 12,600 $ 320
46
16. ACQUISITIONS
Effective October 2, 1994, the Company acquired the net assets of MFC for
$7,750 in cash and a $1,050 note payable due in two annual installments.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets and liabilities of MFC based on their estimated fair values at the
date of acquisition. The financial position of MFC at October 2, 1994 is
reflected in the Company's consolidated balance sheet at that date, and MFC
has been included in the Company's operations since that date.
Effective January 1, 1995, the Company acquired the net assets of
Oberdorfer for the assumption of $3,900 of long-term debt plus $600 in cash
payable in four equal quarterly installments beginning April 1995. The
agreement provides for an increase in the purchase price of up to $1,000 if
Oberdorfer meets certain earnings criteria over the five-year period ending
December 31, 1999. The acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets and liabilities of Oberdorfer based on their
estimated fair values at the date of acquisition. Operating results of
Oberdorfer since January 1, 1995 are included in the Company's consolidated
financial statements.
On February 24, 1995, the Company completed the purchase of the net assets
of IFC for $5,700 in cash and a $1,000 note payable due in February 1996.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets and liabilities of IFC based on their estimated fair values at the
date of acquisition. Operating results of IFC since February 24, 1995 are
included in the Company's consolidated financial statements.
On May 8, 1995, the Company completed the purchase of the outstanding stock
of BFC for $13,000 in cash, a note payable for $2,000 payable over a three
year period, and 61,540 shares of common stock of the Company, valued at
$1,000. The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets and liabilities of BFC based on their estimated fair values at the
date of acquisition. Operating results of BFC since May 8, 1995 are included
in the Company's consolidated financial statements.
On June 12, 1995, the Company completed the purchase of the stock of Penn
Steel for $700 cash, $300 in cash to be held in escrow for warranties, and
80,000 shares of the common stock of the Company valued at $1,310. The
acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets and
liabilities of Penn Steel based on their estimated fair values at the date
of acquisition. Operating results of Penn Steel since June 12, 1995 are
included in the Company's consolidated financial statements (SEE NOTE 18).
47
On August 1, 1995, the Company completed the purchase of the net assets of
CP for $47,800 in cash and a note payable for $9,000 payable over a
six-year period. The acquisition has been accounted for under the purchase
method of accounting and, accordingly, the purchase price has been
allocated to the assets and liabilities of CP based on their estimated fair
values at the date of acquisition. Operating results of CP since August 1,
1995 are included in the Company's consolidated financial statements.
The estimated fair value of assets acquired and liabilities assumed in each
of the fiscal year 1995 acquisitions are summarized as follows:
Oberdorfer IFC BFC Penn Steel CP
---------- ----------- ---------- ---------- -----------
Accounts receivable, net $ 1,535 $ 2,549 $ 6,620 $ 3,016 $ 5,532
Inventories 1,408 1,945 852 3,459 5,084
Other current assets 353 210 725 321 1,043
Property, plant, and equipment 4,611 7,875 4,020 4,740 38,243
Intangible assets and other 1,030 11,673 72 12,399
Accounts payable and accrued expenses (3,491) (2,084) (5,763) (2,355) (5,501)
Long-term debt (4,846) (3,795) (2,127) (6,943)
--------- -------- -------- -------- ---------
Purchase price $ 600 $ 6,700 $ 16,000 $ 2,310 $ 56,800
--------- -------- -------- -------- ---------
--------- -------- -------- -------- ---------
Effective January 5, 1996, the Company completed the purchase of the net
assets of TSC for $13,000 in cash and the assumption of $2,195 in long-term
debt. The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets and liabilities of TSC based on their estimated fair values at the
date of acquisition. Operating results of TSC since January 5, 1996 are
included in the Company's consolidated financial statements.
Effective February 4, 1996, the Company completed the purchase of the net
assets of Hi-Tech for $2,880 in cash, the assumption of $2,625 in long-term
debt, and a $320 note payable due in December 1996. The acquisition has
been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the assets and
liabilities of Hi-Tech based on their estimated fair values at the date of
acquisition. Operating results of Hi-Tech since February 4, 1996 are
included in the Company's consolidated financial statements.
Effective March 1, 1996, the Company completed the purchase of the
outstanding stock of SACC for $12,000 in cash and the assumption of $28,538
in long-term debt. The acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the assets and liabilities of SACC based on their estimated
fair values at the date of acquisition. Operating results of SACC since
March 1, 1996 are included in the Company's consolidated financial
statements.
48
Effective April 1, 1996, the Company completed the purchase of the net
assets of Bohn for $8,250 in cash and the assumption of $2,012 in long-term
debt. The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets and liabilities of Bohn based on their estimated fair values at the
date of acquisition. Operating results of Bohn since April 1, 1996, are
included in the Company's consolidated financial statements.
The estimated fair value of assets acquired and liabilities assumed in each
of the fiscal year 1996 acquisitions are summarized as follows:
TSC Hi-Tech SACC Bohn
-------- --------- -------- ---------
Accounts receivable, net $ 3,833 $ 801 $ 9,911 $ 4,139
Inventories 4,795 367 5,975 1,300
Other current assets 211 8 19 112
Property, plant, and equipment 9,938 4,622 26,980 5,948
Intangible assets and other 521 437 5,046 2,777
Accounts payable and accrued expenses (4,103) (410) (7,393) (4,014)
Long-term debt (2,195) (2,625) (28,538) (2,012)
---------- ---------- -------- ----------
Purchase price $ 13,000 $ 3,200 $ 12,000 $ 8,250
---------- ---------- -------- ----------
---------- ---------- -------- ----------
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Oberdorfer, IFC, BFC, Penn Steel, CP, TSC,
Hi-Tech, SACC, and Bohn as if the acquisitions had occurred at the
beginning of fiscal years 1995 and 1996, after giving effect to certain
adjustments, including additional depreciation expense, interest expense on
the acquisition debt, amortization of intangible assets, and related income
tax effects. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made at the beginning of either fiscal
years 1995 or 1996, or of results which may occur in the future.
October 1, September 29,
1995 1996
----------- ------------
Sales $ 527,639 $ 532,572
Operating income $ 49,349 $ 39,405
Income before provision for income taxes $ 41,032 $ 28,187
Net income $ 24,943 $ 16,912
Net income per common share $ 1.41 $ 0.96
The Company's April 30, 1993 acquisition of Mabry included an agreement for
contingent consideration based on earnings. The Company recorded additional
amounts due to the sellers of Mabry of $654 in fiscal year 1994 and $2,793
in fiscal year 1995 in full settlement of such contingent consideration.
These amounts are included as an addition to goodwill related to such
acquisition.
49
17. UNAUDITED PRO FORMA INFORMATION
The unaudited pro forma provision for income taxes and net income for the
period ended October 2, 1994 assumes that the Company was subject to
corporate income taxes as a C corporation as of the beginning of fiscal
1994. Unaudited pro forma earnings per average common share has been
calculated by dividing pro forma net income by the weighted average number
of common shares outstanding. The calculation of the weighted average
common shares outstanding for fiscal year 1994 assumes that the number of
shares (1,002,500) at the IPO price per share necessary to fund the
estimated final S corporation distribution to the previous S corporation
stockholders, as discussed in the Company's registration statement on Form
S-1, was outstanding for the entire year and also reflects the number of
shares issued in connection with the Company's IPO in August 1994 for the
entire year.
18. SUBSEQUENT EVENTS (UNAUDITED)
On October 31, 1996, the Company consummated an agreement in principle to
sell Penn Steel. The sales price is based on the book value of Penn Steel
at October 31, 1996 less $600. The Company recorded a one-time pre-tax loss
of $1,807 in the consolidated statement of income for the year ended
September 29, 1996 based on its estimate of the October 31, 1996 book value
of Penn Steel. The actual book value for the purposes of this calculation
is subject to negotiation by both parties to the agreement. The agreement
states that if the parties do not agree on the book value of Penn Steel,
the disagreement will be resolved through negotiation between the chief
executive officers of the purchaser and the Company.
Subsequent to year end, the Company acquired all of the stock of Interstate
Forging Industries, Inc. (Interstate) of Milwaukee, Wisconsin and Navasota,
Texas for a purchase price of approximately $47,000 plus the assumption by
the Company of approximately $23,000 of Interstate's debt. The acquisition
was effected through a merger whereby a subsidiary of the Company was
merged into Interstate and Interstate became a wholly owned subsidiary of
the Company. The Company filed a Registration Statement on Form S-4 (the
"S-4") with the SEC to register certain contingent payment rights which the
Company would have to pay to the shareholders and certain option holders as
a portion of the purchase price if Interstate achieves certain income
levels over the three years ending December 31, 1998. This acquisition will
be accounted for under the purchase method of accounting. Interstate, which
produces custom closed die forgings of carbon, alloy, and stainless steel,
had annual sales for the year ended December 31, 1995 of approximately
$83,400.
50
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the fiscal years 1995 and 1996 and through the date of this report,
there has been no change in the Company's independent accountants, nor have any
disagreements with such accountants or reportable events occurred.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 18, 1997, as filed with the
Securities and Exchange Commission.
ITEM 11: EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 18, 1997, as filed with the
Securities and Exchange Commission.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the
section entitled "Security Ownership of Management and Certain Beneficial
Owners" and "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 18, 1997, as filed with the
Securities and Exchange Commission.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 18, 1997, as filed with the
Securities and Exchange Commission.
51
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS
The exhibits set forth in the following index of exhibits are filed as a
part of this report:
Exhibit
Number Page
------- ----
3.1 Certificate of Incorporation of the Company, as amended(1)
3.2 Bylaws of the Company(1)
10.2(r) Credit Agreement dated July 1, 1996 among the Company and
its subsidiaries, SouthTrust Bank of Alabama, National
Association, and NBD Bank(2)
10.2(s) Stock Purchase Agreement between Southern Aluminum Castings
Company and Citation Corporation dated February 12, 1996(3)
10.3(a) Employment Agreement commencing on August 9, 1994 between
Citation Corporation and T. Morris Hackney(1)
10.3(b) Employment Agreement commencing on August 9, 1994 between
Citation Corporation and R. Conner Warren(1)
10.4 Citation Corporation Incentive Award Plan(1) 57
10.4(a) Citation Corporation Stock Plan for Non Employee Directors(4)
10.4(b) Citation Non-Qualified Stock Option Plan for Non-Employee
Directors
10.6 Tax Indemnification Agreement between Shareholders existing
prior to August 9, 1994 and Citation Corporation(1)
21 Subsidiaries of the Registrant 63
23 Consent of Coopers & Lybrand, LLP 64
Report of Independent Certified Public Accountants on
Supplementary Information 65
Schedule II - Valuation and Qualifying Accounts 66
27 Financial Data Schedule, submitted to the Securities and
Exchange Commission in electronic format
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 under the Securities Act of 1933 (Registration No. 33-79804, as filed
August 2, 1994). The exhibit numbers listed correspond to the exhibit
numbers in the Form S-1.
(2) Incorporated by reference to Exhibit 10.2(r) of the Company's report on
Form 10-Q for the quarter ended June 30, 1996.
(3) Incorporated by reference to Exhibit 2.2 of the Company's Form 8-K dated
March 1, 1996.
(4) Incorporated by reference to Exhibit 10.4(a) of the Company's Annual Report
on Form 10-K for the year ended October 1, 1995.
52
FINANCIAL STATEMENT SCHEDULES
The Index to financial statements and schedules filed as a part of this
Report is contained at page 24.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the fiscal year ended September 29,
1996.
53
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CITATION CORPORATION
/s/ T. Morris Hackney
------------------------------
By: T. MORRIS HACKNEY
Chief Executive Officer and
Chairman of the Board
December 12, 1996
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ T. Morris Hackney Chief Executive Officer and December 12, 1996
- --------------------------------- Chairman of the Board
T. MORRIS HACKNEY (Principal Executive Officer)
/s/ Frederick F. Sommer President and Chief Operating December 12, 1996
- --------------------------------- Officer
FREDERICK F. SOMMER
/s/ R. Conner Warren Executive Vice President of December 12, 1996
- --------------------------------- Finance and Administration
R. CONNER WARREN Treasurer and Director
(Principal Financial Officer)
/s/ Thomas W. Burleson Vice President - Corporate December 12, 1996
- --------------------------------- Controller
THOMAS W. BURLESON (Principal Accounting Officer)
/s/ Hugh G. Weeks Director December 12, 1996
- ---------------------------------
HUGH G. WEEKS
/s/ A. Derrill Crowe Director December 12, 1996
- ---------------------------------
A. DERRILL CROWE
/s/ Franklyn Esenberg Director December 12, 1996
- ---------------------------------
FRANKLYN ESENBERG
/s/ William W. Featheringill Director December 12, 1996
- ---------------------------------
WILLIAM W. FEATHERINGILL
/s/ Frank B. Kelso, II Director December 12, 1996
- ---------------------------------
FRANK B. KELSO, II
/s/ Van L. Richey Director December 12, 1996
- ---------------------------------
VAN L. RICHEY
54
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
__________________
EXHIBITS
TO
FORM 10-K
CITATION CORPORATION
For the fiscal year ended September 29, 1996 Commission File No. 0-24492
55
TABLE OF CONTENTS
FOR EXHIBITS
The exhibits set forth in the following index of exhibits are filed as a
part of this report:
Exhibit
- -------
Number Page
- ------- ----
3.1 Certificate of Incorporation of the Company, as amended(1)
3.2 Bylaws of the Company(1)
10.2(r) Credit Agreement dated July 1, 1996 among the Company and its
subsidiaries, SouthTrust Bank of Alabama, National Association,
and NBD Bank (2)
10.2(s) Stock Purchase Agreement between Southern Aluminum Castings
Company and Citation Corporation dated February 12, 1996(3)
10.3(a) Employment Agreement commencing on August 9, 1994 between
Citation Corporation and T. Morris Hackney(1)
10.3(b) Employment Agreement commencing on August 9, 1994 between
Citation Corporation and R. Conner Warren(1)
10.4 Citation Corporation Incentive Award Plan(1) 57
10.4(a) Citation Corporation Stock Plan for Non Employee Directors(4)
10.4(b) Citation Non-Qualified Stock Option Plan for Non-Employee
Directors
10.6 Tax Indemnification Agreement between Shareholders existing
prior to August 9, 1994 and Citation Corporation(1)
21 Subsidiaries of the Registrant 63
23 Consent of Coopers & Lybrand, LLP 64
Report of Independent Certified Public Accountants on
Supplementary Information 65
Schedule II - Valuation and Qualifying Accounts 66
27 Financial Data Schedule, submitted to the Securities and Exchange
Commission in electronic format
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 under the Securities Act of 1933 (Registration No. 33-79804, as filed
August 2, 1994). The exhibit numbers listed correspond to the exhibit
numbers in the Form S-1.
(2) Incorporated by reference to Exhibit 10.2(r) of the Company's report on
Form 10-Q for the quarter ended June 30, 1996.
(3) Incorporated by reference to Exhibit 2.2 of the Company's Form 8-K dated
March 1, 1996.
(4) Incorporated by reference to Exhibit 10.4(a) of the Company's Annual Report
on Form 10-K for the year ended October 1, 1995.
56