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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED MAY 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-25068
HASKEL INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 95-4107640
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 EAST GRAHAM PLACE, BURBANK, CA 91502
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 843-4000
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: CLASS A COMMON
STOCK
NAME OF EACH EXCHANGE ON WHICH REGISTERED: THE NASDAQ STOCK MARKET
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes __ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 of this chapter) 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. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $19,795,936 as of August 16, 1996.
As of August 16, 1996, the registrant had 4,688,230 shares of Class A
Common Stock and 40,000 shares of Class B Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Established in 1946, the Company manufactures pneumatically (compressed
air or gas) and hydraulically (oil) driven, high-pressure low-flow, fixed
displacement, reciprocating plunger, liquid pumps, gas boosters, chemical
injection pumps and air pressure amplifiers ("Haskel(R) Specialty Pumps") for
industrial, commercial, aerospace and military applications. Management believes
that the Company is one of the world's leading manufacturers of pneumatically-
driven, high-pressure liquid pumps and gas boosters, which represent the vast
majority of Haskel(R) Specialty Pumps manufactured by the Company. The Company
also manufactures high-pressure valves, regulators, and accessories to
complement Haskel(R) Specialty Pumps. The Company distributes third-party
manufactured valves, cylinders and actuators, and other pneumatic and hydraulic
devices.
Applying its engineering expertise and high-pressure pump, booster,
amplifier and relief valve technology, the Company is also engaged in the test
and control systems business. The Company's systems business consists of the
design and manufacture of many different kinds of apparatus that incorporate the
Company's products, engineering knowledge and experience in high pressure
technology, often incorporating electronic and computer controls to achieve a
functional piece of equipment. This integrated equipment (a "Haskel(R) System")
has a wide variety of applications throughout industry.
The Company also specializes in the international trading of electronic
components, utilizing its proprietary QRD(R) (Quick Response Delivery) global
trading network.
In its fiscal year ended May 31, 1996, approximately 42% of the
Company's business was manufacturing (including Haskel(R) Systems); the balance
was distribution of third-party fluid power products and distribution of
electronic components.
The Company's operations are organized into two groups, the Industrial
Products Group ("IPG") and the Electronic Products Group ("EPG"). The IPG
operates in two segments, industrial products manufacturing and industrial
products distribution. The EPG operates in one segment, electronic products
distribution.
The IPG's operations are headquartered in Burbank, California and
consist of the Company's Industrial Technologies Division ("ITD"), Haskel
Controls Division ("Controls"), and the Company's wholly owned subsidiary,
Haskel Energy Systems, Ltd. ("HESL"), located in Sunderland, England and its
divisions and subsidiaries. The ITD is the U.S. manufacturer of Haskel(R)
Specialty Pumps, Haskel(R) Systems, high-pressure valves, regulators and
accessories to complement these products. Controls distributes product lines
used primarily in the fluid power business, the largest line of which is the
Company's products. HESL represents the Company's European industrial products
operations with offices located in Sunderland and Manchester, England; Aberdeen,
Scotland; Lille, France; Wesel, Germany; and the most recent addition, after the
completion of the fiscal year, in Zoetermeer, the Netherlands. HESL and its
divisions and subsidiaries primarily distribute Haskel(R) Specialty Pumps and
design and manufacturer Haskel(R) Systems for specific applications required by
customers in Europe, India, and the Middle East. HESL and its divisions and
subsidiaries also manufacture products needed for HESL's markets that are not
produced in the United States, such as the Jetflow Airmover(R), and distribute
products of other manufacturers.
The EPG consists of M.G. Electronics, Inc. ("MGE"), headquartered in
Westlake Village, California, and its purchasing office in Hong Kong. The EPG
provides purchasing services, product substitution and solutions to shortage and
delivery problems of original
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equipment manufacturers ("OEMs") of electronic components. The EPG specializes
in locating sources (which includes researching, evaluating and supplying) for
circuit board-level components, such as integrated circuits, capacitors,
transistors and resistors.
Certain financial information about the Company's business segments and
its domestic and foreign operations and export sales is presented in Note 14 of
the Notes to Consolidated Financial Statements appearing in this Report.
Inter-segment sales are principally sales from the IPG manufacturing segment to
the IPG distribution segment. No single customer accounted for more than 10% of
sales during fiscal 1994, 1995 or 1996.
INDUSTRIAL PRODUCTS GROUP - MANUFACTURING
Products and Markets
The Company is one of the world's leading manufacturers of
pneumatically-driven, high-pressure liquid pumps and gas boosters, which
represent the vast majority of Haskel(R) Specialty Pumps manufactured by the
Company. Haskel(R) Specialty Pumps produce very high pressures (typically 4,000
to 20,000 psi with a capability of up to 150,000 psi) at low volumes of flow,
with rated fluid power of up to ten horsepower. Haskel(R) Specialty Pumps
utilize reciprocating plungers with fixed displacement bodies to generate these
pressures. Management believes that the high quality of the Company's products,
in terms of engineering design, reliability, durability and performance, enables
the Company to sell such products at a premium price. Haskel(R) Specialty Pumps
are designed for niche markets where high pressure with low flow of liquids or
gases at ten horsepower or less is required. The pump's function is to generate
pressure, taking in low-pressure, low-flow liquids and gases and producing
high-pressure, low-flow liquids and gases. The energy produced by a pump is used
to move a linear or rotary actuator, generate pressure for testing or metal
forming, charge pressure containers, and transfer fluids under pressure.
Additional products include metal seals for extreme temperature applications;
the Company's patented Hydroswage(R) products, which use high liquid pressure
for metal expansion, creating a high integrity joint between the metal tube and
the tube sheet as found in boilers and heat exchangers; and the Jetflow
Airmover(R), which ventilates stagnant environments, such as mines, by diluting
and removing hazardous gases. The Company has also entered into private branding
agreements with other companies in the pressure industry to have manufactured
certain valve and pump products in the Company's name for marketing by the
Company in selected geographic areas.
Haskel's systems business consists of the design and manufacture of
many different kinds of apparatus that incorporate the Company's products,
engineering knowledge and experience in high pressure technology, together with
third party products. They often incorporate electronic computer controls to
achieve a functional piece of equipment. Haskel(R) Systems have a wide variety
of applications throughout industry. Some of the many applications of Haskel(R)
Systems include:
- pressure testing hoses, valves and cylinders
- mixing liquids and gases under pressure
- injecting gases into plastics in order to improve the molding
process
- boosting oxygen for life support and emergency service use
- boosting nitrogen for charging cryostats in missile guidance
applications, commercial aircraft tires, struts and escape
chutes
- pressurizing argon for infrared cooling in missiles
- boosting helium for testing automotive brake and air
conditioning hoses and charging satellite rocket motors
- pressure charging and testing of automotive air bag cannisters
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- recovering and charging chlorofluorocarbons ("CFC's") used in
air conditioning and refrigeration applications
- recovering and charging SF6 (Sulfar Hexafluoride), an arc
suppressant gas, used in high voltage switch gear
- pressurizing carbon dioxide for filling fire extinguishers and
manufacturing foam
- compressing natural gas (CNG) for use as a vehicle fuel
- hydrostatic forming of metal using the Company's
Hydroswage(R) process
- work holding and press overload applications
- chemical injection and well head control applications for oil
and gas production platforms
- boosting shop compressed air
In addition, other manufacturers incorporate Haskel(R) Specialty Pumps in their
equipment for these and similar purposes.
During fiscal year 1996, the Company began producing, in the United
States, a series of "test bench" Haskel(R) Systems designed to meet the growing
demand for devices that test the integrity of valves, hoses, cylinders, and
other components commonly used by the nuclear, oil and gas, airline, chemical
and power generation industries in high-pressure liquid and gas applications.
Since 1992, the Company has been designing and manufacturing similar systems at
HESL.
The Company has qualified for and been awarded the ISO 9001
accreditation, a total quality certification from the International Standards
Organization ("ISO"), for HESL's United Kingdom operations and the Company is in
the process of applying for such certification for its IPG operations. The ISO
9001 accreditation gives recognition for maintaining an internationally
recognized standard of quality in both its products and engineering and should
help the Company maintain a competitive advantage.
On November 30, 1995, HESL acquired the high-pressure pump distribution
and systems fabrication division of Armaturenbau, GmbH, located in Wesel,
Germany for approximately $412,000. Previously, Armaturenbau had been
distributing the Company's products in Germany. The new business, known as
Haskel HochdruckSysteme GmbH, distributes Haskel products and designs and
manufactures Haskel(R) Systems for the German market.
The markets served by the IPG are substantial and diversified, with no
single customer accounting for 10% or more of its sales. Total IPG -
Manufacturing sales were approximately 45.9%, 40.9% and 42.3% of the Company's
total sales in 1994, 1995 and 1996, respectively.
The following table lists the broad range of industries utilizing
Haskel(R) Specialty Pumps and Haskel(R) Systems. The industries that, taken in
the aggregate, account for a majority of the Company's sales are marked with an
asterisk(*).
INDUSTRIES USING HASKEL(R) PRODUCTS
Abrasive Pressure Water Cleaning Marine Engineering
Aerospace and Aircraft * Mining
Automotive * Medical Equipment and Emergency Support
Services
Boiler and Heat Exchanger Manufacture Oil and Gas Exploration and
Production *
Brewing and Distilling Oil and Petrochemical Refining and
Production *
Chemicals Pressure Testing *
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CNG Charging Stations Paper Industry
Defense * Plastic Extrusion Machinery
Diving Charging Equipment Railways
Electronic/Electrical Machinery Refrigeration and Air Conditioning
Fire Fighting and Related Services Research and Development
Establishments, including
General Engineering * Universities and Colleges
I.C. Engines and Compressors Textile Engineering
Industrial Machinery Utilities, Power Generation,
Valve Testing and Packing Removal Electricity Distribution *
Although specific applications may have a limited life, the useful
lives of the IPG's products are generally quite long. Product parts are usually
replaceable from current stock; older products can be modified to include the
latest technology. Spare parts requirements grow each year as the number of
installed units increases, providing an increasing source of revenue.
Facilities and Materials
The IPG manufactures Haskel(R) Specialty Pumps and related products and
Haskel (R) Systems at the Company's facilities in Burbank, California, and in
Sunderland, England. Manufacturing operations in Sunderland include products
that are not produced in the United States, which are needed for European
markets, such as the Jetflow Airmover(R). Haskel(R) Systems are also designed
and manufactured at facilities in Manchester, England; Lille, France; and
Wesel, Germany. Approximately 76% of the components used in its products are
manufactured by the Company, with the balance subcontracted to outside
machining and processing companies.
Historically, the IPG has been able to pass a significant portion of
increased component part prices through to their customers by price increases,
although there is no assurance that they will be able to continue to do so in
the future. Currently, all materials used by the Company in the manufacturing
process are readily available at reasonable prices, and Management does not
anticipate any adverse change in this situation. Management has an ongoing
program to improve its manufacturing processes.
Backlog
Backlog of unfilled firm orders for the IPG - Manufacturing segment was
approximately $5,114,000 at May 31, 1996, as compared to approximately
$3,630,000 at May 31, 1995. This increase in backlog was due primarily to
increased orders as a result of continued internal growth as the IPG continues
to expand its international markets, especially throughout Europe and the
Pacific Rim. Substantially all of the Company's fiscal 1996 year-end backlog is
expected to be recognized as revenue in fiscal 1997.
Pursuant to the customary terms of the Company's agreements with
government contractors and other customers and in accordance with industry
custom, a customer may generally cancel or reschedule an order without penalty
if the Company has not made financial commitments with respect to the order.
Lead times for the release of purchase orders depend upon the scheduling and
forecasting practices of the Company's individual customers, which also can
affect the timing of the conversion of the Company's backlog into revenues. For
these reasons, among others, the Company's backlog at a particular date may not
be indicative of its future revenue, and there is no assurance that the backlog
will be completed and recorded as revenue. Cancellation of pending contracts or
termination or reductions of contracts in progress may have a materially adverse
effect on the Company's business and results of operations.
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INDUSTRIAL PRODUCTS GROUP - DISTRIBUTION
Haskel(R) Specialty Pumps and Haskel(R) Systems
The Company's manufactured products are sold through a direct sales
force, independent distributors, and authorized manufacturers' representatives
throughout the world. The largest distribution of the Company's products are
through its own subsidiaries and divisions. Products are sold throughout the
United States; Canada; the United Kingdom; other European countries, including
France, Germany, and the Netherlands; the former Soviet Republics; Pacific Rim
countries, including China and Japan; Australia; Africa; South America; India;
and the Middle East.
Distribution of the IPG's products is accomplished through a network of
82 distributors in the United States and Canada and 64 distributors in Europe,
the Asia-Pacific region and Central and South America. The activities of these
distributors are supported by the Company's regional sales managers who have
extensive technical backgrounds.
Third-Party Pumps and Related Products
The IPG distributes over 40 different lines of third-party
manufactured products worldwide. These products are used primarily in the pump
and pump-related fluid power business, and include cylinders, actuators,
pneumatic and hydraulic valves, hoses and fittings, high-pressure components,
pumps and motors, as well as a major line of seals and lubricants.
In June 1996, HESL acquired Hydraulic Mobile Equipment Ltd. ("HME") for
approximately $814,000. HME, located in Manchester, England, distributes a range
of high-pressure gear pumps, valves and motors in the United Kingdom and has a
growing systems business. Additionally, in June 1996, the Company opened a new
facility in Zoetermeer, the Netherlands, which will provide sales and service
for the Company's full range of products and systems in the Benelux countries.
Total IPG - Distribution sales were approximately 44.7%, 34.3% and
31.9% of the Company's total sales in fiscal 1994, 1995 and 1996, respectively.
Backlog of unfilled firm orders for the IPG - Distribution segment was
approximately $3,276,000 at May 31, 1996, as compared to approximately
$2,979,000 at May 31, 1995. Substantially all of the Company's fiscal 1996
year-end backlog is expected to be recognized as revenue in fiscal 1997.
ELECTRONIC PRODUCTS GROUP
The EPG provides purchasing services, product substitution and
solutions to shortage and delivery problems of OEMs of electronic components.
The EPG specializes in locating sources (which includes researching, evaluating
and supplying) for circuit board-level components, such as integrated circuits,
capacitors, transistors and resistors. There are more than 500,000 separate
components available for use in electronic systems, each designated by a unique
part number. A typical electronic system may consist of hundreds of components;
if any single component becomes unavailable, an entire production line could
come to a halt. Changing manufacturer requirements, advancing technology, and
the shortening of the cycle of bringing new products to market, as manufacturers
adopt "just-in-time" systems and related inventory reduction procedures, often
result in last-minute parts shortages, requiring buyers to spend an increasing
percentage of their time trying to find missing components for their production
lines.
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When the EPG receives a customer request, it uses its databases and
CD-ROM engineering library to determine the availability of the requested,
identical or alternative components and immediately transmits inquiries
regarding these parts to all sources and stocking locations that have been
identified as potential suppliers. Upon locating a suitable component, the EPG
ascertains the purchase price and then quotes a sale price to the potential
buyer. Through negotiation with the potential customer, a mutually satisfactory
price is reached. The EPG then purchases the product and sells it to the
customer. Because most of MGE's customers have an immediate and urgent need for
a product that they have been unable to find elsewhere, the EPG achieves profit
margins that are higher than customary for electronic components.
The EPG uses independent manufacturers' representative organizations,
telemarketing and Internet E-Mail gateways to allow purchasing departments to
transmit requirements directly. As part of a multi-pronged program to market its
services to potential customers, preprinted personalized forms are used that
enable buyers to simply write in the part number and number of units required
and transmit their requests to the EPG. The EPG is using its international
purchasing office in Hong Kong to assist in procuring parts in the Pacific Rim.
MGE has qualified for and been awarded the ISO 9002 accreditation, a
total quality certification from the ISO, for its Westlake Village, California
facility. The ISO 9002 accreditation attests that MGE maintains an
internationally recognized standard of quality in its distribution business
and should help MGE's competitive advantage.
In May 1996, the Company reorganized the EPG by closing its offices in
the United Kingdom and Germany. The United Kingdom operations were consolidated
into the Westlake Village, California facility, while the German operations are
being handled by local representatives in that country. In addition to the
closing of these facilities, there were selective reductions in employees at the
Westlake Village facility. In total, approximately 13 individuals, or 30%, of
the EPG's employees were terminated. Management believes that these actions were
necessary to respond to the slow down in the worldwide electronics industry
served by the EPG, as many major computer and semiconductor manufacturers began
to reduce the previous buildup of inventories. The EPG's Hong Kong office
has not been closed. Management intends to monitor the situation and take
further steps as appropriate.
Quick Response Distribution(R) System
Through the Company's global sourcing and trading network and
proprietary QRD(R) system, the EPG is a worldwide distributor of electronic
components, particularly components for circuit boards. The EPG utilizes the
QRD(R) system for locating and trading electronic components and services
requested by its customers. Upon locating an appropriate component, the EPG
uses the QRD(R) system to purchase and resell the component. Key elements of the
QRD(R) system are its information databases, communications software, a CD-ROM
engineering library and the technical expertise of its staff. The value of the
QRD(R) system is derived primarily from two factors: first, the large size and
international scope of its database, permitting a comprehensive product search
and enabling it to solve customer parts shortages; and second, the speed with
which it can locate, purchase and deliver parts, reducing customers' needs for
inventories, increasing customer inventory turns and facilitating "just-in-time"
procurement systems. Moreover, the QRD(R) system permits the EPG to operate
with minimal inventories, purchasing all parts to customer order.
The heart of the EPG's QRD(R) system is its ability to access and
communicate automatically in real time with thousands of suppliers throughout
the world. A network of 40 high-performance PC workstations is utilized,
integrated into a database, an accounting and
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communication system and a fully-networked integrated computer/telecopier system
to communicate rapidly with over 8,400 vendors worldwide, independent
representatives' offices, and international purchasing offices. Additionally,
on-line access to information regarding hundreds of millions of dollars of
vendor component inventories is available. For immediate alternate sourcing,
the EPG can consult a computerized technical library, which includes a
comprehensive CD-ROM database of circuit board component specifications.
Total EPG sales were approximately 9.4%, 24.8%, and 25.8% of the
Company's total sales in fiscal 1994, 1995, and 1996 respectively.
The EPG's distribution business, through its QRD(R) system, provides
its customers a short lead time between orders and delivery. As a consequence,
there is not a significant backlog of orders in the operation of this business
segment.
COMPETITION
Manufacturing
In general, the principal competitive factors in the markets in which
the Company's IPG Manufacturing segment participates are product quality and
performance, availability, reliability, technical support and price.
In the high-pressure pump manufacturing industry, the Company's IPG -
Manufacturing segment has three major competitors: Teledyne Fluid Systems, a
division of Teledyne Inc.; Schmidt Kranz & Company GmbH; and SC Hydraulic
Engineering Corporation. Certain of the Company's competitors are larger overall
and have greater financial resources than the Company. The Company has a
significantly larger United States and United Kingdom market share in this line
of business than do any of its competitors, but there can be no assurance that
the Company will maintain its market share. In order to remain competitive, the
Company supports the reliability and reputation of its products with customer
service, prompt product delivery, competitive pricing, and comprehensive
technical assistance.
The Company's competitors in the low-horsepower (10 HP or less)
systems market include the same companies that compete with the Company in the
high-pressure pump market and a number of small manufacturers of systems, as
well as unrelated distributors of systems. The Company's competitors in the
higher-horsepower (more than 10 HP) systems market are primarily the same
distributors with which it competes in its distribution business.
Distribution
Unlike its manufacturing business, the Company's IPG distribution
business competes with many other companies that provide substantially similar
products. Management believes that many of these competing companies are larger
and have greater financial strength than the Company.
In its EPG distribution business, the Company competes with numerous
companies in each market it serves, many of which have far greater financial and
other resources than the Company. There is intense competition in electronic
component sourcing and supply to OEMs. Although the Company received a trademark
on its marketing system, it does not have patent or copyright protection on its
proprietary system or technology, nor does it have exclusive franchises for the
products it distributes, and there can be no assurance that traditional
franchised electronic distributor organizations or independent distributors will
not adopt similar communications technologies to offer the same service.
Additionally, purchasing
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departments of OEMs can develop this capability in-house, and many of the larger
OEMs have already established international purchasing offices. In some cases,
the Company competes with franchised distributors, such as Avnet Inc., Arrow
Electronics Inc. and other large organizations, many of which have substantially
greater financial and other resources. The Company also competes with small
independent distributors that locate and source products, but Management
believes that few of these distributors utilize the advanced technology employed
by the Company for servicing its customers.
ENGINEERING, DESIGN, RESEARCH AND DEVELOPMENT
Substantially all of the Company's engineering, design, research and
development ("EDR&D") is performed in connection with its manufacturing business
and falls into three categories. The first and most significant category is the
modification or improvement of existing products. Modifications are usually the
result of application engineering, where the Company tailors a product to fit a
specific application, often at the request of a particular customer. The Company
also engineers improvements that apply to all of its pumps. The second type of
EDR&D involves utilizing Haskel(R) high-pressure technology and know how to
develop new products. The Company's Hydroswage(R), for example, uses Haskel(R)
Specialty Pumps to create high pressure for hydraulically expanding metal tubes
into tube sheets. During fiscal year 1996, the Company introduced a
lower-priced, high quality commercial hydraulic heat exchanger tube expansion
system incorporating the Hydroswage(R) technology. Tube expansion systems, which
are used worldwide in boilers, economizers, and heat exchanging systems, expand
tubing where it connects to tube sheets and other structures to form a high
integrity joint. The third type of EDR&D is the development of products
unrelated to pumps where the Company can utilize its expertise in valve and seal
technology. One product that resulted from this kind of EDR&D is the Company's
line of high-pressure metal seals.
The Company's business requires ongoing EDR&D expenditures. For fiscal
years 1994, 1995 and 1996, the Company incurred approximately $1,186,000,
$1,151,000, and $905,000, respectively, on general engineering and research and
development (R&D) with an increasing part of these expenditures now directed
towards R&D. Due to increased engineering efforts, the Company began tracking
time related to direct production during fiscal year 1996 and that portion of
expenditures applicable to sustaining engineering is now being charged directly
to cost of sales. The Company relies on market opportunities to determine the
allocation of such expenditures. The Company expects to continue to pursue
product development programs and to increase expenditures in all of its
principal product lines and services.
For its electronic component distribution business, the Company's EDR&D
focuses on the continual updating and upgrading of its QRD(R) sourcing and
tracking system. Over the past three years, the Company has customized its
software to optimize rapid worldwide communications and allow it to offer
purchasing solutions to its electronic's OEM market.
CUSTOMER SUPPORT AND SERVICES
The Company provides competitive warranty service for each of its
product lines, as well as follow-up service, training, and support, for which
the Company typically charges separately. Management views customer support
services as a critical competitive factor, as well as a revenue source. The
Company maintains its own service groups and trains its customers and
distributors in the performance of user-level maintenance.
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GOVERNMENT REGULATION
The Company's manufacturing operations are subject to various foreign,
federal, state and local laws, including those restricting the discharge of
materials into the environment. The Company is subject to environmental
regulation governing the generation, transportation and disposal of hazardous
waste, the appropriate labeling of products and materials, storage and use of
hazardous materials, and employee safety training. Applicable federal
environmental regulations include, but are not limited to, the federal
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA");
the Resource Conservation and Recovery Act; the Clean Air Act; and the Clean
Water Act. Individual Company sites may also be subject to similar state and
local environmental regulation. The Company is not involved in any pending or
threatened proceedings that would require curtailment of its operations because
of such regulations. The Company continually expends funds to assure that its
facilities are in compliance with applicable environmental regulations. However,
such expenditures have not been significant in the past, and no significant
future expenditures are expected.
FUNDS IN FOREIGN SUBSIDIARIES
The Company has relied primarily on its income from domestic operations
to pay dividends and make major capital expenditures. In pursuit of a global
growth strategy, the Company generally avoids paying dividends from the earnings
of its U.K. and French subsidiaries, allowing substantial cash balances to be
retained in those countries for internal growth and strategic acquisitions
outside the United States. In July 1995, $3,500,000 was distributed to the
Company by its foreign subsidiaries.
While Management is continually evaluating possible acquisitions and,
from time to time, is engaged in discussions with respect thereto, the Company
currently has no commitments for any material acquisition.
PATENTS AND TRADEMARKS
The Company currently owns a number of United States and foreign
patents and trademarks, which expire at various dates through 2006. Although
Management believes that the patents and trademarks associated with the
Company's various products are of value, Management does not consider any of
them to be essential to the Company's business.
EMPLOYEES
As of May 31, 1996, the Company had 335 employees, including 61 in
general management, administration and finance; 80 in sales and marketing; 25 in
engineering; and 169 in operations, manufacturing, and customer service.
Management believes that the Company's success depends in part upon its ability
to attract, retain, train and motivate highly skilled and dedicated employees.
None of the Company's employees is represented by a labor union, and the Company
has never experienced a work stoppage. Management believes the Company's
relations with its employees are good.
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal facilities are as follows:
Lease Expiration
Owned/ Square Feet Dates, Including
Location Leased Under Roof Occupied By Option Periods
- -------- ------ ----------- ----------- ----------------
Burbank, California Owned 103,500 Corporate, ITD, --
Controls Division
Denver, Colorado Leased 500 Controls Division January 1997
American Fork, Utah Leased 500 Controls Division Month-to-Month
Kent, Washington Leased 1,500 Controls Division January 1998
San Bruno, California Leased 500 Controls Division Month-to-Month
San Diego, California Leased 500 Controls Division Month-to-Month
Brisbane, Australia Leased 500 ITD Month-to-Month
Sunderland, England Owned 41,000 HESL --
Manchester, England Leased 7,000 HESL October 1999
Lille, France Owned 7,000 HESL --
Aberdeen, Scotland Leased 1,000 HESL October 2009
Wesel, Germany Leased 2,366 HESL December 1996
Westlake Village, Leased 6,550 MGE September 1998
California
Hong Kong Leased 500 MGE April 1997
Singapore Leased 500 ITD December 1996
The Company's corporate headquarters and principal executive offices
are located at the Burbank, California premises.
The Company's IPG - Manufacturing business segment uses the facilities
located in Burbank, California; Sunderland and Manchester, England; Lille,
France; and Wesel, Germany. The Company's IPG - Distribution business segment
uses the facilities located in Burbank, California; Denver, Colorado; American
Fork, Utah; Kent, Washington; San Diego, California; San Bruno, California;
Sunderland, England; Aberdeen, Scotland; Singapore; and Brisbane, Australia. The
Company's EPG business segment uses the facilities at Westlake Village,
California and Hong Kong.
Management believes that the facilities used by the Company are
suitable and adequate for the Company's business as presently conducted.
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ITEM 3. LEGAL PROCEEDINGS
Other than as set forth below, the Company is not a party to any legal
proceedings other than routine litigation incidental to its business.
San Fernando Valley Area 2 Superfund Site
The Environmental Protection Agency (the "EPA") has named the Company a
Potentially Responsible Party ("PRP"), as that term is defined in applicable
law, for an area known as the San Fernando Valley Area 2 Superfund Site (the
"Superfund Site"), in which the groundwater has been contaminated by solvents.
Of the 32 parties named by the EPA as PRPs for the Superfund Site, 27 parties,
including the Company, have formed the Glendale PRP Group (the "Group"). Under
applicable law, most notably the federal CERCLA, the Company might be jointly
and severally liable with other PRPs for the full cost of cleaning up the
Superfund Site, including the cost of the remedial design phase discussed below,
which the EPA currently estimates to be approximately $48,000,000 (the
"Remediation Cost"). There is also legal authority, however, which holds that
when the approximate extent of contamination caused by each PRP can be
determined, liability must be allocated among the PRPs in proportion to their
relative contribution. Based on this authority, Management and the Company's
environmental counsel believe there will be a rational, pro rata allocation of
responsibility for the cleanup of the Superfund Site among the participating
PRPs. Management and the Company's environmental counsel believe, based upon
extensive research conducted on the Company's site, that the Company was, at
most, a small contributor to groundwater contamination at the Superfund Site.
On December 21, 1993, an independent mediation team engaged by the
Group presented a confidential proposed interim allocation schedule (the
"Interim Allocation"), which allocated 1.76% responsibility to the Company for
the remedial design phase. In May 1994, 23 of the 27 parties (including the
Company) signed an Administrative Order on Consent ("AOC"), by which the parties
committed themselves to carrying out the initial remedial design phase.
Subsequent to the Interim Allocation, the Group delivered data to the EPA
regarding the existence of additional PRPs. Based upon that data, the EPA named
additional PRPs in May and June 1995. Several of those newly named PRPs joined
the Group, such that currently there are 32 members of the PRP group.
In June 1995, the initial phase of an allocation process began for the
purpose of dividing the liability between Lockheed Martin Corporation
("Lockheed"), as the only Burbank-based PRP, on the one hand, and all other
PRPs, all of whom are Glendale-based (the "Glendale Parties"), on the other hand
(the "Burbank-Glendale Split"). In Fall 1995, the Group began the process of
reallocating percentages among the Group members with the aim of arriving at a
final allocation relative to the Remediation Cost (the "Final Allocation"). The
Group engaged the services of technical scientists as arbitrators who determined
that Lockheed was to bear 58.8% of the Remediation Cost and the Glendale Parties
were to bear 41.2% of the Remediation Cost. The Glendale-Burbank Split decision
has been challenged by Lockheed and has not yet been confirmed by a court. Based
upon the advice and opinion of environmental counsel, the Company believes that
it is reasonable to assume that the Glendale-Burbank Split arbitration award
will be confirmed.
In July 1996, the Glendale Parties began a mediation regarding the
reallocation of the 41.2% of the Remediation Costs. While the mediation is not
yet complete, the Company believes, based upon the advice and opinion of its
environmental counsel, that the Company's share of the 41.2% of the Glendale
Parties' portion will not exceed 1.5%, or approximately $300,000. It is the hope
of the Group that the Final Allocation will be concluded prior to the time the
EPA will request receipt of a signed AOC regarding the 12-year remedy phase.
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In addition to the Remediation Cost, the EPA has informed the Group
that it intends to seek reimbursement from PRPs for some portion of the
approximately $13,000,000 of expenses it has incurred in studying the Superfund
Site and three adjacent superfund sites. The EPA also has the right to seek
recovery from PRPs for additional administrative expenses it incurs in studying
the superfund sites. Those expenses are not currently quantifiable or subject to
reasonable estimation. The EPA has informed the Company's environmental counsel
that only a portion of the $13,000,000 is attributable to the Superfund Site and
the Company's counsel does not believe it is unreasonable to estimate that
approximately 25% of such amount will be attributable to the Superfund Site.
Assuming that 25% of the claimed costs are attributable to the Superfund Site,
the Company believes, based upon advice and opinion of its environmental
counsel, that the Company's share of that amount would be approximately $50,000.
In the event that the pending mediation does not successfully conclude
in a mediated settlement, the Company believes, based upon the advice and
opinion of it environmental counsel, that the Company's share of the Remediation
Cost, whether determined by the EPA or by a court of law, would nevertheless be
approximately 1.5% of the Glendale Parties' share as determined by the
Glendale-Burbank Split. Furthermore, the Company believes, based upon the advice
and opinion of its environmental counsel, that if the Glendale-Burbank Split is
not confirmed by the Court, that the Company's share would not be significantly
impacted.
On-Site Contamination
The soil at the property occupied by the Company at 100 East Graham
Place, Burbank, California has been contaminated by hazardous waste, primarily
at one pit with a surface area of less than ten square feet (the "On-Site
Contamination"). The extent of such contamination has been quantified by
environmental consultants and engineers. The cost of such soil and groundwater
assessment was approximately $250,000, including the cost of installation of
five groundwater wells, which the Company has installed pursuant to a directive
of the Regional Water Quality Control Board ("RWQCB"). Based on such analysis,
Management estimates that approximately 250 cubic yards of contaminated soil has
been affected. The remediation system to clean the on-site contamination was
installed in July 1995, and was continuously operational for about four months,
until November 1995, by which time the contamination in the soil had been
reduced by more than 90% of the original concentrations. The Company had spent
approximately $71,000 on mobilizing, installing and operating the remediation
system through December 1995. The Company's environmental consultants and
engineers believed that maximum possible results were obtained after four months
of operation of the remediation system. However, the RWQCB requested that the
system be reactivated for a 90-day period to ascertain if additional benefits
were possible. The Company completed the additional 90-day reactivation period
and has met the RWQCB's objectives. The estimated costs associated with such
reactivation are approximately $45,000.
Lubrication Corporation of America
The Company has been named a PRP regarding contamination of a site
operated by Lubrication Corporation of America ("LCA"). LCA operates a used oil
recycling facility in the Santa Clarita flood plain, to which a portion of the
Company's used oil was sent for recycling. In 1992, the Company was informed by
the California Department of Toxic Substances Control that the Company's total
contribution to the contamination was about 2,500 gallons, which constituted
approximately .05% of the total contamination identified at the LCA site.
Recently, the Company was informed by the Department of Toxic Substances Control
that its contribution was in the amount of 4,545 gallons. The Department of
Toxic Substances Control has negotiated a settlement with approximately 20 other
LCA PRPs who collectively constitute about 6% of the total contamination found
at the LCA site. The Department of
13
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Toxic Substances is also negotiating with the United States military which,
according to the Department of Toxic Substances Control, is responsible for more
than 70% of the total contamination found at the LCA site. The Company has been
offered a full release from the Department of Toxic Substances Control relative
to the LCA site if the Company pays approximately $37,000. The Company is
considering this settlement offer.
Insurance and Reserves
When the Company initially tendered the EPA claim relative to the
Superfund Site, the Company's insurers refused to pay the Company's defense
costs. The Company brought litigation against its insurers in which the Company
sought an order that its insurers must defend and indemnify the Company with
respect to Superfund Site litigation. In August 1995, the trial court ruled that
the Company's insurers must reimburse the Company for its past defense costs and
must pay its defense costs in the future. As a result of this ruling, the
Company expects a substantial recovery of its defense costs. Currently, the
Company is negotiating with its carriers who have indicated their willingness to
pay the Company in excess of $600,000 in past defense costs incurred through May
31, 1996. They have also indicated their willingness to pay all defense costs
incurred subsequent to May 31, 1996, at a reasonable rate. Litigation is pending
as to whether the Company's insurers must indemnify the Company for the
Superfund Site liability.
The Company established an Environmental Reserve in the amount of
$1,445,000 for contingent liabilities that may arise in connection with the
Superfund Site, the On-Site Contamination and other environmental matters. As of
May 31, 1993 the Company had reserved $510,000 to perform testing and cleanup of
soil contamination at its facility in Burbank in accordance with a mandate from
the RWQCB. The Company increased the Environmental Reserve when the EPA
established its $48,000,000 estimate of the Remediation Cost. At May 31, 1996,
the Environmental Reserve was $1,006,000. In light of the results of the
Glendale-Burbank Split arbitration and the progress of the Glendale Parties'
mediation, the Company believes, based upon the advice and opinion of its
environmental counsel, that the Company's liabilities will be less than the
amount currently in reserves for these matters. However, until further
definitive facts develop regarding these matters, the reserve amount will not be
changed.
The Company has not included any specific amount in the Environmental
Reserve for litigation defense costs, which cannot be estimated but could be
substantial if the pending mediation does not result in a settlement among the
PRPs. However, in light of the court order regarding the obligation of the
insurers to pay defense costs, the impact upon the Company in the event of
litigation, should not be substantial.
Due to the nature of environmental matters, there can be no assurance
that the Environmental Reserve will be adequate to cover any contingent
liabilities arising from the above-referenced environmental matters or that any
liability in excess of the Environmental Reserve will not have a materially
adverse effect on the Company's results of operations or financial condition.
Compliance with Existing Regulations
Although Management anticipates increases in the Company's cost of
ongoing compliance with existing environmental regulations due to inflation,
Management believes that the cost of compliance will not have a material adverse
effect on the Company's financial condition.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of fiscal 1996.
15
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PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock is quoted on the Nasdaq Stock Market
under the symbol "HSKL". Prior to November 1, 1994, there was no public trading
market for the Company's Common Stock. The following table sets forth the high
and low sales prices for the Company's Class A Common Stock as reported by the
Nasdaq Stock Market:
Fiscal 1995 High Low
----------- ---- ---
First Quarter -- --
Second Quarter $10 1/2 $ 9
Third Quarter $12 1/2 $ 8 1/2
Fourth Quarter $10 1/8 $ 5 1/4
Fiscal 1996
-----------
First Quarter $ 8 $ 5 1/8
Second Quarter $ 7 $ 5
Third Quarter $ 7 3/8 $ 5 1/4
Fourth Quarter $ 7 1/2 $ 5 3/4
On August 16, 1996, the closing price of the Company's Class A Common
Stock on the Nasdaq Stock Market was $ 8 5/8.
On August 9, 1996, there were approximately 483 holders of record of
the Company's Class A Common Stock.
There is no established trading market for shares of the Company's
Class B Common Stock. As of August 16, 1996, all of the Company's Class B Common
Stock was held by eight irrevocable trusts. Altogether, there are three
beneficiaries of these trusts and each trust has only one beneficiary. All eight
trusts have the same co-trustees.
The Company paid cash dividends in the amount of $.28 per share in
fiscal years ended May 31, 1995 and 1996, on shares of its Class A and Class B
Common Stock. The Company currently expects that comparable cash dividends will
continue to be paid.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the
three years in the period ended May 31, 1996 are derived from the consolidated
financial statements of the Company and notes thereto included elsewhere herein
and audited by Deloitte & Touche LLP, as set forth in their report (which report
is based in part on the work of other auditors), also included elsewhere herein.
The selected consolidated financial data for the years ended May 31, 1992 and
1993 are derived from audited consolidated financial statements of the Company
not included herein. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this Report.
Year Ended May 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
OPERATING PERFORMANCE:
Revenues $35,465,000 $40,054,000 $41,354,000 $51,701,000 $56,792,000
Income before taxes 4,536,000 3,110,000 33,000 1,976,000 4,544,000
Net income 2,452,000 2,208,000 3,000 1,019,000 2,547,000
Cash Flow from Operations 1,608,000 2,390,000 496,000 2,633,000 2,550,000
FINANCIAL POSITION:
Cash & Cash Equivalents $12,966,000 $ 9,736,000 $ 7,120,000 $ 8,806,000 $ 8,239,000
Working Capital 23,251,000 22,287,000 17,172,000 20,969,000 21,891,000
Total Assets 33,596,000 34,506,000 44,411,000 44,295,000 45,360,000
Long-term Debt 92,000 827,000 10,187,000 3,514,000 3,366,000
Shareholders' Equity 27,410,000 25,036,000 24,384,000 31,007,000 32,220,000
PER SHARE DATA:
Net Income $ 0.63 $ 0.57 $ -- $ 0.23 $ 0.54
Cash Dividends 0.53 0.55 0.36 0.28 0.28
Book Value 7.87 7.46 6.33 6.56 6.81
Average shares outstanding 3,898,981 3,876,345 3,929,349 4,500,783 4,738,266
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The consolidated financial statements include the results of the
Company and all of its operating divisions and subsidiaries. The Company's
operations are headquartered in the United States and Europe. The Company is
organized and operates as two groups: the IPG and the EPG.
The IPG's operations are headquartered in Burbank, California and
consist of the Company's Industrial Technologies Division ("ITD"), Haskel
Controls Division ("Controls"), and the Company's wholly owned subsidiary,
Haskel Energy Systems, Ltd. ("HESL"), located in Sunderland, England and its
divisions and subsidiaries. The ITD is the U.S. manufacturer of
Haskel(R) Specialty Pumps, Haskel(R) Systems, high-pressure valves,
regulators and accessories to complement these products. Controls distributes
product lines used primarily in the fluid power business, the largest line of
which is the Company's products. HESL represents the Company's European
industrial products operations with offices located in Sunderland and
Manchester, England; Aberdeen, Scotland; Lille, France; Wesel, Germany; and
the most recent addition, after the completion of the fiscal year, in
Zoetermeer, the Netherlands. HESL and its divisions and subsidiaries primarily
distribute Haskel(R) Specialty Pumps and design and manufacturer Haskel(R)
Systems for specific applications required by customers in Europe, India,
and the Middle East. HESL and its divisions and subsidiaries also manufacture
products needed for HESL's markets that are not produced in the United States,
such as the Jetflow Airmover(R), and distribute specialty products of other
manufacturers.
The EPG consists of M.G. Electronics, Inc. ("MGE"), headquartered in
Westlake Village, California, and its purchasing office in Hong Kong. MGE (UK),
located in Sunderland, England, and MGE Germany, located in Frankfurt, Germany,
were included in the EPG's operations until May 1996 when the Company closed
these facilities. The EPG provides purchasing services, product substitution and
solutions to shortage and delivery problems of OEMs of electronic components.
The EPG specializes in locating sources (which includes researching, locating,
evaluating and supplying) circuit board-level components, such as integrated
circuits, capacitors, transistors and resistors.
ENVIRONMENTAL ISSUES
At May 31, 1996, the Company had reserves of approximately $1,006,000
related to its environmental liabilities. Based on the advice and opinion of its
environmental counsel, Management believes that these reserves are adequate.
The Company has four matters pending concerning environmental issues.
They are: 1) Superfund Site; 2) On-site remediation; 3) LCA litigation; and 4)
Insurance litigation.
Superfund Site. The Company has been named a PRP at the Superfund Site.
(See Note 12 of Notes to Consolidated Financial Statements.) The EPA has divided
the Superfund Site into two regions, Glendale and Burbank, and negotiations are
being conducted between regions, and among PRP members, to reallocate the
respective shares of the regions and PRP members. The Company and other PRP's
may be jointly and severally liable for the remediation of this site. However,
based upon advice and opinion of environmental counsel, the Company, which is a
participant in the Glendale region, does not anticipate its proportionate share
of the remediation costs to exceed the amount already reserved.
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On-Site Remediation. The Company contracted with a third party to
install a vapor extraction system designed to remove below-surface contaminants
at the Company's Burbank facility. This system was operated for several months
during the fiscal year and lowered the contaminant levels to those recommended
by the RWQCB. After an additional period of required testing, the system was
reactivated for an additional 90-day period. Currently, the Company has complied
with all RWQCB's requests.
LCA Litigation. The Company has been offered a full release from the
California Department of Toxic Substances Control relative to the LCA site in
exchange for approximately $37,000. The Company is considering this settlement
offer.
Insurance Litigation. In August 1995, the Company received a favorable
ruling from the trial court with respect to its insurance litigation against its
main carriers. This ruling requires Company's insurance carriers to provide the
defense costs for its environmental matters. Currently, the Company is
negotiating with its carriers who have indicated their willingness to pay the
Company in excess of $600,000 in past defense costs through May 31, 1996 and all
defense costs incurred subsequent to that date. Litigation is pending as to
whether the Company's insurers must indemnify the Company for the Superfund Site
liability.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the
percentage of net sales represented by certain items included in the
Consolidated Statements of Income:
Year Ended May 31,
---------------------------
1994 1995 1996
----- ----- -----
Sales ............................................... 100.0% 100.0% 100.0%
Cost of sales ....................................... 60.4 61.8 56.5
----- ----- -----
Gross profit ........................................ 39.6 38.2 43.5
Selling expenses .................................... 17.1 15.5 15.8
General and administrative expenses ................. 15.9 16.1 18.2
Engineering design, research and development expenses 2.9 2.2 1.6
Restructuring costs ................................. 1.5 -- --
Environmental reserve costs ......................... 2.5 -- --
----- ----- -----
Total operating costs ............................... 39.9 33.8 35.6
----- ----- -----
Income (loss) from operations ....................... (.3) 4.4 7.9
Other income (expense) .............................. .4 (.6) .1
----- ----- -----
Income before income taxes .......................... .1 3.8 8.0
Provision for income taxes .......................... .1 1.8 3.5
----- ----- -----
Net income .......................................... 0.0% 2.0% 4.5%
===== ===== =====
YEAR ENDED MAY 31, 1996 ("1996") COMPARED TO YEAR ENDED MAY 31, 1995 ("1995")
Sales in 1996 increased by $5,091,000, or 9.8%, to $56,792,000, from
$51,701,000 in 1995. The IPG's sales increased $3,287,000 (8.5%) from
$38,882,000 in 1995 to $42,169,000 in 1996 primarily due to expanding
international markets, especially throughout Europe and the Pacific Rim, and
sales of new and private-branded products. The EPG's sales increased $1,804,000
(14.1%) from $12,819,000 in 1995 to $14,623,000 in 1996. Approximately
$1,354,000 of this increase was due to the EPG's subsidiary in England, which
operated for a full year in 1996 compared to approximately nine months in 1995.
The remaining increase was principally the result of strong market demand in the
United States during the first half of 1996 leading up to the Christmas holiday
season as compared to the first six months in 1995. In the second half of 1996,
the EPG's sales declined concurrently with a slow down in the electronics
industry and were $3,378,000, or 42%, lower as compared to the same six-month
period in 1995.
Cost of sales was $32,082,000 in 1996, compared to $31,937,000 in 1995,
an increase of less than one percent. Cost of sales as a percentage of sales was
56.5% in 1996, as compared to 61.8% in 1995, a decrease of 5.3 percentage
points. Cost of sales as a percentage of sales for the IPG was 54.4% in 1996,
compared to 57.6% in 1995. The decrease in the percentage of cost of sales to
sales is due principally to the additional sales volume which resulted in lower
overhead rates as fixed costs were allocated over a larger
20
21
number of units. Additionally, the IPG continues to improve its manufacturing
processes resulting in lower overall product costs. For the EPG, cost of sales
as a percentage of sales were 62.4% in 1996 as compared to 74.4% in 1995. During
1995, approximately $4,000,000 of EPG sales were derived from high-volume, low
gross margin "memory" components which normally earn gross profit percentages,
on average, of 10% compared to an average of more than 33% on sales of other
electronic components. During 1996, the EPG did not sell a significant volume of
"memory" product and, as such, cost of sales as a percentage of sales decreased.
Selling, general and administrative, and engineering, ("Operating")
expenses increased $2,770,000 from $17,491,000 in 1995 to $20,261,000 in 1996
and, as a percentage of sales, such expenses increased from 33.8% in 1995 to
35.6% in 1996. The higher expenses in 1996 as compared to 1995 resulted
principally from increases in selling and marketing costs associated with the
Company's efforts to expand market share worldwide, and from higher
administrative costs associated with building the Company's infrastructure, as
well as public ownership. Approximately $1,655,000 of the increase was due to
increased costs at the EPG due to the expansion of its European and U.S.
operations during 1996 as compared to 1995. As a result of the slow down in the
electronics industry, in May 1996, the Company reorganized its EPG operations
resulting in the closure of its offices in Europe and a reduction of 13
individuals, or approximately 30%, of its employees at its U.S. facility.
Other income (expense) in 1996 reflected net other income of $95,000 as
compared to net other expense of $297,000 in 1995. The change from 1995 to 1996
is primarily a result of decreased interest expense in 1996 compared to 1995.
The lower interest expense was due to the reduction of a significant portion of
the Company's debt in the third quarter of 1995 as well as lower interest rates
in 1996. In addition, other expense in 1995 includes the write-off of a joint
venture investment of $216,000.
The provision for income taxes in 1996 increased $1,040,000 from 1995
principally due to the increase in taxable income. The effective tax rate in
1996 was 43.9% compared to 48.4% in 1995. The effective tax rate in 1995 was
higher due primarily to additional income taxes associated with dividends from
foreign subsidiaries.
YEAR ENDED MAY 31, 1995 ("1995") COMPARED TO YEAR ENDED MAY 31, 1994 ("1994")
Sales in 1995 increased by $10,347,000, or 25.0%, to $51,701,000, from
$41,354,000 in 1994. The IPG had sales increases of approximately 3.8% to
$38,882,000. The sales increases in the IPG's manufacturing operations were
attributable to new product introductions and improved bookings of operating
systems using the Company's products. The distribution operations of the IPG
experienced a sales decline from 1994 of approximately 4.2%, due principally to
distribution lines lost as a result of the business restructuring begun in 1994
which eliminated unprofitable sales and distribution facilities in the U.S. The
EPG experienced a sales increase of $8,922,000 from 1994, and the IPG had a
$1,425,000 sales increase from 1994. Sales in 1995 included $12,819,000 (24.8%
of consolidated sales) from the EPG. Sales in 1994 include operations from this
group from late November 1993 (after the acquisition of MGE) of $3,897,000 (9.4%
of 1994 consolidated sales). Evaluated on a full year, pro forma basis, the EPG
sales increased more than 58.1% over the same period in 1994. The increased
sales in the EPG operations resulted from a strong market for electronic
components and from new sales representative programs implemented in 1995.
Increased sales of high volume programmable memory components also contributed
to the EPG's sales increase.
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Cost of sales in 1995 was $31,937,000 as compared with $24,983,000 in
1994, an increase of 27.8%. Cost of sales as a percentage of sales in 1995 was
61.8%, an increase of 1.4 percentage points as compared with 60.4% in 1994. Cost
of sales as a percentage of sales for the IPG was 57.6% in 1995 as compared with
61.4% in 1994. During the fourth quarter of 1995, the Company recorded inventory
valuation reserves of approximately $400,000 to reflect the impact of slow
moving and potentially obsolete parts which occurred as a result of changes in
product demand and product lines. The decrease in the IPG's costs as a
percentage of sales is attributable principally to cost reductions related to
the restructuring initiated in 1994 within the U.S. manufacturing operations.
The restructuring savings were partially offset by additional costs incurred to
meet customers' shortened delivery requirements and significant price
competition. This competition is experienced primarily in the IPG's sales of
systems in the low to mid price range. The IPG's meeting customer delivery
schedules and delivering complete systems on time are important to IPG's
strategic plans. Cost of sales as a percentage of sales for the EPG was 74.4% in
1995 as compared with 51.3% in 1994. In 1995, approximately $4,000,000 of EPG
sales were derived from high-volume, low gross margin transactions. This
resulted in the higher cost of sales as a percentage of sales in 1995 as
compared with 1994.
Operating expenses in 1995 were $17,491,000, or 33.8% of sales, as
compared with $14,850,000, or 35.9% of sales, in 1994. Approximately $1,884,000
of the $2,641,000 increase in expenses is attributable to the EPG which was
included in consolidated operations in 1994 for only the six months following
the acquisition of MGE. The remainder of the increase is attributable
principally to costs connected with the IPG's increased sales volume; costs
associated with being a publicly-owned corporation; and increased costs
associated with marketing, engineering and the expansion of foreign operations.
During the fourth quarter of 1995, reserves for uncollectible accounts were
increased by approximately $300,000 for customer accounts which were determined
to be uncollectible during the quarter. The cost increases were offset partially
by savings from the restructuring initiated in 1994. Operating expenses in 1994
include, in addition to the selling, general and administrative, and engineering
expenses, restructuring costs of $620,000, and environmental reserve costs of
$1,039,000.
Other income (expense) in 1995 reflected net other expense of $297,000
as compared to net other income of $171,000 in 1994. The increased expenses in
1995 are primarily attributable to interest charges associated with the debt
incurred in connection with the MGE acquisition for a full year in 1995 as
compared to approximately six months in 1994. In addition, other expense in 1995
includes the write-off of a joint venture investment of $216,000 during the
fourth quarter.
The provision for income taxes in 1995 increased by $927,000 from 1994
attributable principally to the increase in taxable income. The effective tax
rate in 1995 was 48.4% compared to 90.9% in 1994. The effective tax rate in 1995
is increased by additional income taxes associated with dividends received from
foreign subsidiaries. The high effective tax rate in 1994 results principally
from the tax on intercompany profit recorded on shipments that remained in the
European operations' inventory at the fiscal year end.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations and met its
capital requirements primarily through cash generated from operations.
Year Ended May 31,
---------------------------------------
1994 1995 1996
---- ---- ----
Cash and cash equivalents ......................... $7,120,000 $8,806,000 $ 8,239,000
========== ========== ===========
Net cash provided by operating activities ......... $ 496,000 $2,633,000 $ 2,550,000
========== ========== ===========
Net cash used in investing activities ............. $6,637,000 $1,252,000 $ 1,341,000
========== ========== ===========
Net cash provided by (used in) financing activities $3,669,000 $ 188,000 $(1,726,000)
========== ========== ===========
WORKING CAPITAL AND LIQUIDITY
The Company had working capital at May 31, 1996 of $21,891,000 as
compared to $20,969,000 at May 31, 1995.
Net cash provided by operating activities was $496,000, $2,633,000, and
$2,550,000 in 1994, 1995 and 1996, respectively. The decrease in net cash
provided by operating activities in 1996 as compared to 1995 is primarily the
result of increased inventory and accounts receivable balances due to increased
sales levels and newly acquired operations. This decrease in cash flow was
offset by the significant increase in earnings. The increase in net cash
provided by operating activities in 1995 as compared to 1994 is principally the
result of increased operating earnings and favorable currency exchange rate
fluctuations. Depreciation and amortization was $1,011,000, $1,515,000, and
$1,825,000 in 1994, 1995 and 1996, respectively, which included approximately
$377,000, $754,000, and $756,000 in 1994, 1995, and 1996, respectively, of
amortization expense associated with purchased technology and goodwill recorded
in connection with the MGE acquisition.
Net cash used for investing activities was $6,637,000, $1,252,000, and
$1,341,000 in 1994, 1995 and 1996, respectively. Capital expenditures of
$1,330,000 and $1,272,000 represent the primary cash used for investing
activities in 1995 and 1996, respectively. Cash used for investing activities in
1994 was due primarily to the purchase of MGE and Environclean for an aggregate
of $5,770,000, net of cash and cash equivalents acquired, and capital
expenditures totaling $1,279,000 in 1994, offset in part by a decrease in notes
receivable of $549,000 due to payments made in 1994.
Net cash used in financing activities in 1996 was $1,726,000 and
represented principal payments of long-term debt as well as the payment of
dividends. Net cash provided by financing activities was $188,000 in 1995. Net
cash of approximately $6,297,000 ($6,670,000 in 1995, before accounting for
deferred costs of $373,000 in 1994) was raised in connection with the Company's
initial public offering. Following the offering, the Company paid a related
party promissory note using $2,000,000 in cash, and renegotiated its credit
facility with its bank, substantially resulting in the total long-term debt
reduction of $3,173,000 for the year. Cash dividends of $1,201,000 were also
paid during 1995. Net cash provided by financing activities was $3,669,000 in
1994 and was attributable to proceeds from the $6,000,000 loan used for the
purchase of MGE, offset in part by dividends paid in 1994.
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24
The effect of the exchange rates on cash and cash equivalents resulted
in a decrease in cash and cash equivalents of $50,000 in 1996, an increase in
cash and cash equivalents of $117,000 in 1995 and a decrease in cash and cash
equivalents of $144,000 in 1994.
The Company maintains substantial cash balances in Europe consisting of
accumulated earnings from its U.K. and French subsidiaries. The Company intends
to use these funds primarily for acquisitions outside the United States and
expansion of the Company's European operations. The Company currently maintains
approximately $1.6 million of these European cash balances in United States
dollars in order to minimize foreign exchange risks and because it is unable to
anticipate in which currencies it will make future acquisitions and investments.
In July 1995, $3,500,000 was distributed to the Company by its foreign
subsidiaries.
See "Consolidated Statements of Cash Flows" for supplemental
disclosures of cash flow information related to the Company's acquisitions.
At May 31, 1996, the Company's principal source of liquidity was
$8,239,000 in cash and cash equivalents. The Company believes that these funds
plus funds generated by operations, and the available borrowing capacity under
its bank credit line, will be sufficient to finance its working capital and
capital expenditure requirements for at least the next 12 months.
CREDIT FACILITIES
On October 14, 1993, the Company issued a $3,500,000 promissory note in
connection with the acquisition, from a related party, of the land and building
previously leased at its Burbank facility. The $3,500,000 note was paid
subsequent to completion of the initial public offering by payment of $2,000,000
cash and offsetting the $1,500,000 balance of a note receivable from this
related party. (See Notes 4 and 11 of Notes to Consolidated Financial
Statements.)
In November 1993, the Company borrowed $6,000,000 in term debt from a
bank to finance the acquisition of MGE. As of May 31, 1996, the balance of the
term debt was $2,739,000 and bears interest at the LIBOR rate plus 1 3/4% (6.87%
at May 31, 1996). Additionally, the Company has obtained, from the same bank, a
$5,000,000 revolving line of credit and a $4,000,000 acquisition line of credit
available for use in making acquisitions or capital expenditures. Borrowings
under the acquisition credit line will be converted annually into five-year term
loans with interest-only payments in the first year of conversion. Borrowings
under the lines of credit bear interest at the LIBOR rate plus 1 1/2% (6.62% at
May 31, 1996) for the revolving line of credit, and 1 3/4% (6.87% at May 31,
1996) for the acquisition line of credit. At May 31, 1996, there were no
outstanding balances under the lines of credit.
All amounts advanced under the loan agreement, as amended, with the
Company's bank (the "Loan Agreement") are secured by a pledge of 50 percent of
the outstanding shares of HESL. The Loan Agreement requires, among other things,
that the Company maintain a specified minimum consolidated tangible net worth of
not less than $18,000,000; minimum working capital of not less than $15,000,000;
earnings before income taxes, depreciation and amortization equal to or greater
than 1.25 times required debt service, dividends and capital expenditures;
certain other ratios and insurance. In addition, the Loan Agreement restricts
the Company's ability to incur indebtedness, pay dividends in the event of a
default under the Loan Agreement, consummate mergers or acquisitions without
prior Bank approval in which the consideration paid by the Company exceeds the
acquisition line, or
24
25
make annual aggregate capital expenditures exceeding $2,000,000. The revolving
credit portion of the Loan Agreement provides that for at least 30 consecutive
days during each twelve-month period there shall be no loans outstanding under
the revolving credit line. As of May 31, 1996, the Company was in compliance
with all of the covenants of the Loan Agreement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Consolidated Financial Statements of Haskel
International, Inc. and Subsidiaries included herein and listed on the Index to
Consolidated Financial Statements set forth below.
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Reports ........................................... F-1
Consolidated Balance Sheets
at May 31, 1995 and 1996 ................................................ F-3
Consolidated Statements of Income
for the years ended May 31, 1994, 1995 and 1996 ......................... F-5
Consolidated Statements of Shareholders' Equity
for the years ended May 31, 1994, 1995 and 1996 ......................... F-6
Consolidated Statements of Cash Flows
for the years ended May 31, 1994, 1995 and 1996 ......................... F-7
Notes to Consolidated Financial Statements .............................. F-9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
NONE
25
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company are as follows:
Name Age Position with Company
- ---- --- ---------------------
R. Malcolm Greaves 57 President, Chief Executive Officer and Director
Robert A. Smith 55 Executive Vice President and President -
Industrial Products Group
Doranda Frison 44 President - Electronic Products Group and
President of MGE
Lonnie D. Schnell 47 Chief Financial Officer and Secretary
James C. Minyard 54 Formerly President - Electronic Products Group
and President of MGE
Maury S. Friedman 46 Formerly Executive Vice President, President -
Electronic Products Group and Director
Edward Malkowicz 56 Chairman of the Board and Director
Marvin L. Goldberger 74 Director
Marvin Goodson 77 Director
Stanley T. Myers 59 Director
Terrence A. Noonan 58 Director
William L. Slover 74 Director
R. Malcolm Greaves was appointed President and Chief Executive Officer
of the Company on February 14, 1996. He joined HESL as General Manager in
January 1989 and was appointed Managing Director of HESL in June 1990. Mr.
Greaves has served as a director of the Company since September 1990. Between
January 1994 and February 1995, he served as Executive Vice President in
charge of worldwide pump operations, after serving as Vice President, Chief
Operating Officer for Europe, the Middle East, India and Africa from April 1993.
Robert A. Smith joined the Company as President - Industrial Products
Group in February 1995 and has also served as an Executive Vice President of the
Company since November 1995. From February 1991 through February 1995, Mr. Smith
was employed by Puroflow, Inc. and its affiliates, including Puroflow Corp.
(where he served as President and a director from February 1991 to October
1992), and Engineered Filtration Company (where he served as President from
October 1992 to January 1994). Mr. Smith has also served as a director of
Industrial Tools Inc. since 1978 and served as its President from January 1994
to February 1995. These companies are manufacturers of filtration and machining
systems used,
26
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among other things, in airbags. Mr. Smith is currently Vice Chairman of the
Board of Puroflow, Inc.
Doranda Frison joined the Company on July 8, 1996 as President -
Electronic Products Group and President of MGE. Ms. Frison had previously served
as Vice President Sales/Marketing of MGE from January 1989 to August 1994. From
October 1994 through July 1996, she served as a sales and marketing consultant
to various telecommunications and technology companies, primarily AT&T's Western
Region operations.
Lonnie D. Schnell joined the Company as Chief Financial Officer and
Secretary in November 1994. From August 1990 through October 1994, Mr. Schnell
was Vice President and Controller of Teleflex Control Systems, Inc., an
electromechanical actuator and cargo handling business.
James C. Minyard joined the Company as President of MGE in August 1994.
He was promoted to President - Electronic Products Group on April 1, 1996 and
continued to serve as President of MGE. From 1986 until July 1994, Mr. Minyard
served as President of CompuScan, Inc., a company that specialized in automatic
data collection using bar-code technology. Mr. Minyard's employment with the
Company and MGE was terminated on July 1, 1996.
Maury S. Friedman joined the Company as Executive Vice President and a
director in November 1993. He was elected President and Chief Executive Officer
in February 1994 and Chairman of the Board in November 1994. He was named to the
new position of President - Electronic Products Group in April 1995, at which
time he resigned as Chairman of the Board, President and Chief Executive
Officer. Mr. Friedman resigned as a director on January 3, 1996 and as President
- - Electronic Products Group and Executive Vice President on March 31, 1996. He
currently serves as a consultant to MGE.
Edward Malkowicz has been a director of the Company since November 1994.
He was elected Chairman of the Board in April 1995. Between 1992 and May 1995,
Mr. Malkowicz taught business courses at Riverside College in Riverside,
California.
Marvin L. Goldberger, Ph.D., has been a director of the Company since
1982. Since January 1993, Dr. Goldberger has been a professor of physics at the
University of California, San Diego. From September 1991 through December 1992
he was a professor of physics at the University of California, Los Angeles, and
from 1987 through July 1991 he served as the Director of the Institute for
Advanced Studies at Princeton, New Jersey. Dr. Goldberger served as a director
of General Motors from January 1981 through June 1993 and is currently a member
of the General Motors Corporate Advisory Council. He is currently Dean of
Natural Sciences, University of California, San Diego and President Emeritus of
the California Institute of Technology.
Marvin Goodson has been a director of the Company since 1971. Mr.
Goodson is a founder and has been a member of the law firm of Goodson and
Wachtel A Professional Corporation and its predecessors since 1952 and has been
counsel to the Company and its predecessors since 1952.
Stanley T. Myers has been a director of the Company since November 1994.
Mr. Myers has served as President and Chief Executive Officer of Siltec
Corporation, a manufacturer of strategic silicon and epitaxial materials for the
semiconductor industry, since November 1985.
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Terrence A. Noonan has been a director of the Company since May 10,
1996. Since June 1991, Mr. Noonan has also served as President of Furon Company,
a manufacturing company specializing in polymer components. He is also a member
of the Board of Directors of Furon Company.
William L. Slover has been a director since June 1992. Mr. Slover has
been working as a management consultant since January 1990. From March 1987
through June 1992 he also served as a senior consultant with Persona Consulting
Group. Mr. Slover is a director of Trio-Tech International, a manufacturing
company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Under the securities laws of the United States, the Company's directors,
its executive officers, and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific filing deadlines of these reports
have been established and the Company is required to disclose in this Report any
failure to file by these dates during the fiscal year ended May 31, 1996. Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to the
Company during the fiscal year ended May 31, 1996 and Forms 5 and amendments
thereto furnished to the Company with respect to the fiscal year ended May 31,
1996, and written representations, all of these filing requirements have been
satisfied, except that Maury S. Friedman, formerly a director, President -
Electronic Products Group, and Executive Vice President, made two late filings
on Form 4, each relating to one transaction. All such filings have been made as
of the date hereof.
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ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid by the
Company, together with long term and other compensation, for each of the last
three fiscal years to its Chief Executive Officer and to each of its executive
officers whose total salary and bonus from the Company exceeded or equaled
$100,000 in fiscal 1996 (the "Named Executive Officers"):
Summary Compensation Table
----------------------------------------------
Annual Compensation Long-Term Compensation
---------------------------------------------- --------------------------
Awards
------
Other Securities All
Annual Underlying Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation($) Options (#) Compensation($)
- --------------------------- ---- ---------- --------- --------------- ----------- ---------------
R. Malcolm Greaves(1) 1996 $165,200(2) $110,000 -- 43,000(3) $29,500(4)
President and Chief Executive 1995 151,680(2) 20,000 -- -- 34,878(4)
Officer 1994 123,333(2) 50,000 -- 60,000(5) 23,508(4)
Robert A. Smith 1996 157,390 75,000 731(6) 50,000(3) --
Executive Vice President and 1995 34,038 -- -- -- --
President - Industrial 1994 -- -- -- -- --
Products Group
James C. Minyard(7) 1996 104,700 25,000 7,800(6) 30,000(8) --
Formerly President - 1995 -- -- -- -- --
Electronic Products Group 1994 -- -- -- -- --
Maury S. Friedman(9) 1996 240,500 35,000 -- -- 45,400(10)
Formerly Executive Vice 1995 240,000 60,000 -- 60,000(5) --
President and President - 1994 124,000 60,000 -- -- --
Electronic Products Group
Edward Malkowicz(11) 1996 135,000 -- 12,000(6) 24,000(12) 34,000(13)
Chairman of the Board 1995 13,270 -- 1,926(14) 12,000(5) 16,000(13)
1994 -- -- -- -- --
Lonnie D. Schnell 1996 106,000 40,000 1,537(6) 30,000(3) --
Chief Financial Officer and 1995 49,900 6,000 -- -- --
Secretary 1994 -- -- -- -- --
- --------------------------
(1) Mr. Greaves was appointed President and Chief Executive Officer on
February 14, 1996.
(2) A portion of Mr. Greaves' salary in the amount of $108,000 in fiscal
1994, $114,480 in fiscal 1995, and $111,600 in fiscal 1996 was paid in English
Pounds, and has been converted at the estimated average exchange rate of
(pound)1 to $1.50 in effect during fiscal 1994, $1.59 in effect during fiscal
1995, and $1.55 in effect during 1996.
(3) Options granted under the Company's 1995 Incentive Stock Option Plan.
(4) Company's contribution to HESL Pension Plan.
(5) Options granted under the Company's Nonqualified Stock Option Plan.
(6) Automobile allowance.
(7) Mr. Minyard served as President - Electronic Products Group from April
1, 1996 to July 1, 1996, on which date his employment was terminated. Mr.
Minyard also served as President of MGE from August 1, 1994 to July 1, 1996.
[FOOTNOTES CONTINUE ON NEXT PAGE]
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30
(8) Options granted under the Company's 1989 Incentive Stock Option Plan.
(9) Mr. Friedman served as Chairman of the Board and Chief Executive
Officer from November 22, 1994 to April 11, 1995, President-Electronic Products
Group from April 12, 1995 to March 31, 1996 and Executive Vice President of the
Company from November 22, 1995 to March 31, 1996, on which date he resigned.
(10) Represents consulting fees paid to Mr. Friedman subsequent to his
resignation as an officer of the Company on March 31, 1996.
(11) Mr. Malkowicz also served as an executive officer from April 12, 1995
to February 14, 1996.
(12) Options granted under the Company's 1995 Incentive Stock Option Plan,
net of forfeitures pursuant to the terms of the related stock option agreement.
(13) Consisting of $12,000 in director's fees and $4,000 in aggregate
committee fees in fiscal year 1995 and $24,000 in director's fees and $10,000 in
aggregate committee fees in fiscal year 1996.
(14) Consisting of automobile allowance of $1,061 and medical insurance
allowance of $865.
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COMPENSATION OF DIRECTORS
Each of the Company's directors who is not an employee of the Company
(Messrs. Goldberger, Goodson, Malkowicz, Myers, Noonan, and Slover) receives an
annual fee of $24,000, payable in monthly installments. The Company does not pay
its employee directors any fee for their services as directors, except that Mr.
Malkowicz was an employee director through March 1996 and received directors
fees of $2,000 per month during that period. Subsequent to March 1996, Mr.
Malkowicz's status changed to a non-employee director. Each non-employee
director, including Mr. Malkowicz, for the period he was an employee director,
receives reimbursement for out-of-pocket expenses, and $500 for each committee
meeting in which he otherwise participates. Directors who chair a Board
committee receive $750 per meeting. During fiscal 1995 and 1996, Mr. Slover
received fees of $26,600 and $27,800, respectively, for special consulting
services provided to the Company, on an "as requested" basis, in connection with
financial matters and inventory controls. During fiscal 1996, Mr. Goodson
received fees of $9,500 for special consulting services provided to the Company,
on an "as requested" basis, in connection with business matters not involving
legal advice.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Maury S.
Friedman, effective November 19, 1993 and expiring in November 1996. The
employment agreement provided for an annual base salary of $240,000 and a
performance bonus at the discretion of the Board of Directors. Upon Mr.
Friedman's resignation as an officer of the Company on March 31, 1996, the
agreement was terminated. Effective April 1, 1996, Mr. Friedman serves as a
consultant to MGE pursuant to the terms of a consulting agreement dated March
21, 1996. The consulting agreement requires Mr. Friedman to provide consulting
services to MGE at the rate of $200 per hour and will continue on a year-to-year
basis for a term not to exceed December 31, 1998.
Pursuant to an employment agreement dated December 22, 1995 with MGE,
Mr. Minyard was entitled to receive a monthly base salary of $9,000 and a
monthly bonus equal to one percent of pre-tax operating income before corporate
charges, commencing January 1996. This agreement also provided for a
Company-provided automobile, health insurance, Board-determined discretionary
bonus of up to 40% of annual base salary and three-month severance pay upon
termination. Mr. Minyard's employment at the Company and MGE was terminated on
July 1, 1996 and the agreement is no longer in effect.
The Company established, effective March 1, 1996, an Executive
Separation Pay Plan (the "Separation Pay Plan"), to establish a uniform basis
for providing separation allowances to certain executives when their positions
are eliminated or when they are terminated for reasons other than for cause. The
Separation Pay Plan is administered by the Compensation Committee. The Board of
Directors or the Compensation Committee has absolute discretion to designate
those executives who are covered by the Separation Pay Plan (a "Covered
Employee"). The amount of separation allowance which a Covered Employee is
entitled to receive is determined by the Board of Directors and specified as a
number of months of the Covered Employee's base salary as of the date of
termination of employment. Presently, the following Named Executive Officers are
the only executives designated as Covered Employees under the Separation Pay
Plan (specified period for separation allowance indicated in parentheses): R.
Malcolm Greaves, President and Chief Executive Officer (12 months); Robert A.
Smith, Executive Vice President and President-Industrial Products Group (10
months); and Lonnie D. Schnell, Chief Financial Officer and Secretary (8
months).
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32
With the exception of the employment agreements as described above, the
Company has no employment agreements with any of the Named Executive Officers.
STOCK OPTION PLANS
1989 Incentive Stock Option Plan
The Haskel International, Inc. 1989 Incentive Stock Option Plan, as
amended (the "1989 ISO Plan") is administered by the Compensation Committee.
Subject to the terms of the 1989 ISO Plan, the Compensation Committee
establishes the terms and conditions applicable to option grants under said
Plan. The 1989 ISO Plan has a term of ten years and provides for the sale by the
Company of a maximum of 450,000 shares of Class A Common Stock, subject to
adjustments to reflect any future change in capitalization of the Company. As of
May 31, 1996, there were options granted and outstanding for 70,065 shares at an
exercise price of $9.46 per share, 38,086 shares at an exercise price of $7.18
per share, and 110,000 shares at an exercise price of $8.03 per share. There are
no further grants being made under this Plan, its having been replaced by the
1995 Incentive Stock Option Plan.
Nonqualified Stock Option Plan
The Haskel International, Inc. Stock Option Plan, as amended (the
"Nonqualified Plan"), is also administered by the Compensation Committee. The
Nonqualified Plan differs from the 1989 ISO Plan in that the 1989 ISO Plan is
qualified under the Internal Revenue Code as an Incentive Stock Option plan
entitling the optionee to certain income tax benefits, to which the optionee
under the Nonqualified Plan is not entitled. Subject to the terms of the
Nonqualified Plan, the Compensation Committee establishes the terms and
conditions applicable to option grants under said Plan. The Nonqualified Plan
has a term of ten years and provides for the sale by the Company of a maximum of
650,000 shares of Class A Common Stock, subject to adjustments to reflect any
future change in capitalization of the Company. As of May 31, 1996, there were
options granted and outstanding under the Nonqualified Plan for 87,500 shares at
an exercise price of $9.46 per share, 215,247 shares at an exercise price of
$7.18 per share, 127,667 shares at an exercise price of $7.00 per share, and
24,000 shares at an exercise price of $10.00 per share. There are no further
grants being made under this Plan, its having been replaced by the 1995
Incentive Stock Option Plan.
1995 Incentive Stock Option Plan
The Haskel International, Inc. 1995 Incentive Stock Option Plan (the
"1995 ISO Plan"), which replaced both the 1989 ISO Plan and the Nonqualified
Plan, was approved by the shareholders at the 1995 Annual Shareholders Meeting
on October 5, 1995. The 1995 ISO Plan permits certain employees of the Company
and its subsidiaries who are responsible for the management, growth and
protection of the business of the Company or its subsidiaries to be granted the
right to purchase shares of Class A Common Stock at the fair market value per
share at the date of grant. The 1995 ISO Plan is designed to assist the Company
in securing and retaining employees of outstanding ability and to motivate such
individuals to exert their best efforts on behalf of the Company. The 1995 ISO
Plan is administered by the Stock Option Committee of the Board of Directors,
consisting of disinterested directors as that term is defined by Rule 16b-3
under the Securities Exchange Act of 1934, as amended. The Committee selects
employees who may purchase shares under the 1995 ISO Plan and establishes,
subject to the terms of the 1995 ISO Plan, the terms and conditions applicable
to such purchase. In order to purchase shares, an employee is required to enter
into a purchase agreement with the Company. The 1995 ISO Plan has a term of ten
years and provides for
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33
the grant of options to purchase an aggregate of 240,000 shares of Class A
Common Stock, plus the number of shares available as a result of presently
outstanding options which lapse because of nonexercise under the 1989 ISO Plan
and the Nonqualified Plan. That additional number of shares cannot be determined
at this time, but cannot exceed the total number of 773,885 shares subject to
options which are currently outstanding and unexercised. The number of shares is
also subject to adjustments to reflect any future changes in the capitalization
of the Company. As of May 31, 1996, there were options granted and outstanding
for 104,000 shares at an exercise price of $5.375 per share, 43,000 shares at an
exercise price of $6.50 per share, and 5,000 shares at an exercise price of
$7.25 per share.
1995 Formula Stock Option Plan
The Haskel International, Inc. 1995 Formula Stock Option Plan (the
"1995 Formula Plan") was approved by the shareholders at the 1995 Annual
Shareholders Meeting on October 5, 1995. The 1995 Formula Plan permits
directors who are not employees of the Company or its subsidiaries ("Outside
Directors") and who have been granted options under said Plan, the right to
purchase shares of Class A Common Stock at the fair market value per share at
the date of the grant. Because the 1995 Formula Plan operates by its own terms,
and there are no discretionary decisions, there is no committee needed to
administer the 1995 Formula Plan. The 1995 Formula Plan is designed to assist
the Company in attracting and retaining high quality Outside Directors. At
present, that group consists of Messrs. Goldberger, Goodson, Malkowicz, Myers,
Noonan, and Slover. Every new Outside Director, upon becoming a director of the
Company, is granted an option to purchase 10,000 shares of Class A Common Stock.
Such options vest in equal amounts over five years, with the first installment
vesting on the first anniversary of the Outside Director's appointment as
director. Additional options are granted to each Outside Director if the
Company's performance exceeds certain benchmarks. All options granted under the
1995 Formula Plan become 100% vested in the event of a change in control of the
Company. The 1995 Formula Plan provides for the grants of options to purchase an
aggregate of 40,000 shares of Class A Common Stock. The number of shares is also
subject to adjustments to reflect any future changes in the capitalization of
the Company. As of May 31, 1996, there were options granted and outstanding for
10,000 at an exercise price of $6.625 per share.
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34
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock
options granted to the Named Executive Officers during fiscal 1996:
Option Grants in Last Fiscal Year
---------------------------------
Potential Realizable Value
At Assumed Annual
Rates of Stock Price
Individual Grants Appreciation For Option Term
------------------------------------------------------- --------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 0%($) 5%($) 10%($)
- ---- ----------- ------------ ----------- ---------- ----- -------- --------
R. Malcolm Greaves 43,000 18.9% $ 6.50 2/27/06 $0 $455,275 $724,950
Robert A. Smith 50,000 21.9% $5.375 2/21/05 $0 $437,765 $697,068
James C. Minyard -- -- -- -- -- -- --
Maury S. Friedman -- -- -- -- -- -- --
Edward Malkowicz 100,000(1) 43.9% $5.375 4/12/05 $0 $210,127(1) $334,593(1)
Lonnie D. Schnell 30,000 13.2% $5.375 11/7/04 $0 $262,659 $418,240
- --------------------
(1) Pursuant to the terms of the stock option agreement entered into
between the Company and Mr. Malkowicz, the option lapsed with respect to 76,000
shares during fiscal 1996. Potential Realizable Values were calculated based on
the net 24,000 shares relating to such option.
STOCK OPTION EXERCISES AND OPTIONS OUTSTANDING
The following table provides certain information regarding outstanding
options by the Named Executive Officers at May 31, 1996:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
-----------------------------------------------
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised In-the-Money
Name Exercise (#) Realized ($) Options at May 31, 1996 (#) Options at May 31, 1996 ($)
- ---- ------------ ------------ --------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
R. Malcolm Greaves -- -- 104,267 44,733 $ 4,300 $17,200
Robert A. Smith -- -- 10,000 40,000 $16,250 $65,000
James C. Minyard -- -- 10,000 20,000 -- --
Maury S. Friedman -- -- 40,000 -- -- --
Edward Malkowicz -- -- 10,400 25,600 $13,000 $26,000
Lonnie D. Schnell -- -- 6,000 24,000 $ 9,750 $39,000
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REPRICING OF OPTIONS
The following table shows all repricings of options held by any
executive officer during the last ten completed fiscal years:
Ten-Year Option Repricings
--------------------------
Length of
Number of Original
Securities Market Price Exercise Option Term
Underlying of Stock at Price at Remaining
Options Time of Time of New at Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment
- ---- ---- ----------- ------------ ------------ -------- ------------
Maury S. Friedman 1/19/95 60,000(1) $10.13 $7.18(2) $8.03 6/9/04
- --------------------
(1) Pursuant to the terms of the stock option agreement entered into
between the Company and Mr. Friedman, the option lapsed with respect to 20,000
shares on March 31, 1996, upon Mr. Friedman's resignation as an officer of the
Company, and lapsed with respect to the remaining 40,000 shares on June 3, 1996.
(2) This option, and all other options granted on June 9, 1994, was at
an exercise price of $7.18, subject to adjustment based on the independent
appraisal report of the shares owned by the Company's Profit Sharing Plan for
the fiscal year ended May 31, 1994. Based on that appraisal, the exercise price
of all options granted on June 9, 1994, including Mr. Friedman's option, was
adjusted to $8.03.
RETIREMENT PLANS
Haskel International, Inc. Profit Sharing Plan
The Haskel International, Inc. Profit Sharing Plan, as amended (the
"PSP"), covers all of Haskel International, Inc.'s employees and includes MGE's
employees, but not HESL's or its subsidiaries' employees. The purpose of the PSP
is to enable participating employees of the Company to share in a portion of the
profits and in the growth and prosperity of the Company and to provide them with
the opportunity to accumulate capital for their future economic security.
Employees are entitled to 100% of their account balances upon death or
retirement. Generally, employees whose employment terminates for any reason
other than death or retirement are vested after five years of service. However,
if the percentage interest in the PSP and other similar plans of certain
high-level employees of the Company falls below a prescribed level, employees
who commenced participating in the PSP prior to June 1, 1989 become vested
according to a schedule that provides for full vesting after fifteen years of
service. The PSP is funded solely by the Company; individual contributions
through payroll deduction or otherwise are not permitted. The Company
contribution is determined annually by the Board of Directors of the Company.
The PSP is administered by a four-member administrative committee of employees
(the "Administrative Committee") appointed by the Board of Directors. The Board
of Directors retains an independent corporate trustee who holds all funds in
trust and votes the Company shares held by the PSP as directed by the
Administrative Committee.
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HESL Pension Plan
All of HESL's employees who work at least 16 hours per week, who are at
least 21 years of age, and have been with HESL for one year or more are covered
by the Haskel Retirement Benefits Plan, a contributory pension plan (the "HESL
Pension Plan"). Mr. Greaves is the only executive officer who is currently
participating in the HESL Pension Plan. Currently, the pension costs are
equivalent to 15% of the individual's pensionable salary (basic annual salary or
wages at the HESL Pension Plan anniversary, which is June 1 of each year) and
are borne 80% by HESL and 20% by the individual. The pension benefits payable
are on a final salary basis, ie. pension benefits accrue at the rate of 1/60th
of final pensionable salary for each complete year of service with HESL less
deductions to take into account the lower-level earnings and upper-level
earnings limits originally set down in SERPS (State Earnings Related Pension
Scheme). Pension benefits are subject to an annual cost-of-living increase of
not less than 3% nor more than 5%. Three directors of HESL have an enhancement
to their pension plan (the "Haskel Discretionary Benefits Scheme"), whereby
pension benefits accrue at the rate of 1/40th of pensionable salary but, again,
subject to the deductions described in the preceding sentence. The normal
retirement age for both men and women is 65 years. The HESL Pension Plan
additionally provides for a death-in-service lump sum payment of twice salary
(in the case of the three directors' pension enhancement scheme, four times
salary) and a spouse's pension of two-thirds the prospective pension at date of
death of the employee. The funds are held and invested by Norwich Union on
behalf of the trustees of the HESL Pension Plan, and HESL is assisted in its
management of the HESL Pension Plan by Sedgwick Noble Lowndes, who are pension
advisers. The trustees responsible for the HESL Pension Plan are HESL's
secretary, a retired director of HESL, an employee of HESL and a representative
of HESL's legal counsel, Dickinson Dees. See Note 8 of Notes to Consolidated
Financial Statements.
The following table sets forth annual pension benefits under the HESL
Pension Plan on a straight-life annuity basis for representative years of
service as defined in the HESL Pension Plan at an accrual rate of 1/60th of
final pensionable salary. Amounts shown assume retirement at age 65 on January
1, 1996. Other than the adjustment described in footnote 2 below, such benefits
are not subject to reduction for benefits and other offset amounts. As of May
31, 1996, Mr. Greaves had approximately 7 years of service credited under the
HESL Pension Plan.
HESL Pension Plan Table
-----------------------
Estimated Annual Retirement Benefit at Age 65 for Indicated Years of Credited Service(2)
----------------------------------------------------------------------------------------
Final Pensionable Salary(1) 5 10 15 20 25 30 35
- --------------------------- ------- ------- ------- ------- ------- -------- --------
$ 50,000 $ 4,167 $ 8,333 $12,500 $16,667 $20,833 $ 25,000 $ 29,167
75,000 6,250 12,500 18,750 25,000 31,250 37,500 43,750
100,000 8,333 16,667 25,000 33,333 41,667 50,000 58,333
125,000 10,417 20,833 31,250 41,667 52,083 62,500 72,917
150,000 12,500 25,000 37,500 50,000 62,500 75,000 87,500
200,000 16,667 33,333 50,000 66,667 83,333 100,000 116,667
- ---------------------
(1) Calculated based on highest average of three consecutive years'
pensionable salaries at June 1 during the 13-year or shorter period prior to
retirement.
(2) Benefits under the HESL Pension Plan are reduced in an amount of
1/100th of the employee's earnings in excess of a lower earnings limit (as of
April 6, 1996, such limit was (pound)3,172, subject to annual adjustment), not
to exceed an upper earnings limit (as of April 6, 1996, such limit was
(pound)23,660, subject to annual increase) times the number of years in service
after April 6, 1978.
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REPORT OF COMPENSATION COMMITTEE
The Compensation Committee reviews and makes recommendations to the
Board of Directors regarding salaries, bonuses, benefits, and other compensation
for executive officers and key employees of the Company. This Compensation
Committee report discusses the components of the Company's executive officer
compensation policies and programs and describes the bases upon which
compensation is determined by the Compensation Committee with respect to the
executive officers of the Company, including the Named Executive Officers.
Compensation Philosophy. The compensation philosophy of the Company is
to link directly executive compensation to individual and team contributions,
continuous improvements in corporate performance and shareholder value. The
Compensation Committee has adopted the following objectives as guidelines for
compensation decisions:
- Display a willingness to pay levels of compensation that are
necessary to attract and retain highly qualified executives.
- Be willing to compensate executive officers in recognition
of superior individual performance, new responsibilities or new positions within
the Company.
- Take into account historical levels of executive
compensation and the overall competitiveness of the market for high quality
executive talent.
- Implement a balance between short and long-term compensation
to complement the Company's annual and long-term business objectives and
strategy and encourage executive performance in furtherance of the fulfillment
of those objectives.
- Provide variable compensation opportunities based on the
performance of the Company, encourage stock ownership by executives and align
executive remuneration with the interests of shareholders.
The Compensation Committee is aware of the Internal Revenue Code
$1,000,000 cap on deductions for compensation. While that cap does not have an
impact on the Company at present, the Compensation Committee will take
appropriate steps to make the Company's compensation policy comply should
circumstances warrant in the future.
Compensation Program Components. The Compensation Committee regularly
reviews the Company's compensation program to ensure that pay levels and
incentive opportunities are competitive with the market and reflect the
performance of the Company. The particular elements of the compensation program
for executive officers are further explained below.
Base Salary. The Company's base pay levels for executive officers are
determined by the particular responsibilities of the position held and the
experience of the individual and by comparing the salary scale with companies of
similar size and complexity. Actual base salaries are kept within a competitive
salary range for each position that is established through job evaluation and
market comparisons.
Chief Executive Officer's Compensation. The Chief Executive Officer
("CEO") of the Company heads a group of senior management officers who
participate in a common set of compensation criteria linked to the performance
of the Company. The compensation of the CEO is determined by the Compensation
Committee and approved by the Board of Directors based upon its assessment of
the Company's financial performance and non-financial performance measured
against a background of factors which are critical to the success of the
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38
business. The Compensation Committee exercises its judgment in weighting the
factors and evaluating performance. The CEO, who currently sits on the
Compensation Committee, does not participate in deliberations regarding his own
compensation.
Annual Bonus. The executive bonus program provides for the granting of
cash bonuses to the senior managers (including the Named Executive Officers) of
the Company. The objective of the bonus is to enhance management's contribution
to shareholder value by providing competitive levels of compensation for the
attainment of financial objectives. In particular, the executive bonus program
focuses corporate behavior on consistent and steady earnings growth by basing
performance on a comparison of actual results to the Company's annual budget.
Actual bonuses are subject to decrease or increase on the basis of the Company's
performance and range up to 55% of base salary for attaining goals. Based on the
Company's performance during fiscal year 1996, bonuses were paid to the Named
Executive Officers and the majority of the senior management.
Summary. After its review of all existing programs, the Compensation
Committee continues to believe that the total compensation program for
executives of the Company is focused on increasing values for shareholders and
enhancing corporate performance. The Compensation Committee believes that
executive compensation levels of the Company are competitive with the
compensation programs provided by other corporations with which the Company
competes. The foregoing report has been approved by all members of the
Compensation Committee.
COMPENSATION COMMITTEE
Stanley T. Myers, Chairman
Marvin L. Goldberger
Terrence A. Noonan
R. Malcolm Greaves
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During fiscal 1996, Marvin Goodson, Edward Malkowicz, Stanley T.
Myers, Dr. Marvin Goldberger and R. Malcolm Greaves served as members of the
Compensation Committee of the Board of Directors, which determines salaries of
the Company's employees. Mr. Goodson served on the Compensation Committee until
February 26, 1996, when Mr. Greaves was appointed by the Board of Directors as
Mr. Goodson's replacement. Mr. Greaves, President and Chief Executive Officer of
the Company, did not participate in deliberations regarding his own
compensation. The Company incurred attorneys' fees in the amount of
approximately $358,000 in fiscal 1996 in connection with services provided by
the firm of Goodson and Wachtel A Professional Corporation. Mr. Goodson is a
principal with that law firm.
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39
Performance Graph
The following graph compares the Company's cumulative total
shareholders return since the Class A Common Stock became publicly traded on
November 1, 1994, with the Nasdaq Stock market (National Market) Index, the
Standard & Poor's 500 Index and with a peer group comprised of companies which
manufacture high-pressure equipment and with which the Company generally
competes. The peer group is comprised of the following companies: Duriron Co.
Inc., Flow International Corp., IDEX Corp., Oilgear Co. and Watts Industries
Inc. The graph and table assume that $100 was invested on November 1, 1994 in
the Company's Class A Common Stock, at the initial public offering price of
$10.00 per share, and in each of the indexes mentioned above, and that all
dividends were reinvested.
Total Shareholder Return
[PERFORMANCE GRAPH APPEARS HERE]
Quarters
11/1/94 Nov 94 Feb 95 May 95 Aug 95 Nov 95 Feb 96 May 96
------- ------ ------ ------ ------ ------ ------ ------
Haskel Intl Inc-CLA 100 100.00 95.69 68.49 58.93 56.38 66.87 74.25
S&P 500 Index 100 96.86 104.77 115.48 122.38 132.67 141.13 148.32
Peer Group 100 89.86 101.45 107.13 128.38 122.97 113.60 117.02
NASQAQ COMPOSITE 100 96.68 102.65 111.84 132.41 137.84 143.02 162.55
39
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to each person
who, as of July 31, 1996 is known by the Company to be the beneficial owner of
more than five percent (5%) of the Company's Common Stock:
Class A Common Stock Class B Common Stock
------------------------ ----------------------
Amount and Amount and Percent of
Nature of Percent Nature of Percent Combined
Name and Address of Beneficial of Beneficial of Voting
Beneficial Owner Ownership Class(1) Ownership Class(1) Power(2)
- ---------------- --------- -------- --------- -------- --------
Hayman Family Trusts 1,584,477(3) 33.8% 40,000(3) 100.0% 34.4%
c/o The Boston Company
300 S. Grand Avenue Suite 1200
Los Angeles, CA 90071
Maury S. Friedman 447,000(4) 9.5% -- -- 9.5%
29480 Bertrand Street
Agoura Hills, CA 91301
Haskel, Inc. Profit Sharing Plan 259,607 5.5% -- -- 5.5%
Citizens Bank, Trustee
225 East Colorado Blvd.
Pasadena, CA 91101
- --------------------
(1) Included as outstanding for purposes of these calculations with
respect to (1) the Class A Common Stock were 4,688,230 shares of Class A Common
Stock outstanding as of May 31, 1996 plus, in the case of a particular person,
the shares of Class A Common Stock subject to currently exercisable options
(which are deemed to include options exercisable within 60 days after August 16,
1996) held by that person, which options are specified by footnote. Other than
as described in the preceding sentence, shares upon exercise of outstanding
options are not deemed to be outstanding for purposes of these calculations, and
(ii) the Class B Common Stock were 40,000 shares of Class B Common Stock
outstanding as of May 31, 1996.
(2) Represents the combined voting power of the shares of Class A
Common Stock and Class B Common Stock beneficially owned by the persons named as
a percent of the aggregate combined voting power of all outstanding shares of
Common Stock.
(3) All of the shares shown are owned beneficially and of record by
eight irrevocable trusts. Sheryl L. Everett is the beneficiary of three of the
trusts, Sandra Nelson the beneficiary of three of the trusts, and Rick Meeker
Hayman the beneficiary of two of the trusts. The trustees of two of the trusts
of which Sheryl L. Everett is the beneficiary, two of the trusts of which Sandra
Nelson is the beneficiary and the two of the trusts of which Rick Meeker Hayman
is the beneficiary are The Boston Safe Deposit and Trust Company of California
("The Boston Company"), Sheryl L. Everett and Sandra Nelson. The Boston Company
has two votes and each of the other trustees has one vote in determining action
to be taken by each of these six trusts with respect to the shares held by each
such trust. The Boston Company is sole trustee for each of the other two trusts,
one of which Sheryl L. Everett is the beneficiary and one of which Sandra Nelson
is the beneficiary. Excludes 25,450 and 41,145 shares as to which Sandra Nelson
and Sheryl L. Everett, respectively, have sole voting and dispositive power; and
41,145 shares which are held in trust by another trustee, and with respect to
which Rick Meeker Hayman is the beneficiary, and has sole voting and dispositive
power.
(4) Includes 440,000 shares owned beneficially and of record by the
Friedman Family Trust, of which Maury S. Friedman and Lisa E. Friedman are
co-trustees, and 7,000 shares owned by Mr. Friedman as custodian for his minor
children.
40
41
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of July 31, 1996, by (i)
each director and nominee for director, (ii) each of the executive officers
named in the Summary Compensation Table, and (iii) all directors and executive
officers as a group. Except as otherwise noted, and subject to applicable
community property and similar laws, each person named has sole voting and
investment power with respect to the Common Stock shown as beneficially owned.
Class A Shares Percent
Beneficially of
Name and Address Title Owned Class
- ---------------- ----- -------------- -------
R. Malcolm Greaves President, Chief Executive 117,600(1) 2.5%
100 East Graham Place Officer and Director
Burbank, CA 91502
Robert A. Smith Executive Vice President and 10,000(2) *
100 East Graham Place President - Industrial Products
Burbank, CA 91502 Group
James C. Minyard Formerly President - Electronic 10,400(3) *
1874 Dunnigan Street Products Group and President of
Camarillo, CA 93010 MGE
Maury S. Friedman Formerly Executive Vice 447,000(4) 9.5%
29480 Bertrand Street President, President - Electronic
Agoura Hills, CA 91301 Products Group and Director
Lonnie D. Schnell Chief Financial Officer and 7,500(5) *
100 East Graham Place Secretary
Burbank, CA 91502
Edward Malkowicz Chairman of the Board and 21,400(6) *
100 East Graham Place Director
Burbank, CA 91502
Marvin L. Goldberger Director 50,155(7) 1.1%
100 East Graham Place
Burbank, CA 91502
Marvin Goodson Director 178,910(8) 3.8%
100 East Graham Place
Burbank, CA 91502
Stanley T. Myers Director 3,400(9) *
100 East Graham Place
Burbank, CA 91502
Terrence A. Noonan Director 1,000 *
100 East Graham Place
Burbank, CA 91502
William L. Slover Director 32,000(10) *
100 East Graham Place
Burbank, CA 91502
All directors and executive
officers as a group (11
persons) 879,365(11) 18.8%
* Denotes beneficial ownership of less than 1%.
[Footnotes on next page]
41
42
- --------------------
(1) Includes 114,600 shares issuable upon exercise of options
exercisable within 60 days of August 16, 1996.
(2) Includes 10,000 shares issuable upon exercise of options exercisable
within 60 days of August 16, 1996.
(3) Includes 10,000 shares issuable upon exercise of options
exercisable within 60 days of August 16, 1996. Mr. Minyard was terminated as an
employee of the Company and MGE on July 1, 1996.
(4) Includes 440,000 shares owned beneficially and of record by the
Friedman Family Trust, of which Mr. Friedman is a co-trustee; and 7,000 shares
owned by Mr. Friedman as custodian for his minor children. Mr. Friedman resigned
as a director of the Company in January 1996 and as President - Electronic
Products Group in April 1996. He currently serves as a consultant to MGE.
(5) Includes 6,000 shares issuable upon exercise of options exercisable
within 60 days of August 16, 1996.
(6) Includes 10,400 shares issuable upon exercise of options exercisable
within 60 days of August 16, 1996.
(7) Includes 11,155 shares owned beneficially and of record by the
Marvin and Mildred Goldberger Family Trust, of which Dr. Goldberger is a
co-trustee; and 39,000 shares issuable upon exercise of options exercisable
within 60 days of August 16, 1996.
(8) Includes 26,800 shares owned beneficially and of record by the
Goodson and Wachtel Professional Corporation Profit Sharing Plan, of which Mr.
Goodson is a co-trustee; 81,110 shares owned beneficially and of record by the
Marvin and Mae Goodson Family Trust, of which Mr. Goodson is a co-trustee; and
71,000 shares issuable upon exercise of options exercisable within 60 days of
August 16, 1996.
(9) Includes 2,400 shares issuable upon exercise of options exercisable
within 60 days of August 16,1996.
(10) Includes 5,000 shares owned beneficially and of record by the
Slover Family Trust, of which Mr. Slover is a trustee; and 27,000 shares
issuable upon exercise of options exercisable within 60 days of August 16, 1996.
(11) Includes 290,400 shares issuable upon exercise of options
exercisable within 60 days of August 16, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incurred attorneys' fees in the amounts of approximately
$358,000 in fiscal 1996 in connection with services provided by the firm of
Goodson and Wachtel A Professional Corporation. That firm continues to provide
legal services to the Company. Marvin Goodson, a director and shareholder of the
Company, is a principal with that law firm. In addition, that firm represents
the Hayman Family Trusts and the Haskel, Inc. Profit Sharing Plan, who are
principal shareholders of the Company.
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43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K):
Exhibit
Number Exhibit Description
3.1 Restated Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1995)
3.2 Restated Bylaws of the Company, as amended.
4.1 Specimen Class A Common Stock and Class B Stock Certificates.
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1 (File No. 33-74362))
4.2 Form of Underwriter's Warrants. (Incorporated by reference to
Exhibit 4.2 of the Company's Registration Statement on Form S-1
(File No. 33-74362))
10.1 1989 Incentive Stock Option Plan and form of Stock Option
Agreement. (Incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-1 (File No. 33-74362))
10.2 Non-Qualified Stock Option Plan and form of Stock Option Agreement.
(Incorporated by reference to Exhibit 10.2 of the Company's
Registration Statement on Form S-1 (File No. 33-74362))
10.3 1995 Incentive Stock Option Plan and form of Stock Option
Agreement.
10.4 1995 Formula Stock Option Plan and form of Stock Option Agreement.
10.5 Haskel Inc. Profit Sharing Plan. (Incorporated by reference to
Exhibit 10.3 of the Company's Registration Statement on Form S-1
(File No. 33-74362))
10.6 Haskel Energy Systems, Ltd. Pension Plan. (Incorporated by
reference to Exhibit 10.4 of the Company's Registration Statement
on Form S-1 (File No. 33-74362))
10.7 Agreement and Plan of Reorganization of M.G. Electronics, Inc. into
Haskel Network Group, Inc. dated November 17, 1993 and related
Indemnification Agreement and Agreement of Merger. (Incorporated by
reference to Exhibit 10.7 of the Company's Registration Statement
on Form S-1 (File No. 33-74362))
10.8 Employment Agreement dated November 17, 1993 between Maury S.
Friedman and the Company. (Incorporated by reference to Exhibit
10.8 of the Company's Registration Statement on Form S-1 (File No.
33-74362))
10.9 Non-Competition Agreement dated November 17, 1993 between Maury S.
Friedman, the Friedman Family Trust and M.G. Electronics, Inc.
(Incorporated by reference to Exhibit 10.9 of the Company's
Registration Statement on Form S-1 (File No. 33-74362))
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44
Exhibit
Number Exhibit Description
10.10 Consulting Agreement dated March 21, 1996 between the Company and
Maury S. Friedman. (Incorporated by reference to Exhibit 10.17 of
the Company's Quarterly Report on Form 10-Q for the period ended
February 29, 1996)
10.11 Leases dated June 1, 1993 and September 24, 1993 between West Lake
Village Industrial Park and M.G. Electronics, Inc. (Incorporated by
reference to Exhibit 10.10 of the Company's Registration Statement
on Form S-1 (File No. 33-74362))
10.12 Consultant and Widow's Pension Agreement dated May 16, 1983 between
the Company and Frederick J. Broderick and related Memorandum dated
April 22, 1993. (Incorporated by reference to Exhibit 10.13 of the
Company's Registration Statement on Form S-1 (File No. 33-74362))
10.13 Glendale Superfund Site PRP Organization Agreement dated October
28, 1993 by and among the Company and the other PRPs in the Group.
(Incorporated by reference to Exhibit 10.14 of the Company's
Registration Statement on Form S-1 (File No. 33-74362))
10.14 Amendment to the Glendale Superfund Site PRP Organization Agreement
dated as of January 11, 1996 by and among the Company and the
other PRPs in the Group.
10.15 Memorandum of Agreement Regarding Cost-Sharing for the Glendale
Operable Unit Superfund Sites dated June 7, 1995 by and among the
Company and the other PRPs in the Group.
10.16 Underwriter's Warrant Agreement. (Incorporated by reference to
Exhibit 10.18 of the Company's Registration Statement on Form S-1
(File No. 33-74362))
10.17 Loan Agreement dated February 21, 1995 by and between the Company
and Union Bank and related Commercial Promissory Note, Arbitration
Agreement, Continuing Guaranty and Security Agreement-Pledge.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the period ended February 28, 1995)
10.18 First Amendment dated as of August 30, 1995 to Loan Agreement
between the Company and Union Bank.
10.19 Second Amendment dated as of February 13, 1996 to Loan Agreement
between the Company and Union Bank.
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45
Exhibit
Number Exhibit Description
10.20 Third Amendment dated as of April 16, 1996 to Loan Agreement
between the Company and Union Bank.
10.21 Employment Agreement dated December 22, 1995 regarding James C.
Minyard.
10.22 Haskel International, Inc. Executive Separation Pay Plan.
11.1 Statement regarding computation of net income per share.
21 Schedule of Subsidiaries.
27 Financial Data Schedule.
The following schedules supporting the financial statements:
Schedule II Valuation and Qualifying Accounts
(b) Reports on Form 8-K:
The Company filed one Current Report on Form 8-K dated May 31, 1996,
during the fourth quarter of its fiscal year, reporting certain information
under Item 5 thereof. No financial statements were filed therewith.
45
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: August 26, 1996 HASKEL INTERNATIONAL, INC.
By /s/ Lonnie D. Schnell
---------------------------------
Lonnie D. Schnell
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears
below constitutes and appoints R. Malcolm Greaves and Lonnie D. Schnell, or any
one of them, his attorney-in-fact and agent, with full power of substitution,
for him in any and all capacities, to sign any amendments to this Annual Report,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Edward Malkowicz Chairman of the Board August 26, 1996
- ----------------------------- and Director
Edward Malkowicz
/s/ R. Malcolm Greaves Chief Executive Officer August 26, 1996
- ----------------------------- and Director
R. Malcolm Greaves
/s/ Marvin L. Goldberger Director August 26, 1996
- -----------------------------
Marvin L. Goldberger
/s/ Marvin Goodson Director August 26, 1996
- -----------------------------
Marvin Goodson
- ----------------------------- Director August 1996
Stanley T. Myers
/s/ Terrence A. Noonan Director August 26, 1996
- -----------------------------
Terrence A. Noonan
- ----------------------------- Director August 1996
William L. Slover
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HASKEL INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports........................................... F-1
Consolidated Balance Sheets
at May 31, 1995 and 1996................................................ F-3
Consolidated Statements of Income
for the years ended May 31, 1994, 1995 and 1996......................... F-5
Consolidated Statements of Shareholders' Equity
for the years ended May 31, 1994, 1995 and 1996......................... F-6
Consolidated Statements of Cash Flows
for the years ended May 31, 1994, 1995 and 1996......................... F-7
Notes to Consolidated Financial Statements.............................. F-9
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48
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Haskel International, Inc.:
We have audited the accompanying consolidated balance sheets of Haskel
International, Inc. and its subsidiaries as of May 31, 1995 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended May 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based upon our audits. We
did not audit the financial statements of Haskel Energy Systems, Ltd. ("HESL")
(a consolidated subsidiary), which statements reflect total assets constituting
35% and 30% of consolidated total assets at May 31, 1995 and 1996, respectively,
and total sales constituting 28%, 28% and 31% for fiscal years 1994, 1995 and
1996, respectively, of consolidated total sales. Those financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for HESL, is based solely
upon the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Haskel International, Inc. and its subsidiaries at May 31,
1995 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended May 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, based on our audits and
the report of other auditors, the financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
August 23, 1996
F - 1
49
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF
HASKEL ENERGY SYSTEMS LIMITED
We have audited the consolidated balance sheets of Haskel Energy Systems
Limited and its subsidiaries as of May 31, 1995 and 1996, and the related
consolidated statements of income, of shareholders' equity, and of cash flows
for each of the three years in the period ended May 31, 1996 (not included
herein). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon 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
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Haskel Energy Systems Limited
and its subsidiaries as of May 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
May 31, 1996 in conformity with generally accepted accounting principles.
PRICE WATERHOUSE
Chartered Accountants
and Registered Auditors
Newcastle
United Kingdom
August 23, 1996
F - 2
50
HASKEL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
May 31, May 31,
1995 1996
---------- -----------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $8,806,000 $ 8,239,000
Accounts receivable, net 8,870,000 9,581,000
Inventories 8,827,000 10,532,000
Prepaid expenses 431,000 356,000
Income taxes receivable 491,000 -
Deferred income taxes 1,022,000 1,260,000
---------- -----------
TOTAL CURRENT ASSETS 28,447,000 29,968,000
PROPERTY, PLANT & EQUIPMENT, NET 5,351,000 5,526,000
PURCHASED TECHNOLOGY, NET 7,098,000 6,569,000
GOODWILL, NET 3,389,000 3,248,000
OTHER ASSETS 10,000 49,000
----------- -----------
TOTAL $44,295,000 $45,360,000
=========== ===========
See notes to consolidated financial statements.
F - 3
51
HASKEL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
May 31, May 31,
1995 1996
----------- -----------
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 389,000 $ 985,000
Accounts payable 3,402,000 3,510,000
Dividends payable 331,000 331,000
Accrued liabilities 2,610,000 3,089,000
Income taxes payable 746,000 162,000
----------- -----------
TOTAL CURRENT LIABILITIES 7,478,000 8,077,000
LONG-TERM DEBT 3,125,000 2,381,000
DEFERRED INCOME TAXES 450,000 334,000
OTHER ACCRUED LIABILITIES 2,235,000 2,348,000
COMMITMENTS & CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock: 2,000,000 shares authorized;
none issued and outstanding
Common Stock:
Class A, without par value; 20,000,000 shares
authorized; issued and outstanding 4,688,230
at May 31, 1995 and May 31, 1996 13,436,000 13,436,000
Class B, without par value; 40,000 shares
authorized, issued and outstanding at
May 31, 1995 and May 31, 1996 19,000 19,000
Retained Earnings 17,729,000 18,951,000
Cumulative foreign currency translation adjustment (177,000) (186,000)
----------- -----------
Total shareholders' equity 31,007,000 32,220,000
----------- -----------
TOTAL $44,295,000 $45,360,000
=========== ===========
See notes to consolidated financial statements
F - 4
52
HASKEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended May 31,
-------------------------------------------
1994 1995 1996
----------- ------------ ------------
SALES $41,354,000 $51,701,000 $56,792,000
COST OF SALES 24,983,000 31,937,000 32,082,000
----------- ----------- -----------
GROSS PROFIT 16,371,000 19,764,000 24,710,000
EXPENSES:
Selling 7,091,000 7,998,000 9,000,000
General and administrative 6,573,000 8,342,000 10,356,000
Engineering design, research 1,186,000 1,151,000 905,000
and development
Restructuring Costs 620,000 - -
Environmental reserve costs 1,039,000 - -
----------- ----------- -----------
Total 16,509,000 17,491,000 20,261,000
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (138,000) 2,273,000 4,449,000
OTHER INCOME (EXPENSE):
Interest expense (308,000) (550,000) (274,000)
Interest income 423,000 435,000 356,000
Other 56,000 (182,000) 13,000
----------- ----------- -----------
171,000 (297,000) 95,000
----------- ----------- -----------
INCOME BEFORE INCOME
TAXES 33,000 1,976,000 4,544,000
PROVISION FOR INCOME TAXES 30,000 957,000 1,997,000
----------- ----------- -----------
NET INCOME $ 3,000 $ 1,019,000 $ 2,547,000
=========== =========== ===========
PER SHARE DATA:
NET INCOME $0.00 $0.23 $0.54
DIVIDENDS $0.36 $0.28 $0.28
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 3,929,349 4,500,783 4,738,266
=========== =========== ===========
See notes to consolidated financial statements
F - 5
53
HASKEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED MAY 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
SHARES OUTSTANDING
COMMON STOCK, CLASS A SHARES
Balance, beginning of year 2,906,372 3,406,470 4,688,230
Issuance of common stock 500,098 874,500 -
Conversion of common stock - 407,260 -
----------- ----------- -----------
BALANCE, END OF YEAR 3,406,470 4,688,230 4,688,230
=========== =========== ===========
COMMON STOCK, CLASS B SHARES
Balance, beginning of year 449,955 447,260 40,000
Repurchase of common stock (2,695) - -
Conversion of common stock - (407,260) -
----------- ----------- -----------
BALANCE, END OF YEAR 447,260 40,000 40,000
=========== =========== ===========
COMMON STOCK, CLASS A
Balance, beginning of year $ 3,296,000 $ 6,859,000 $13,436,000
Issuance of common stock 3,563,000 6,381,000 -
Conversion of common stock - 196,000 -
----------- ----------- -----------
BALANCE, END OF YEAR 6,859,000 13,436,000 13,436,000
----------- ----------- -----------
COMMON STOCK, CLASS B
Balance, beginning of year 218,000 215,000 19,000
Repurchase of common stock (3,000) - -
Conversion of common stock - (196,000) -
----------- ----------- -----------
BALANCE, END OF YEAR 215,000 19,000 19,000
----------- ----------- -----------
RETAINED EARNINGS
Balance, beginning of year 21,817,000 17,971,000 17,729,000
Net income 3,000 1,019,000 2,547,000
Repurchase of common stock (22,000)
Cash dividends, class A and B shares (1,316,000) (1,261,000) (1,325,000)
Dividend - related party (2,511,000)
----------- ----------- -----------
BALANCE, END OF YEAR 17,971,000 17,729,000 18,951,000
----------- ----------- -----------
CUMULATIVE TRANSLATION ADJUSTMENT
BALANCE, END OF YEAR (661,000) (177,000) (186,000)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY $24,384,000 $31,007,000 $32,220,000
=========== =========== ===========
See notes to consolidated financial statements
F - 6
54
HASKEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31,
------------------------------------------
1994 1995 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,000 $ 1,019,000 $ 2,547,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,011,000 1,515,000 1,825,000
Gain on sale of property (19,000) (15,000) (5,000)
Deferred income taxes (453,000) (242,000) (354,000)
Effect of exchange rate changes (221,000) 368,000 41,000
Changes in operating assets and liabilities
(net of acquisitions):
Accounts receivable, net 253,000 904,000 (711,000)
Inventories 614,000 (617,000) (1,436,000)
Prepaid expenses and other assets (124,000) 322,000 36,000
Accounts payable and accrued liabilities 466,000 (456,000) 700,000
Income taxes (1,034,000) (165,000) (93,000)
----------- ----------- -----------
Net cash provided by operating activities 496,000 2,633,000 2,550,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,279,000) (1,330,000) (1,272,000)
Proceeds from sale of property 79,000 78,000 90,000
Repayment on notes receivable-related party 549,000
Purchase of subsidiary (net of cash and
cash equivalents acquired) (5,770,000) (159,000)
Increase in long-term investments (216,000)
----------- ----------- -----------
Net cash used in investing activities (6,637,000) (1,252,000) (1,341,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt-related party (2,000,000)
Principal payments on long-term debt (141,000) (3,173,000) (401,000)
Proceeds from issuance of debt 6,000,000
Proceeds from issuance of common stock 332,000 6,754,000
Repurchase of common stock (25,000)
Deferred public offering costs (373,000)
Dividends declared (1,316,000) (1,261,000) (1,325,000)
Repayment of notes payable (192,000)
Increase (decrease) in dividends payable (173,000) 60,000
Dividend-related party (635,000)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 3,669,000 188,000 (1,726,000)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (144,000) 117,000 (50,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,616,000) 1,686,000 (567,000)
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 9,736,000 7,120,000 8,806,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,120,000 $ 8,806,000 $ 8,239,000
=========== =========== ===========
See notes to consolidated financial statements.
F - 7
55
HASKEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended May 31,
------------------------------------------
1994 1995 1996
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 280,000 $ 580,000 $ 256,000
=========== =========== ===========
Income taxes $ 1,652,00 $ 1,245,000 $ 2,128,000
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On October 14, 1993, the Company paid $1,000,000 in cash and issued a
promissory note in the amount of $3,500,000 in connection with the purchase
of land and buildings. Because the property was purchased from a group of
controlling shareholders, the Company has recorded the property at the
historical net book value ($365,000) to such shareholders and has reflected
the excess of the purchase price as a deemed dividend of $2,511,000
($635,000 of which is cash) net of deferred income taxes of $1,624,000. In
November 1994, the Company paid the promissory note with $2,000,000 cash and
offsetting a $1,500,000 note receivable from such shareholders.
On November 19, 1993, the Company acquired all the outstanding stock of M.G.
Electronics, Inc. (MGE) for $9,499,000 ($6,000,000 in cash, $268,000
acquisition costs and $3,231,000 of Class A Common Stock) plus assumed
liabilities.
Fair value of assets acquired $ 13,273,000
Cash paid (6,268,000)
Common stock issued (3,231,000)
-----------
Liabilities assumed $ 3,774,000
===========
On December 30, 1993, the Company's wholly owned foreign operating
subsidiary, Haskel Energy Systems, Ltd. ("HESL"), acquired all of the
outstanding stock of Enviroclean Systems Limited for $207,000 ($15,000
in cash and a note payable of $192,000) plus liabilities.
Fair value of assets acquired $ 859,000
Cash paid (15,000)
-----------
Liabilities assumed $ 844,000
===========
In fiscal year 1995, $6,670,000 was raised (net of offering costs) in
connection with the Company's initial public offering of Class A Common
Stock. These proceeds, net of deferred public offering costs of $373,000,
resulted in net proceeds from the offering of $6,297,000.
On November 30, 1995, HESL acquired certain assets of Armaturenbau GmbH
for $412,000 ($159,000 in cash and a note payble of $253,000.)
See notes to consolidated financial statements.
F - 8
56
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Haskel
International, Inc. (the "Company"), its wholly owned operating domestic
subsidiaries and its operating foreign subsidiary, Haskel Energy Systems, Ltd.
("HESL"), and its operating subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Cash Equivalents
The Company considers all short-term investments with original
maturities of 90 days or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. The cost of
domestic inventories is determined by the last-in, first-out (LIFO) method and
represents approximately 67% and 64% of consolidated inventories at May 31, 1995
and 1996, respectively. All other inventories are valued using the first-in,
first-out (FIFO) method. If all domestic inventories had been valued on the FIFO
method, they would have been higher by $1,766,000 and $1,843,000 at May 31, 1995
and 1996, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Provision for
depreciation has been made based upon the estimated useful lives of the assets,
which range from 3 to 30 years, using principally the straight-line method.
Provision for amortization of leasehold improvements is made based upon the
estimated lives of the assets or terms of the leases, whichever is shorter.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets and
liabilities. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to periods in which the differences are
expected to reverse. A valuation allowance is established, when necessary, to
reduce deferred income tax assets to the amount expected to be realized. Income
tax expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred income tax assets and liabilities.
Fair Value of Financial Instruments
The carrying values of cash equivalents, accounts receivable, and
accounts payable approximate fair value due to the short maturities of such
instruments. The carrying values of notes payable approximate fair value due to
the fact that the majority of the notes are based on variable interest rates.
F - 9
57
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue is recognized upon shipment of product. Accounts receivable are
uncollateralized and contain no significant concentrations of credit risk.
Research and Development
Research and development costs are expensed as incurred.
Earnings Per Share
Earnings per share are computed based upon the weighted average number
of common shares and dilutive common share equivalents (consisting of incentive
stock options and nonqualified stock options) outstanding during the periods.
Foreign Currency Translation
Foreign assets and liabilities are translated to their United States
dollar equivalents based on rates of exchange prevailing at the end of each
respective period. Income statement information is translated using the average
rate for the year. Gains and losses resulting from foreign currency
transactions, which have not been significant, are included in the consolidated
statements of income. Gains and losses resulting from translation of foreign
financial statements are included as a separate component of shareholders'
equity.
Restructuring Costs
During 1994, the Company restructured part of its operations. The
restructuring charge, which related almost entirely to certain employee
termination benefits, was substantially paid as of May 31, 1994.
Intangible Assets
The Company reviews the carrying value of all intangible assets on a
quarterly basis, and if future undiscounted cash flows are believed insufficient
to recover the remaining carrying value of an intangible asset, the carrying
value is written down to fair market value in the period the impairment is
identified.
Stock Options
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". The Company plans to adopt only the disclosure portion of the
statement and therefore does not expect the statement to have a material impact
on the financial statements.
F - 10
58
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the 1994 and 1995 financial
statements to conform with the 1996 financial statement presentation.
2. MERGERS AND ACQUISITIONS
On November 19, 1993, the Company paid $6,000,000 in cash, $268,000 in
acquisition costs and issued 450,000 shares of its Class A Common Stock in
exchange for all of the outstanding common stock of MGE. The transaction has
been accounted for as a purchase. The valuation of the Company's stock used in
recording the purchase price was $7.18 per share, which was the value as of the
fiscal year ended May 31, 1993 as determined by an independent appraisal. In
connection with the acquisition, the Company recorded purchased technology of
$7,900,000 and goodwill of $3,428,000, which are being amortized over 15 years.
On December 30, 1993, HESL acquired all the outstanding stock of
Enviroclean Systems Limited in exchange for $15,000 in cash and a note payable
of $192,000. In connection with the acquisition, the Company recorded goodwill
of approximately $320,000, which is being amortized over 15 years.
On November 30, 1995, HESL acquired certain assets of Armaturenbau GmbH
in exchange for $159,000 in cash and a note payable of $253,000. In connection
with the acquisition, the Company recorded goodwill of approximately $108,000,
which is being amortized over 15 years.
F - 11
59
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
May 31, May 31,
1995 1996
------------ ------------
Cash and cash equivalents:
Cash in banks ................................... $ 2,980,000 $ 2,901,000
Time deposits ................................... 5,826,000 5,338,000
------------ ------------
$ 8,806,000 $ 8,239,000
============ ============
Accounts receivable:
Accounts receivable ............................. $ 9,785,000 $ 10,542,000
Less: Allowance for doubtful accounts ........... (915,000) (961,000)
------------ ------------
$ 8,870,000 $ 9,581,000
============ ============
Inventories:
Raw materials ................................... $ 2,837,000 $ 3,335,000
Work-in-process ................................. 1,249,000 2,032,000
Finished goods .................................. 4,741,000 5,165,000
------------ ------------
$ 8,827,000 $ 10,532,000
============ ============
Property, plant and equipment:
Land and building ............................... $ 2,655,000 $ 2,636,000
Computer equipment .............................. 1,730,000 2,530,000
Machinery and equipment ......................... 3,154,000 3,378,000
Furniture and fixtures .......................... 2,646,000 2,466,000
Leasehold improvements .......................... 1,269,000 1,436,000
------------ ------------
11,454,000 12,446,000
Less: Accumulated depreciation and amortization.. (6,116,000) (6,920,000)
------------ ------------
5,338,000 5,526,000
------------ ------------
Equipment under capital lease ..................... 43,000
Less: Accumulated amortization .................... (30,000)
------------
13,000
------------
$ 5,351,000 $ 5,526,000
============ ============
Purchased technology:
Purchased technology ............................ $ 7,900,000 $ 7,900,000
Less: Accumulated amortization .................. (802,000) (1,331,000)
============ ============
$ 7,098,000 $ 6,569,000
============ ============
Goodwill:
Goodwill ........................................ $ 3,760,000 $ 3,859,000
Less: Accumulated amortization .................. (371,000) (611,000)
------------ ------------
$ 3,389,000 $ 3,248,000
============ ============
F - 12
60
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS (CONTINUED)
May 31, May 31,
1995 1996
----------- ----------
Accrued Liabilities:
Accrued payroll and related expenses ..... $ 529,000 $ 452,000
Accrued bonuses .......................... 123,000 725,000
Accrued environmental expenses ........... 171,000 93,000
Accrued retirement benefits .............. 113,000 209,000
Accrued vacation ......................... 323,000 521,000
Accrued commissions ...................... 282,000 284,000
Other .................................... 1,069,000 805,000
---------- ----------
$2,610,000 $3,089,000
========== ==========
4. LONG-TERM DEBT
Long-term debt consists of the following:
May 31, May 31,
1995 1996
---------- ----------
Various installment notes issued in connection with stock
repurchases. Principal payable in equal quarterly
installments through February 2000. Interest payable at
a rate equal to one year Treasury Notes adjusted
quarterly. Interest rate at May 31, 1996 was 5.19%............ $ 501,000 $ 386,000
Non-interest bearing note payable issued in connection
with acquisition. Payable in three annual installments of
$95,000. Interest imputed based on an assumed
interest rate of 8%............................................ 241,000
Note payable to bank, principal payable in 46 equal
monthly installments of $65,200 beginning in February,
1996. The unpaid principal balance bears interest, to be
paid monthly, based upon the LIBOR rate plus 1 3/4%.
Interest rate at May 31, 1996 was 6.87%.
Collateralized by 50% of the Company's stock in HESL........... 3,000,000 2,739,000
Capitalized equipment lease obligation, secured by the
related equipment, payable in monthly installments
including interest at 10.75% through September 1995 ........... 13,000
---------- ----------
3,514,000 3,366,000
Less: Current portion of long-term debt......................... (389,000) (985,000)
---------- ----------
Long-term debt................................................... $3,125,000 $2,381,000
========== ==========
F - 13
61
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
4. LONG-TERM DEBT (CONTINUED)
Amounts of scheduled debt repayments by fiscal year are summarized as follows:
May 31,
----------
1997 .................................................. $ 985,000
1998 .................................................. 973,000
1999 .................................................. 947,000
2000 .................................................. 461,000
----------
$3,366,000
==========
The Company has a $5 million revolving line of credit available with a
bank at an interest rate equal to the LIBOR rate plus 1 1/2% (6.62% at May 31,
1996). There were no outstanding balances under the line of credit as of May 31,
1995 or 1996.
The Company has a $4 million acquisition line of credit available with
the same bank at an interest rate equal to the LIBOR rate plus 1 3/4% (6.87% at
May 31, 1996). The Company may make minimum draws against this line of $250,000.
Balances outstanding against this line at the end of February each year are
converted into a five-year term loan, payable in 48 equal installments beginning
one year from the conversion to a term loan. The term loan with the bank bears
interest at the same rate as the acquisition line. There were no borrowings
against this acquisition line and no term loans associated with this line
outstanding as of May 31, 1996.
The above loan agreement with the bank contains certain covenants,
including a requirement to maintain working capital of not less than
$15,000,000; tangible net worth of not less than $18,000,000; and earnings
before income taxes, depreciation and amortization equal to or greater than 1.25
times required debt service, dividends and capital expenditures. In addition,
the covenants restrict the Company's ability to incur indebtedness, pay
dividends in the event of default, consummate certain mergers and make capital
expenditures in excess of $2,000,000. As of May 31, 1996, the Company was in
compliance with all of the covenants of the loan agreement.
5. LEASE COMMITMENTS
The Company leases office space, plant and warehouse facilities under
operating lease agreements expiring at various dates through October 2000. Some
of the operating leases contain renewal options and provisions requiring the
Company to pay property tax increases in addition to the minimum rental.
Additionally, the Company leases automobiles under operating lease agreements
expiring at various dates through November 1997.
F - 14
62
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
5. LEASE COMMITMENTS (CONTINUED)
Future minimum rental payments under operating leases with an initial
term of one year or more are as follows:
Fiscal year ending May 31,
1997 .............................................. $231,000
1998 .............................................. 161,000
1999 .............................................. 78,000
2000 .............................................. 29,000
2001 .............................................. 6,000
--------
Total minimum lease payments ........................ $505,000
========
Rent expense for all operating leases was $328,000, $212,000, and
$246,000 for fiscal years 1994, 1995 and 1996, respectively. See discussion of
related party leases in Note 11.
6. INCOME TAXES
The provision for income taxes is summarized as follows:
Fiscal Year Ended May 31,
-------------------------
1994 1995 1996
---- ---- ----
Current:
Federal ................... $ 62,000 $ 311,000 $1,124,000
State ..................... (9,000) 263,000 326,000
Foreign ................... 430,000 625,000 901,000
-------------------------------------
483,000 1,199,000 2,351,000
Deferred:
Federal ................... (394,000) (180,000) (305,000)
State ..................... (59,000) (62,000) (49,000)
-------------------------------------
$ 30,000 $ 957,000 $1,997,000
=====================================
HESL had undistributed earnings of approximately $12,100,000 at May 31,
1995. In July 1995, $3,500,000 of these earnings were distributed to the
Company. The Company included income taxes on this distribution in its fiscal
year 1995 tax provision. Management retained permanently the remaining
$8,600,000 of the undistributed earnings of HESL as of May 31, 1995 primarily
for internal growth and strategic acquisitions outside of the United States.
Unrecognized income taxes on such earnings would be approximately 2 1/2 percent,
or $215,000, after taking into effect foreign tax credits which would be
available as a reduction of the majority of the U.S. income tax in the event of
the future distribution of these earnings. In fiscal year 1996, the Company has
provided taxes (net of expected foreign tax credits) on the undistributed
earnings of HESL in excess of the $8,600,000 permanently retained.
F - 15
63
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
6. INCOME TAXES (CONTINUED)
The components of deferred tax assets (liabilities) are as follows:
May 31, 1995 May 31, 1996
------------ ------------
Federal State Federal State
--------------------------------------------------------
Deferred tax assets:
Uniform capitalization rules ..... $ 280,000 $ 66,000 $ 280,000 $ 54,000
Allowance for doubtful accounts ... 250,000 59,000 281,000 63,000
Environmental accrual ............. 362,000 85,000 342,000 65,000
Vacation and sick accrual ......... 101,000 24,000 137,000 26,000
Retirement accrual ................ 470,000 111,000 451,000 87,000
Reserve for obsolescence .......... 224,000 53,000 283,000 77,000
Purchased land/building - related..
party (Note 11) ............... 1,275,000 326,000 1,286,000 263,000
State taxes ....................... 25,000 62,000
Other ............................. 7,000 2,000 90,000 18,000
--------------------------------------------------------
Total deferred tax assets ........... 2,994,000 726,000 3,212,000 653,000
Deferred tax liabilities:
Depreciation ...................... (126,000) (31,000) (160,000) (31,000)
Purchased technology .............. (2,413,000) (568,000) (2,234,000) (428,000)
Other ............................. (7,000) (2,000) (66,000) (20,000)
--------------------------------------------------------
Total deferred tax liabilities ...... (2,546,000) (601,000) (2,460,000) (479,000)
--------------------------------------------------------
Net deferred tax asset .............. $ 448,000 $ 125,000 $ 752,000 $ 174,000
--------------------------------------------------------
The reconciliation between the amount computed by applying the U.S.
federal statutory tax rate of 35% to income before income taxes and the actual
income taxes follows:
Fiscal Year Ended May 31,
-------------------------
1994 1995 1996
---- ---- ----
Income tax expense at statutory rate .............. $ 11,000 $ 692,000 $1,590,000
State income taxes, net of federal tax benefit .... (44,000) 130,000 131,000
Goodwill .......................................... 78,000 79,000
Tax-free municipal bond interest .................. (19,000)
Taxes associated with dividends from HESL ........ 34,000 53,000
Foreign income subject to tax other than at federal
statutory rate .................................... 110,000
Other ............................................. 82,000 23,000 34,000
-------------------------------------
$ 30,000 $ 957,000 $1,997,000
=====================================
F - 16
64
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
7. PROFIT SHARING PLAN
The Company has a profit sharing plan which covers substantially all
U.S. employees. Contributions are at the discretion of the Board of Directors.
The Company did not make any profit sharing contributions for fiscal years 1994,
1995 or 1996.
8. RETIREMENT PLANS
HESL maintains two pension plans for the benefit of employees:
(a) The Haskel Retirement Benefits Plan provides future benefits for
all employees of HESL who have completed one year of qualifying service.
(b) A Discretionary Benefits Plan provides additional future benefits
for United Kingdom directors.
Pension costs are determined under the provisions of Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions."
Plan assets are held separately from those of HESL and are invested with
insurance companies. Certain selected information for the plans is as follows:
May 31,
--------------------------
1995 1996
------------ -----------
Actuarial present value of benefit obligations:
Vested benefits ......................................... $ 1,385,000 $ 1,897,000
Non-vested benefits ..................................... 185,000 174,000
----------- -----------
Accumulated benefit obligation ............................ 1,570,000 2,071,000
Effect of projected salary increases ...................... 796,000 229,000
----------- -----------
Projected benefit obligation .............................. 2,366,000 2,300,000
Net assets available for benefits (market value) .......... 1,766,000 1,876,000
----------- -----------
Projected benefit obligation in excess of plan assets ..... 600,000 424,000
Unrecognized net obligation being recognized over 15 years 558,000 469,000
----------- -----------
Unfunded obligation / (Prepaid pension cost) .............. $ 42,000 $ (45,000)
=========== ===========
Net periodic pension cost included the following components:
1994 1995 1996
--------- --------- ---------
Service cost - benefits earned during the period $ 134,000 $ 131,000 $ 158,000
Interest cost on projected benefit obligation .. 224,000 214,000 184,000
Expected return on plan assets ................. (158,000) (158,000) (150,000)
Amortization of unrecognized net obligation .... 48,000 42,000 16,000
--------- --------- ---------
Net periodic pension cost ...................... $ 248,000 $ 229,000 $ 208,000
========= ========= =========
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 9 percent and 8 percent, respectively, for
fiscal years 1994 and 1995 and 8 percent and 6 percent, respectively, for fiscal
year 1996. The expected long-term rate of return on assets was 9 percent for
fiscal years 1994 and 1995 and 8 percent for fiscal year 1996. The discount rate
approximates the rate on AA-rated bonds in the United Kingdom.
F - 17
65
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
9. STOCK OPTIONS AND WARRANTS
The Company has four stock option plans: the 1989 Incentive Stock
Option Plan and the Nonqualified Stock Option Plan which were replaced by the
1995 Incentive Stock Option Plan and the 1995 Formula Stock Option Plan,
respectively. Under the Company's various stock option plans, the Company may
issue nonqualified and incentive stock options to officers, directors and other
employees to purchase the Company's Class A Common Stock at a price that is not
less than 100 percent of the fair market value at the date of grant. The options
granted under the 1989 Incentive Stock Option Plan and the Nonqualified Stock
Option Plan become exercisable at such times, and in such installments, as were
determined by the Board of Directors at the time of the grant. The options
granted under the 1995 Incentive Stock Option Plan, which replaced both the 1989
Incentive Stock Option Plan and Nonqualified Stock Option Plan, become
exercisable at such times, and in such installments, as are determined by the
Stock Option Committee at the time of grant. The options granted under the 1995
Formula Stock Option Plan become exercisable in equal installments over five
years. The options under all of the above plans expire no later than ten years
after the date of grant. There are 1,380,000 shares of Class A Common Stock
reserved for issuance under the option plans as of May 31, 1996. As of May 31,
1996, options for 581,619 of these shares, in the aggregate, were exercisable.
The following table summarizes the stock option activity:
Range of Option
Shares Prices Per Share
-------- ----------------
Outstanding at June 1, 1993 ... 410,195 $4.17 - $9.46
Options exercised ............. (42,100) $4.17 - $9.46
Options granted ............... 321,500 $7.18
Options canceled .............. (165,310) $4.17 - $9.46
--------
Outstanding at May 31, 1994 ... 524,285 $7.00 - $9.46
Options exercised ............. (12,000) $7.00 - $7.18
Options granted ............... 269,000 $8.03 - $10.00
Options canceled .............. (2,400) $8.03 - $9.46
--------
Outstanding at May 31, 1995 ... 778,885 $7.00 - $10.00
Options granted ............... 238,000 $5.38 - $7.25
Options canceled .............. (182,320) $5.38 - $9.50
--------
Outstanding at May 31, 1996 ... 834,565 $5.38 - $10.00
========
In connection with the initial public offering of its common stock, the
Company sold Representative's Warrants which entitle the holder to purchase up
to 75,000 shares of Class A Common Stock at a price per share of $15.00. The
Warrants are exercisable for a period of four years beginning November 1, 1995.
The warrants contain certain restrictions regarding transferability and
registration rights. On November 22, 1994, an option to purchase 25,000 shares
of Class A Common Stock was granted to an unaffiliated person at an option price
of $10.00 per share. This option is 100% vested and expires November 22, 1999.
F - 18
66
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
10. RETIREMENT BENEFITS
The Company is committed under unfunded consultant and non-compete
agreements to make post-retirement payments to employees in return for
consulting services from date of retirement to date of death or disability and
subsequent retirement payments to each employee's widow. Total payments
associated with these pension agreements were $149,000 for fiscal year 1994 and
$139,000 for fiscal years 1995 and 1996. Additionally, the Company has accrued
costs of $1,382,000 and $1,348,000 associated with the actuarial present value
of the accumulated obligation as of May 31, 1995 and 1996, respectively. The
actuarial assumptions used to determine the obligation include an assumed
interest rate of 7%. Such accrual was made because the Company determined that
significant consulting service would not be required in the future. The current
portion of the liability was $139,000 as of May 31, 1995 and 1996 and is
included in accrued liabilities. Other accrued liabilities include $1,243,000
and $1,209,000 as of May 31, 1995 and 1996, respectively.
11. RELATED PARTY TRANSACTIONS
The Company previously leased its principal office space, plant, and
warehouse facilities in Burbank, California from a controlling shareholder of
the Company. Lease payments were $161,000 for fiscal year 1994 and are included
in rent expense for operating leases presented in Note 5.
On October 14, 1993, the Company purchased the land and certain
buildings previously leased at its Burbank facility from a group of controlling
shareholders of the Company. The Company paid $1,000,000 in cash and issued a
$3,500,000 promissory note to the sellers. The purchase price was based upon an
independent appraisal. The promissory note was repaid in 1995 by a cash payment
of $2,000,000 and offsetting a $1,500,000 balance of a note receivable from the
same shareholders (see below). Interest paid on the note totaled $167,000 in
fiscal year 1995. Because the property was purchased from a group of controlling
shareholders, the Company recorded the property at the historical net book value
to such shareholders and reflected the excess of the purchase price of
$4,500,000 and the net book value of $365,000, as a deemed dividend of
$2,511,000 net of deferred income taxes of $1,624,000.
During fiscal year 1993, the Company received a note in the amount of
$1,500,000 from a group of controlling shareholders of the Company. The note
receivable was settled during fiscal year 1995 in a non-cash exchange with a
portion of a $3,500,000 promissory note (see above) from the Company. Accrued
interest receivable on the note was $29,000 as of May 31, 1994. During 1995,
$62,000 in interest was received on the note.
The Company incurred attorneys' fees in the amount of $489,000,
$353,000, and $358,000 in 1994, 1995 and 1996, respectively, in connection with
services provided by a law firm. A principal with that law firm, which serves as
the Company's counsel, is also a director and shareholder of the Company. In
addition, that firm represents the Hayman Family Trusts and the Haskel, Inc.
Profit Sharing Plan, which are principal shareholders of the Company. The
Company had accrued $21,000 and $62,000 as of May 31, 1995 and May 31, 1996,
respectively, associated with the above.
F - 19
67
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
12. CONTINGENCY
The Company is currently under investigation by the Environmental
Protection Agency (the "EPA") regarding contamination at the Burbank, California
facility which is part of an area known as the San Fernando Valley Area 2
Superfund Site (the "Superfund Site"). A law firm specializing in environmental
law has been hired by the Company to represent it in this matter. There are
several potentially responsible parties ("PRPs") involved in this investigation.
Under applicable law, most notably the federal Comprehensive Environmental
Response Compensation and Liability Act, the Company might be jointly and
severally liable with the other PRPs for the full cost of cleaning up the
Superfund Site.
The PRP's entered into an agreement whereby they are split between the
Glendale-based ("Glendale") parties, in which the Company is included, and the
Burbank-based ("Burbank") parties. The Glendale and Burbank parties engaged the
services of technical scientists as arbitrators who determined that the Burbank
parties would bear 58.8% of total estimated remediation costs of $48,000,000 and
the Glendale parties would bear the remaining 41.2%. This split is currently
being appealed by the Burbank parties. In July, 1996, the Glendale parties began
a mediation amongst themselves regarding the allocation of the 41.2%. Although
the mediation is not yet complete, the Company believes, based upon the advice
and opinion of its environmental counsel, that the Company's share of the 41.2%
portion will not exceed 1.5%, or approximately $300,000, if the arbitrator's
determination is upheld.
In addition to the remediation costs, the EPA has informed the Company
that it intends to seek reimbursement from the PRPs for some portion of the
$13,000,000 of expenses it has incurred in studying the Superfund Site and three
adjacent superfund sites. The EPA also has the right to seek recovery from PRPs
for additional administative expenses it incurs in studying the superfund sites.
Those expenses are not currently quantifiable or subject to reasonable
estimation. The EPA has informed the Company's environmental counsel that only a
portion of the $13,000,000 is attributable to the Superfund Site and the
Company's counsel believes that this portion will be approximately 25%. Assuming
the 25% of the claimed costs are attributable to the Superfund Site, the Company
believes, based upon advice and opinion of its environmental counsel, that the
Company's share of that amount would be approximately $50,000, based on a
projection of a 1.5% allocation. As of May 31, 1995 and 1996, the Company had
accrued liabilities of $962,000 and $913,000, respectively, related to this
matter. The Company believes, based upon the advice and opinion of its
environmental counsel, that the Company's liabilities will be less than the
amount currently in reserves for these matters. However, until further
definitive facts develop regarding these matters, the reserve amount will not be
changed.
Additionally, the Company was issued a mandate by the Regional Water
District to perform testing and clean-up of a site at the same facility. Based
on information available to date, management had accrued liabilities of $103,000
and $56,000 as of May 31, 1995 and 1996, respectively, which management believes
will be sufficient to perform the requested tasks.
When the Company initially tendered the EPA claim relative to the
Superfund Site, the Company's insurers refused to pay the Company's defense
costs. The Company brought litigation against its insurers in which the Company
sought an order that its insurers
F - 20
68
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
12. CONTINGENCY (CONTINUED)
must defend and indemnify the Company with respect to Superfund Site litigation.
In August 1995, the trial court ruled that the Company's insurers must reimburse
the Company for its defense costs and must pay its defense costs in the future.
As a result of this ruling, the Company expects a substantial recovery of its
defense costs. Currently, the Company is negotiating with its carriers who have
indicated their willingness to pay the Company in excess of $600,000 in past
defense costs incurred through May 31, 1996. They have also indicated their
willingness to pay all defense costs incurred subsequent to May 31, 1996, at a
reasonable rate. Litigation is pending as to whether the Company's insurers must
indemnify the Company for the Superfund Site liability.
Due to the nature of environmental matters, there can be no assurance
that the Environmental Reserve will be adequate to cover any contingent
liabilities arising from the above-referenced environmental matters or that any
liability in excess of the Environmental Reserve will not have a materially
adverse effect on the Company's results of operations or financial condition.
13. COMMON STOCK
Shareholders of Class B Common Stock elect the majority and
shareholders of Class A Common Stock elect the minority of the Board of
Directors. The holders of Class A Common Stock and Class B Common Stock have
equal rights on a per share basis (including the right to dividends) and vote as
a single class on all matters except the election of directors.
During the second quarter of fiscal 1995, the Company effected an
Initial Public Offering of 862,500 shares of its Class A Common Stock. The
proceeds to the Company for the offering were approximately $7,765,000 (after
underwriting commissions and expenses). Other costs associated with the offering
were approximately $1,468,000, resulting in net funds available to the Company
of approximately $6,297,000.
14. BUSINESS SEGMENTS
The Company is organized and operates in two business groups: the
Industrial Products Group (IPG) and the Electronic Products Group (EPG). The IPG
operates in two segments: industrial products manufacturing and industrial
products distribution. The EPG operates in one segment: electronic products
distribution. The IPG manufacturing segment manufactures pneumatically and
hydraulically driven, high-pressure low-flow, fixed displacement, reciprocating,
liquid pumps, gas boosters, chemical injection pumps, air pressure amplifiers,
high-pressure valves, regulators, and accessories to complement these products.
The IPG manufacturing segment also designs and manufacturers systems. The IPG
distribution segment distributes product lines used primarily in the fluid power
business, the largest line of which is the Company's products. The EPG
distribution segment distributes circuit board-level electronic components to
manufacturers of electronic systems and products.
F - 21
69
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
14. BUSINESS SEGMENTS (CONTINUED)
Intersegment sales are principally sales from the IPG manufacturing
segment to the IPG distribution segment. Corporate expenses consist mainly of
salaries and related expenses, legal and accounting costs, and directors' fees.
Fiscal Year Ended May 31,
-------------------------
1994 1995 1996
---- ---- ----
Sales:
Industrial Products Group - Manufacturing ............. $ 20,062,000 $ 25,603,000 $ 29,184,000
Industrial Products Group - Distribution .............. 18,811,000 18,019,000 18,718,000
Electronic Products Group - Distribution .............. 3,896,000 12,819,000 14,623,000
Less intersegment sales ............................... (1,415,000) (4,740,000) (5,733,000)
------------ ------------ ------------
Total sales .................................... $ 41,354,000 $ 51,701,000 $ 56,792,000
============ ============ ============
Operating profit:
Industrial Products Group - Manufacturing ............. $ 817,000 $ 3,024,000 $ 4,925,000
Industrial Products Group - Distribution .............. 50,000 1,310,000 1,707,000
Electronic Products Group -Distribution ............... 92,000 (413,000) 147,000
------------ ------------ ------------
Total operating profit ......................... 959,000 3,921,000 6,779,000
Interest expense ........................................ (308,000) (550,000) (274,000)
Interest income ......................................... 423,000 435,000 356,000
Other ................................................... 56,000 (182,000) 13,000
Corporate expenses ...................................... (1,097,000) (1,648,000) (2,330,000)
------------ ------------ ------------
Income before income taxes .................... $ 33,000 $ 1,976,000 $ 4,544,000
============ ============ ============
Depreciation and amortization:
Industrial Products Group - Manufacturing ............. $ 368,000 $ 427,000 $ 670,000
Industrial Products Group - Distribution .............. 210,000 199,000 254,000
Electronic Products Group - Distribution .............. 433,000 889,000 901,000
------------ ------------ ------------
Total depreciation and amortization .......... $ 1,011,000 $ 1,515,000 $ 1,825,000
============ ============ ============
Capital expenditures (excluding subsidiaries acquired):
Industrial Products Group - Manufacturing ............. $ 982,000 $ 903,000 $ 687,000
Industrial Products Group - Distribution .............. 233,000 283,000 335,000
Electronic Products Group -Distribution ............... 64,000 144,000 250,000
------------ ------------ ------------
Total capital expenditures ................... $ 1,279,000 $ 1,330,000 $ 1,272,000
============ ============ ============
F - 22
70
HASKEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
14. BUSINESS SEGMENTS (CONTINUED)
Fiscal Year Ended May 31,
-------------------------
1994 1995 1996
---- ---- ----
Identifiable assets:
Industrial Products Group - Manufacturing.. $ 15,828,000 $ 17,033,000 $ 18,102,000
Industrial Products Group - Distribution .. 13,769,000 11,130,000 10,482,000
Electronic Products Group - Distribution .. 12,278,000 12,141,000 10,802,000
Corporate ................................. 2,536,000 3,991,000 5,974,000
------------ ------------ ------------
Total assets .................... $ 44,411,000 $ 44,295,000 $ 45,360,000
============ ============ ============
Sales:
United States ............................. $ 32,627,000 $ 40,567,000 $ 42,215,000
Europe .................................... 11,754,000 14,807,000 19,987,000
Less sales between geographic areas ....... (3,027,000) (3,673,000) (5,410,000)
------------ ------------ ------------
$ 41,354,000 $ 51,701,000 $ 56,792,000
============ ============ ============
Operating profit (loss):
United States ............................. $ (318,000) $ 2,353,000 $ 4,346,000
Europe .................................... 1,277,000 1,568,000 2,433,000
------------ ------------ ------------
959,000 3,921,000 6,779,000
Interest expense ............................ (308,000) (550,000) (274,000)
Interest income ............................. 423,000 435,000 356,000
Other ....................................... 56,000 (182,000) 13,000
Corporate expenses .......................... (1,097,000) (1,648,000) (2,330,000)
------------ ------------ ------------
Income before income taxes .................. $ 33,000 $ 1,976,000 $ 4,544,000
============ ============ ============
Identifiable assets:
United States ............................. $ 30,517,000 $ 28,794,000 $ 31,685,000
Europe .................................... 13,894,000 15,501,000 13,675,000
------------ ------------ ------------
$ 44,411,000 $ 44,295,000 $ 45,360,000
============ ============ ============
Export sales were $4,326,000 and $5,461,000 during fiscal year 1994 and
1995, respectively. Export sales did not represent more than 10% of total sales
during fiscal year 1996.
No single customer accounted for more than 10% of total sales during
fiscal year 1994, 1995 or 1996.
15. SUBSEQUENT EVENT
On June 3, 1996, HESL acquired all of the outstanding stock of
Hydraulic Mobile Equipment Limited ("HME") in exchange for approximately
$814,000. The business is located in Manchester, England.
* * * * * *
F - 23
71
SCHEDULE II
HASKEL INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Balance at Balance at
Beginning of End of
Period Additions Write-offs Period
------------ --------- ---------- ----------
May 31, 1994 $188,000 $ 73,000 $ 50,000 $211,000
May 31, 1995 $211,000 $791,000 $ 87,000 $915,000
May 31, 1996 $915,000 $389,000 $343,000 $961,000
72
EXHIBIT INDEX
Exhibit
Number Exhibit Description
- ------- -------------------
(4) 3.1 Restated Articles of Incorporation of the Company, as amended.
(1) 3.2 Restated Bylaws of the Company, as amended.
(2) 4.1 Specimen Class A Common Stock and Class B Stock Certificates.
(2) 4.2 Form of Underwriter's Warrants.
(2) 10.1 1989 Incentive Stock Option Plan and form of Stock Option
Agreement.
(2) 10.2 Non-Qualified Stock Option Plan and form of Stock Option Agreement.
(1) 10.3 1995 Incentive Stock Option Plan and form of Stock Option Agreement.
(1) 10.4 1995 Formula Stock Option Plan and form of Stock Option Agreement.
(2) 10.5 Haskel Inc. Profit Sharing Plan.
(2) 10.6 Haskel Energy Systems, Ltd. Pension Plan.
(2) 10.7 Agreement and Plan of Reorganization of M.G. Electronics, Inc. into
Haskel Network Group, Inc. dated November 17, 1993 and related
Indemnification Agreement and Agreement of Merger.
(2) 10.8 Employment Agreement dated November 17, 1993 between Maury S.
Friedman and the Company.
73
Exhibit
Number Exhibit Description
- ------- -------------------
(2) 10.9 Non-Competition Agreement dated November 17, 1993 between Maury S.
Friedman, the Friedman Family Trust and M.G. Electronics, Inc.
(5) 10.10 Consulting Agreement dated March 21, 1996 between the Company and
Maury S. Friedman.
(2) 10.11 Leases dated June 1, 1993 and September 24, 1993 between West Lake
Village Industrial Park and M.G. Electronics, Inc.
(2) 10.12 Consultant and Widow's Pension Agreement dated May 16, 1983 between
the Company and Frederick J. Broderick and related Memorandum dated
April 22, 1993.
(2) 10.13 Glendale Superfund Site PRP Organization Agreement dated October 28,
1993 by and among the Company and the other PRPs in the Group.
(1) 10.14 Amendment to the Glendale Superfund Site PRP Organization Agreement
dated as of January 11, 1996 by and among the Company and the
other PRPs in the Group.
(1) 10.15 Memorandum of Agreement Regarding Cost-Sharing for the Glendale
Operable Unit Superfund Sites dated June 7, 1995 by and among the
Company and the other PRPs in the Group.
(2) 10.16 Underwriter's Warrant Agreement.
(3) 10.17 Loan Agreement dated February 21, 1995 by and between the Company
and Union Bank and related Commercial Promissory Note, Arbitration
Agreement, Continuing Guaranty and Security Agreement-Pledge.
(1) 10.18 First Amendment dated as of August 30, 1995 to Loan Agreement
between the Company and Union Bank.
(1) 10.19 Second Amendment dated as of February 13, 1996 to Loan Agreement
between the Company and Union Bank.
74
Exhibit
Number Exhibit Description
- ------- -------------------
(1) 10.20 Third Amendment dated as of April 16, 1996 to Loan Agreement between
the Company and Union Bank.
(1) 10.21 Employment Agreement dated December 22, 1995 regarding James C.
Minyard.
(1) 10.22 Haskel International, Inc. Executive Separation Pay Plan.
(1) 11.1 Statement regarding computation of net income per share.
(1) 21 Schedule of Subsidiaries.
(1) 27 Financial Data Schedule.
(1) Filed herewith.
(2) Filed as an exhibit to the Registrant's Registration Statement on
Form S-1 (SEC File No. 33-74362), and incorporated herein by this
reference.
(3) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 28, 1995, and incorporated herein by
this reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1995, and incorporated herein by this reference.
(5) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 29, 1996, and incorporated herein by
this reference.