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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER 0-3134
PARK-OHIO HOLDINGS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1867219
- ----------------------------------------------------- -----------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
23000 EUCLID AVENUE
CLEVELAND, OHIO 44117
- ----------------------------------------------------- -----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (216) 692-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) of the Act:
Common Stock, Par Value $1.00 Per Share
(Title of class)
Park-Ohio Holdings Corp. is a successor issuer to Park-Ohio Industries, Inc.
Indicate by check mark whether the registrant (1) has filed 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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1999: Approximately $105,232,000.
Number of shares outstanding of the registrant's Common Stock, par value
$1.00 per share, as of March 5, 1999: 11,147,462 including 355,206 shares in
treasury.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 29, 1999 ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.
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PARK-OHIO HOLDINGS CORP.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
ITEM NO. PAGE NO.
- -------- --------
PART I
1. Business 1
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for the Registrant's Common Stock and Related
Security Holder Matters 8
6. Selected Consolidated Financial Data 8
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
7A. Quantitative and Qualitative Disclosure about Market Risk 15
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35
PART III
Part III information will appear in the Registrant's Proxy
Statement in connection with its 1999 Annual Meeting of
Shareholders. Such Proxy Statement will be filed with the
Securities and Exchange Commission pursuant to Regulation
14A and such information will be incorporated herein by
reference as of the date of such filing. 35
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 36
SIGNATURES 37
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PART I
ITEM 1. BUSINESS
THE COMPANY
Park-Ohio Holdings Corp. ("Holdings") was incorporated as an Ohio
corporation in 1998. Holdings, primarily through the subsidiaries owned by its
direct subsidiary, Park-Ohio Industries, Inc. ("Park-Ohio") is a leading
provider of logistics services and a manufacturer of highly engineered products.
Reference herein to the "Company" includes, where applicable, Holdings,
Park-Ohio and its direct and indirect subsidiaries and its predecessor
companies, which have operated for more than 150 years.
The Company operates through two segments, Integrated Logistics Solutions
("ILS") and Manufactured Products, which serve a wide variety of industrial
markets. ILS is a leading national supplier of fasteners (e.g., nuts, bolts and
screws) and other industrial products to original equipment manufacturers
("OEMs"), other manufacturers and distributors. In connection with the supply of
such industrial products, ILS provides a variety of value-added, cost-effective
procurement solutions. The principal customers of ILS are OEMs in the
transportation, industrial, electrical and lawn and garden equipment industries.
Manufactured Products designs and manufactures a broad range of high quality
products engineered for specific customer applications. The principal customers
of Manufactured Products are end-users in the automotive, railroad, truck and
aerospace industries. Between 1994 and 1998, the Company grew significantly,
through both internal growth and acquisitions. Over this period, the Company's
net sales increased from $129.2 million to $551.8 million, income from
continuing operations before income taxes increased from $6.7 million to $22.7
million, and EBITDA increased from $11.4 million to $52.9 million. As of
December 31, 1998, the Company employed approximately 3,000 persons.
OPERATIONS
The following chart highlights the Company's two business segments, the
primary industries they serve and the key products they sell.
NET SALES FOR THE
YEAR ENDED
SEGMENT PRIMARY INDUSTRIES SERVED SELECTED PRODUCTS/SERVICES DEC. 31, 1998
------- ------------------------- -------------------------- -----------------
(MILLIONS)
INTEGRATED LOGISTICS Automotive parts and Inventory management, $364.5
SOLUTIONS accessories, electrical engineering and
equipment, lawn and garden procurement of standard
equipment, HVAC, and specialty fasteners,
industrial equipment, fittings, rubber and other
railroad and heavy truck industrial products.
MANUFACTURED PRODUCTS Automotive, aerospace, Engineering and 187.3
power generation, manufacturing the
railroad, shipbuilding, following: Aluminum
steel, telecommunications permanent mold castings
and truck such as clutch retainers,
pinion carriers and
transmission pump
housings; forged and
machined products such as
aircraft landing gears,
locomotive crankshafts and
camshafts; induction
heating systems; and,
industrial rubber products
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INTEGRATED LOGISTICS SOLUTIONS
ILS is a leading national supplier of over 150,000 standard and specialty
fasteners and other industrial products pursuant to either supply chain
management agreements or traditional wholesale supply arrangements. ILS operates
out of branches located throughout the United States, Canada, Puerto Rico,
Mexico and England, and has a central distribution center located in Dayton,
Ohio. ILS generated net sales of $364.5 million, or 66% of the Company's net
sales for the year ended December 31, 1998. The four largest customers,
comprised of many divisions, accounted for approximately 21% of sales of ILS.
The loss of any one of these customers would have an adverse effect on this
segment.
Products and Services. Supply chain management, which is ILS' primary
focus for future growth, involves offering customers procurement solutions and
comprehensive, on-site management for most of their fastener and related
hardware needs. Supply chain management customers receive value-added services,
such as part usage and cost analysis, product redesign recommendations, supplier
selection, quality assurance, bar coding, product packaging and tracking,
just-in-time delivery, electronic billing services and ongoing technical
support. Supply chain management services are typically provided to customers
pursuant to total fastening services ("TFS") contracts. TFS contracts enable
ILS' customers to both reduce procurement costs and better focus on their
companies' core manufacturing competencies by: (i) significantly reducing the
administrative and labor costs associated with fastener procurement by
outsourcing certain internal purchasing, quality control and inventory
fulfillment responsibilities; (ii) reducing the amount of working capital
invested in inventory; (iii) achieving purchasing efficiencies as a result of
vendor consolidation; and (iv) receiving technical expertise in the selection of
fastener and other components for certain manufacturing processes. Management
believes that TFS contracts foster longer-lasting supply relationships with
customers, who increasingly rely on the Company for their fastener needs, as
compared to traditional buy/sell distribution relationships. Sales pursuant to
TFS contracts have increased significantly in recent years and represented over
59% of ILS' net sales for the year ended December 31, 1998. ILS' remaining sales
are generated through the wholesale supply of fasteners and other industrial
products to OEMs, other manufacturers and distributors pursuant to master or
authorized distributor relationships.
ILS supplies standard and specialty engineered fasteners such as nuts,
bolts, screws and washers on a fully integrated basis. ILS engineers and
manufactures precision cold formed and cold extruded products including
locknuts, spac nuts and wheel hardware, which are principally used in
applications where controlled tightening is required due to high vibration.
These are manufactured by shaping cold raw materials. Standard and specialty
nuts are produced to customer specifications, which are used in large volumes by
customers in the automotive, truck and railroad industries.
In addition to fasteners, ILS supplies, among other things, valves,
fittings, clamps and rubber products, which currently represent approximately 9%
of ILS' net sales. ILS also provides engineering and design services to its
customers. Applications-engineering specialists and the direct sales force work
closely with the engineering staff of OEM customers to recommend the appropriate
fasteners for a new product or to suggest alternative fasteners that reduce
overall production costs, streamline assembly or enhance the appearance or
performance of the end product.
Markets and Customers. In 1998, approximately 89% of ILS' net sales were
to domestic customers. Remaining sales were primarily to Canada and Mexico. The
domestic industrial fastener market is estimated by industry sources to have
generated between $7 and $9 billion in annual sales in 1998 at the wholesale
level. Fasteners are used extensively by OEMs in a variety of industries, and
demand is generally related to the state of the economy and to the overall level
of manufacturing activity.
ILS markets and sells fasteners and other industrial products to over
12,000 customers domestically and internationally. The principal markets served
by ILS are transportation equipment, including manufacturers of heavy trucks and
recreational vehicles, automotive parts and accessories, industrial equip-
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ment, electrical equipment, including manufacturers of electrical controls,
appliances and motors, lawn and garden equipment and HVAC.
In recent years, OEMs have made it a priority to reduce their total cost of
purchasing and handling fasteners. Due to the low unit cost and the large number
of different fasteners used to manufacture or assemble a single product,
administrative and overhead costs comprise a substantial portion of an OEM's
fastener-related costs. As a result, management believes industrial fastener
suppliers are consolidating as OEMs rely on fewer suppliers to achieve
purchasing efficiencies. ILS provides a wide array of value-added services and
is a reliable source for just-in-time delivery and is well positioned to
capitalize on these trends. In addition, OEMs are increasingly relying on
fastener suppliers to provide design and applications engineering support,
enabling more efficient use of internal engineering resources thereby allowing
ILS to increase the amount of low unit cost fastener and non-fastener items
supplied to OEMs.
Competition. The industrial fastener supply industry is highly competitive
and fragmented. Management believes that substantially all of ILS' competitors
operate on a regional basis and do not provide customers with the wide array of
value-added services offered by ILS. ILS competes primarily on the basis of its
value-added services, extensive product selection and price with primarily
domestic competitors who are capable of providing inventory management programs.
MANUFACTURED PRODUCTS
The Manufactured Products segment includes aluminum casting, forged and
machined products, capital equipment, industrial rubber products and other
manufactured products. Manufactured Products generated net sales of $187.3
million, or 34% of the Company's net sales for the year ended December 31, 1998.
The three largest customers, of which the Company sells to multiple operating
divisions, accounted for approximately 31% of Manufactured Products sales in
1998. The loss of business from any one of these customers would have an adverse
effect on this segment.
ALUMINUM CASTINGS
Aluminum permanent mold castings are produced at General Aluminum Mfg.
Company ("GAMCO") and its wholly owned subsidiary. GAMCO's cast aluminum parts
are critical components manufactured primarily for automotive OEMs. GAMCO's
principal automotive products include: transmission pump housings, planetary
pinion carriers, clutch retainers, rotor castings and bearing cups. In addition,
GAMCO manufactures products for non-automotive end users such as surgical table
components, light housings and electrical meter housings. GAMCO also provides
value-added services such as secondary casting, machining, drilling, tapping and
part assembly. Although these parts are lightweight, they possess high
durability and integrity characteristics even under extreme pressure and
temperature conditions. Demand by automotive OEMs for aluminum permanent mold
products has increased in recent years as OEMs have sought lighter alternatives
to heavier steel and iron components. Lighter aluminum cast components increase
an automobile's fuel efficiency without decreasing its structural integrity.
Management believes this replacement trend will continue as government standards
regarding fuel efficiency become increasingly stringent. GAMCO sells its
products primarily to customers located in North America. The market for
aluminum permanent mold castings is comprised of two segments: automotive and
non-automotive. The domestic aluminum permanent mold industry is highly
competitive. GAMCO competes principally on the basis of its ability to: (i)
engineer and manufacture high quality, semi-machined castings in large volumes;
(ii) provide timely delivery; and (iii) retain the manufacturing flexibility
necessary to quickly adjust to the needs of its customers. Although there are a
number of smaller domestic companies with aluminum permanent mold casting
capabilities, the automotive industry's stringent quality and service standards
enable only large suppliers with the requisite quality certifications to compete
effectively. As one of these suppliers, GAMCO has benefited in recent years as
automotive OEMs have consolidated their supplier base. GAMCO, a well-established
name in the aluminum permanent mold industry, has achieved QS 9000 and ISO 9002
certifications and has been awarded numerous supplier quality awards.
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In January 1999, GAMCO acquired all of the shares of The Metalloy
Corporation ("Metalloy"). Metalloy is a full service aluminum casting and
machining company with operations located in Indiana, Michigan and Mississippi.
The acquisition of Metalloy provides sand and die casting capabilities to
complement GAMCO's permanent mold process. Management believes that GAMCO is one
of the few automotive parts suppliers which has the capabilities of providing
permanent mold, sand-casted and die-casted products.
FORGED AND MACHINED PRODUCTS
The Company's forged and machined products business is carried out at four
operating units consisting of Park Drop Forge, Ohio Crankshaft, Cleveland City
Forge, and Blue Falcon Forge. The forging process enables metal to be shaped
while generally retaining higher structural integrity than metal shaped through
other processes. Park Drop Forge manufactures closed-die metal forgings of up to
6,000 pounds, including crankshafts and aircraft landing gears, primarily for
customers in the railroad and aerospace industries. Park Drop Forge's products
are sold primarily to machining companies and subassemblers who finish the
products for sale to OEMs in the railroad and aerospace industries. Ohio
Crankshaft machines, induction hardens and surface finishes crankshafts and
camshafts used primarily in locomotives, power generators and ships. Cleveland
City Forge manufactures and machines specialized hardware such as turnbuckles
and clevises for construction companies. Its products are manufactured according
to customers' specific dimensional and/or strength requirements. Blue Falcon
Forge produces large forged products such as center plates and couplings, both
of which are used in the undercarriage of rail cars. Forged and machined
products are sold to a wide variety of domestic and international OEMs and other
manufacturers in the transportation, power generation and construction
industries. The Company's forged and machined products business competes
domestically and internationally with other small to medium-sized businesses on
the basis of product quality and precision.
CAPITAL EQUIPMENT
The Company manufactures large industrial equipment through its operating
units consisting of Tocco, Ajax, and Feco. Tocco specializes in the engineering
and construction of induction heating systems primarily for the automotive and
truck industries. Tocco's induction heating systems are engineered and built to
customer specifications and are used primarily by OEMs for surface hardening.
Ajax engineers, manufactures and services mechanical forging presses ranging in
size from 500 to 8,000 tons that are used worldwide in the automotive and truck
manufacturing industries. Feco produces complete oven systems that combine heat
processing and curing technologies with material handling and conveying methods.
Feco's principal products include industrial drying and curing ovens for
automotive components, metal can curing ovens, specialized conveyor and
automation systems for lightweight containers, and plastic and glass bottle
coating and finishing systems. The Company's capital equipment units compete
with large equipment manufacturers on the basis of service capability, ability
to meet customer specifications, delivery performance and engineering expertise
and exists at both domestic and international levels.
INDUSTRIAL RUBBER PRODUCTS
The Company manufactures injection and transfer molded products, lathe-cut
goods, roll coverings and various items requiring rubber to metal bonding for
use in industrial applications through three operating units consisting of
Castle Rubber, Cicero Flexible Products and Geneva Rubber. Castle manufactures
valve seals, power and conveyor rolls and slitter rings. Cicero is a developer
and manufacturer of injection molded silicone rubber products for customers in
the automotive, food processing and consumer appliance industries, such as wire
harnesses, spark plug boots and nipples and general sealing gaskets. Geneva is a
manufacturer of injection molded rubber products for customers in the
automotive, telecommunications, funeral and heavy truck industries. Its products
include primary wire harnesses, transoceanic cable boots, casket gaskets and
shock and vibration mounts. The industrial
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rubber products operating units compete primarily on the basis of price and
product quality with other domestic small to medium-sized manufacturers of
rubber products.
SALES AND MARKETING
ILS markets its products and services in the United States, Mexico, Canada
and Europe, primarily through its direct sales force, which is assisted by
applications engineers who provide the technical expertise necessary to assist
the engineering staff of OEM customers in designing new products and improving
existing products. ILS often obtains new customers as a result of referrals from
existing customers. Manufactured Products markets and sells its products through
both internal sales personnel and independent sales representatives. In some
instances, the internal engineering staff assists in the sales and marketing
effort through joint design and applications-engineering efforts with major
customers. In addition, Manufactured Products markets certain of its products
through various regional and national trade shows.
RAW MATERIALS AND SUPPLIERS
ILS purchases substantially all of its fasteners and Manufactured Products
purchases substantially all of its raw materials, principally metals and certain
component parts incorporated into its products, from third-party suppliers and
manufacturers. Management believes that raw materials and component parts other
than certain specialty fasteners are available from alternative sources. ILS has
multiple sources of supply for standard products, but has limited supply sources
for certain specialty products. Approximately 10% of ILS' fasteners are
purchased from suppliers in foreign countries, primarily Taiwan, Japan and
Korea. The Company is dependent upon the ability of such suppliers to meet
stringent quality and performance standards and to conform to delivery
schedules. Most raw materials required by Manufactured Products are commodity
products available from several domestic suppliers.
BACKLOG
Management believes that backlog is not a meaningful measure for the
Company's ILS operating units, as a majority of ILS' customers require
just-in-time delivery of fasteners and other industrial products. Management
believes that Manufactured Products' backlog as of any particular date is not a
meaningful measure of sales for any future period as a significant portion of
sales are on a release or firm order basis.
ENVIRONMENTAL REGULATIONS
The Company is subject to numerous federal, state and local laws and
regulations designed to protect public health and the environment
("Environmental Laws"), particularly with regard to discharges and emissions, as
well as handling, storage, treatment and disposal, of various substances and
wastes. Pursuant to certain Environmental Laws, owners or operators of
facilities may be liable for the costs of response or other corrective actions
for contamination identified at or emanating from current or former locations,
without regard to whether the owner or operator knew of, or was responsible for,
the presence of any such contamination, and for related damages to natural
resources. Additionally, persons who arrange for the disposal or treatment of
hazardous substances or materials may be liable for costs of response at sites
where they are located, whether or not the site is owned or operated by such
person.
The Company believes that it is currently in material compliance with
applicable Environmental Laws. In general, the Company has not experienced
difficulty in complying with Environmental Laws in the past, and compliance with
Environmental Laws has not had a material adverse effect on the Company's
financial condition, liquidity and results of operations. The Company's capital
expenditures on environmental control facilities were not material during the
past five years and such expenditures are not expected to be material to the
Company in the foreseeable future.
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The Company has been identified as a potentially responsible party at
certain third-party sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or comparable state laws
which provide for strict and, under certain circumstances, joint and several
liability. The Company is participating in the cost of certain clean-up efforts
at several of these sites. The availability of third-party payments or insurance
for environmental remediation activities is subject to risks associated with the
willingness and ability of the third party to make payments. However, the
Company's share of such costs has not been material and based on available
information, the Company does not expect its exposure at any of these locations
to have a material adverse effect on its results of operations, liquidity or
financial condition.
At its facility in Kent, Ohio, the Company's indirect subsidiary, RB&W
Manufacturing LLC, is conducting remediation of groundwater impacted by
operations and disposal activities. Contaminants known to be present in the
groundwater at the facility and/or to have migrated off-site include oil and
certain volatile organic compounds. In addition, soil and groundwater
investigations are being conducted in connection with a closure under the
Resource Conservation and Recovery Act of 1976, as amended, of hazardous waste
storage areas associated with former metal plating operations. RB&W has filed
suit against the former owner seeking reimbursement of costs spent and
contribution for future costs for remediation efforts at the Kent facility. The
Company does not believe that future costs to address the currently identified
environmental issues at its facilities will be material.
INFORMATION AS TO INDUSTRY SEGMENT REPORTING
The information contained under the heading of "Note L -- Industry
Segments" of notes to consolidated financial statements included herein,
relating to net sales, operating income, identifiable assets and other
information by industry segment for the years ended December 31, 1998, 1997, and
1996 is incorporated herein by reference.
RECENT DEVELOPMENTS
The information contained under the headings of "Note B -- Corporate
Reorganization", "Note C -- Acquisitions" and "Note D -- Dispositions" of notes
to consolidated financial statements included herein, is incorporated by
reference.
ITEM 2. PROPERTIES
The Company's operations include numerous manufacturing and warehousing
facilities located in 23 states in the United States and in 4 other countries.
Approximately 54% of the available square footage is owned. In 1998,
approximately 61% of the available domestic square footage was used by the
Manufactured Products segment and 39% by the ILS segment. Approximately 19% of
the foreign facilities was used by the Manufactured Products segment and 81% was
used by the ILS segment. In the opinion of management, Park-Ohio's facilities
are generally well maintained and are suitable and adequate for their intended
uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted in the ordinary course of business.
While any litigation involves an element of uncertainty, in the opinion of
management, liabilities, if any, arising from currently pending or threatened
litigation will not have a material adverse effect on the Company's financial
condition, liquidity and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1998.
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MANAGEMENT
EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers of the Company is as
follows:
NAME AGE POSITION
---- --- --------
EXECUTIVE OFFICERS
Edward F. Crawford................. 59 Chairman of the Board, Chief Executive Officer and
President
James S. Walker.................... 56 Vice President and Chief Financial Officer
Felix J. Tarorick.................. 56 Vice Chairman of the Board and Vice President of
Operations
Ronald J. Cozean................... 35 Secretary and General Counsel
Matthew V. Crawford................ 29 Assistant Secretary, Corporate Counsel and Director
Patrick W. Fogarty................. 38 Director of Corporate Development
Edward F. Crawford has been Chairman of the Board and Chief Executive
Officer of the Company since 1992.
James S. Walker has served as Vice President and Chief Financial Officer of
the Company since 1991. Mr. Walker has been with the Company for over 20 years
and has served in several capacities, including Corporate Controller and
Assistant Treasurer.
Felix J. Tarorick became Vice Chairman of the Board in 1998 and has been
Vice President of Operations since 1996. From 1992 to 1995, Mr. Tarorick served
as President of the former consumer products group. Mr. Tarorick joined the
Company in 1992. Mr. Tarorick became a director of the Company in February,
1998.
Ronald J. Cozean has served as Secretary and General Counsel since joining
the Company in 1994. Mr. Cozean was an associate at the law firm of Squire,
Sanders & Dempsey L.L.P. from 1991 to 1994.
Matthew V. Crawford has served as Assistant Secretary and Corporate Counsel
since joining the Company in February 1995 and has served as President of
Crawford Container Company since 1991. Mr. M. Crawford became a director of the
Company in August 1997. Prior to joining the Company, Mr. M. Crawford worked as
a Corporate Finance Analyst at McDonald & Co. Securities, Inc. Mr. E. Crawford
is the father of Mr. M. Crawford.
Patrick W. Fogarty has been Director of Corporate Development since 1997
and joined the Company in 1995 as Director of Finance. Prior thereto, Mr.
Fogarty held various positions, including Senior Manager, at Ernst & Young LLP
from 1983 to 1995.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock, $1 par value, is traded on the NASDAQ National
Market System. The table presents its high and low sales prices. No dividends
were paid during the periods.
QUARTERLY COMMON STOCK PRICE RANGES
1998 1997
---------- ----------
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---
1st 20 1/8 16 1/2 16 7/8 12 1/2
2nd 19 5/8 18 1/8 15 1/4 11 1/4
3rd 19 3/8 12 16 3/8 14 1/4
4th 16 15/16 11 1/2 18 3/8 15
The number of shareholders of record for the Company's common stock as of
March 5, 1999 was 1,260.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected Income Statement Data:
Net sales............................... $551,793 $441,110 $347,679 $289,501 $129,216
Cost of products sold................... 455,167 368,734 289,400 240,871 104,225
-------- -------- -------- -------- --------
Gross profit.......................... 96,626 72,376 58,279 48,630 24,991
Selling, general and administrative
expenses.............................. 56,478 44,396 38,131 30,020 16,838
Restructuring charge.................... -- -- 2,652 -- --
-------- -------- -------- -------- --------
Operating income(a)................... 40,148 27,980 17,496 18,610 8,153
Other (income) expense.................. -- (320) (4,204)(b) (214) --
Interest expense........................ 17,488 9,101 6,947 5,911 1,501
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes................ 22,660 19,199 14,753 12,913 6,652
Income taxes (benefit).................. 9,726 7,903 5,060 (6,900) (1,826)
-------- -------- -------- -------- --------
Income from continuing operations
before extraordinary charge........ $ 12,934 $ 11,296 $ 9,693 $ 19,813 $ 8,478
======== ======== ======== ======== ========
Income per common share from continuing
operations before extraordinary
charge -- diluted..................... $ 1.16 $ 1.01 $ .88 $ 1.87 $ 1.03
======== ======== ======== ======== ========
Supplemental per common share data:
Pro forma income per common share from
continuing operations before
extraordinary charge on a fully
taxable basis -- diluted.............. $ 1.16 $ 1.01 $ .88 $ .75 $ .47
======== ======== ======== ======== ========
Other Financial Data:
EBITDA(c)............................... $ 52,901 $ 38,345 $ 28,146 $ 24,888 $ 11,366
Capital expenditures.................... 22,681 15,947 15,590 13,632 11,749
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YEAR ENDED AS OF DECEMBER 31
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected Balance Sheet Data:
Cash and cash equivalents............. $ 4,320 $ 1,814 $ 4,659 $ 2,662 $ 2,172
Working capital....................... 176,932 146,444 99,094 96,307 29,411
Total assets.......................... 489,554 413,109 282,910 301,747 128,396
Total debt............................ 238,105 172,755 82,989 118,738 32,001
Shareholders' equity.................. 141,187.. 129,010 115,069 95,542 46,530
(a) Operating income is defined as net sales less cost of products sold,
selling, general and administrative expenses and a restructuring charge. In
1996, the Company incurred a restructuring charge of $2.7 million related to
the consolidation of three of the Company's manufacturing facilities into
one and the discontinuation of certain product lines.
(b) In 1996, other income was comprised of (i) a gain of $2.7 million in
connection with the full settlement of subordinated notes receivable
resulting from the sale of two manufacturing facilities and (ii) a gain of
$1.5 million on the sale of certain securities by the Company in the third
quarter of 1996.
(c) EBITDA is defined as earnings from continuing operations before interest,
income taxes, depreciation, amortization, other income and non-recurring
items. Non-recurring items include a restructuring charge of $2.7 million in
the fourth quarter of 1996 related to the consolidation of three of the
Company's consumer products manufacturing facilities into one and the
discontinuation of certain product lines. EBITDA is not a measure of
performance under generally accepted accounting principles ("GAAP"). While
EBITDA should not be considered in isolation or as a substitute for net
income, cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP or as a measure of
profitability or liquidity, management understands that EBITDA is
customarily used as an indication of a company's ability to incur and
service debt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of other measures of
liquidity and operations that are covered by the audited financial
statements. EBITDA as defined herein may not be comparable to other
similarly titled measures of other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The consolidated financial statements of the Company include the accounts
of Park-Ohio Holdings Corp. and its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. The historical financial
information is not directly comparable on a year-to-year basis due to
acquisitions in 1998 and 1997. During 1998, the Company acquired two businesses
for $40.2 million. During October, 1998, the Company acquired all of the shares
of GIS Industries, Inc. ("Gateway"). Gateway is a distributor of fasteners and
other industrial products and a manufacturer of metal products and fasteners.
During April, 1998, the Company acquired all of the shares of Direct Fasteners
Limited ("Direct"), a distributor of fasteners located in Ontario, Canada.
During 1997, the Company acquired five businesses for $60.4 million ("the 1997
Acquisitions"). The largest of the 1997 Acquisitions was Arden Industrial
Products, Inc. ("Arden") which was acquired for $44 million as of August 1,
1997. Arden is a national supplier of specialty and standard fasteners to the
industrial market. All acquisitions are accounted for as purchases and
consequently their results are included in the consolidated financial statements
from their respective dates of acquisition. In 1996, the Company sold
substantially all of the assets of Bennett Industries, Inc., a manufacturer of
plastic containers, in order to focus on its remaining logistics and
manufacturing businesses.
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OVERVIEW
The Company operates logistics ("Integrated Logistics Solutions" or "ILS")
and diversified manufacturing ("Manufactured Products") businesses that serve a
wide variety of industrial markets. ILS is a leading national supplier of
fasteners (e.g., nuts, bolts and screws) and other industrial products to
original equipment manufacturers ("OEMs"), other manufacturers and distributors.
In connection with the supply of such industrial products, ILS provides a
variety of value-added, cost-effective procurement solutions. The principal
customers of ILS are in the transportation, industrial, electrical and lawn and
garden equipment industries. Manufactured Products designs and manufactures a
broad range of high quality products engineered for specific customer
applications. The principal customers of Manufactured Products are OEMs and
end-users in the automotive, railroad, truck and aerospace industries.
The Company previously announced that it was planning to cause ILS to issue
shares of common stock to the public. It was anticipated that a registration
statement would be filed in the third quarter of 1998 and that the offering
would be completed during 1998. However, the market conditions were not
conducive for initial public offerings during that time period and no prediction
can be made that favorable market conditions will exist in the near term. As a
result, the Company has indefinitely postponed the filing of a registration
statement.
A registration statement relating to these securities has not been filed
with the Securities and Exchange Commission. These securities may not be sold
absent registration or an applicable exemption from registration. The offering
will be made only by means of a prospectus. This disclosure shall not constitute
an offer to sell or the solicitation of an offer to buy, nor shall there be any
sale of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any State.
The statements herein regarding the filing of a registration statement, the
timing of the offering and any other future aspects relating to the offering and
other statements which are not historical facts are forward-looking statements.
Such statements involve risks and uncertainties, including, but not limited to,
market conditions (including the price and market for the common stock) and
other factors detailed herein under the heading "Forward-Looking Statements."
Between 1994 and 1998, the Company has grown significantly, both internally
and through acquisitions. Over this period, the Company's net sales increased at
a 43.8% compounded annual growth rate ("CAGR"), from $129.2 million to $551.8
million, and income from continuing operations on a fully taxed basis increased
at a 33.2% CAGR from $4.1 million to $12.9 million.
This growth has been primarily attributable to the Company's strategy of
making selective acquisitions in order to complement internal growth.
Historically, the Company has acquired underperforming businesses with potential
for: (i) significant cost reductions through improved labor, supplier and
customer relations and increased purchasing power and (ii) revenue enhancement
due to better asset utilization and management practices, as well as increased
access to capital. The Company's internal growth has been driven primarily by
the addition of ILS customers under TFS contracts and by the leveraging of
existing customer relationships at Manufactured Products.
Between January 1, 1994 and December 31, 1998, the Company's continuing
operations incurred $64.2 million of capital expenditures, the majority of which
was used to expand and upgrade existing manufacturing facilities and enhance
ILS' management information systems.
RESULTS OF OPERATIONS
1998 versus 1997
Net sales increased by $110.7 million, or 25%, from $441.1 million in 1997
to $551.8 million in 1998. Approximately 27% of this increase was attributable
to internal growth and 73% was a result of acquisitions completed in 1997 or
1998. Of the internal sales growth, approximately 66% was primarily attributable
to ILS and the addition of TFS customers, and the remainder was due to increased
orders
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from Manufactured Products' customers. The growth in net sales from acquisitions
applies to ILS and primarily pertains to Arden and Gateway.
Gross profit increased by $24.2 million, or 34%, from $72.4 million in 1997
to $96.6 million in 1998. Of the increase, 67% relates to acquisitions and 33%
to internal growth. The Company's consolidated gross margin increased to 17.5%
for 1998 from 16.4% for 1997. This increase in consolidated gross margin was due
to increased margins in both the ILS and Manufactured Products segments. The
increase in Manufactured Products was due to a change in revenue mix and to
increased production thereby allocating fixed manufacturing overhead over a
greater production base. The increase in margins in the ILS segment is a result
of reduced material costs.
Selling, general and administrative costs increased by 27% to $56.5 million
in 1998 from $44.4 million in 1997. Approximately 78% of such increase was
related to acquisitions while the remainder related to the increase in
internally generated net sales. Consolidated selling, general and administrative
expenses as a percentage of net sales was approximately 10% for both periods.
Interest expense increased by $8.4 million from $9.1 million for 1997 to
$17.5 million for 1998 due to higher average debt outstanding during 1998 and to
higher average interest rates in 1998 versus 1997. For the year ended December
31, 1998, the Company averaged outstanding borrowings of $205.3 million as
compared to $123.1 million outstanding for 1997. The $82.2 million increase
related primarily to acquisitions completed during the latter part of 1997 and
1998, working capital increases to support the realized and anticipated growth
in business and capital expenditures to support the operations. The average
borrowing rate of 8.5% for the year ended December 31, 1998 is 1.1% higher than
the average rate of 7.4% for the year ended December 31, 1997 primarily because
of the $150 million bond offering in November, 1997 which carries a coupon of
9.25% versus a 7.3% rate on the bank debt it replaced.
The effective income tax rate for 1998 was 43% as compared to 41% for 1997.
The increase is directly attributable to an increase in expenses recorded for
financial reporting purposes, but not deductible for income tax purposes,
primarily certain goodwill amortization. At December 31, 1998, subsidiaries of
the Company had $1.1 million of net operating loss carryforwards for tax
purposes.
1997 versus 1996
Net sales from continuing operations increased by $93.4 million, or 27%,
from $347.7 million in 1996 to $441.1 million in 1997. Approximately 42% of this
increase was attributable to internal growth and 58% was a result of the 1997
Acquisitions. Of the internal sales growth, approximately 70% was primarily
attributable to the addition of TFS customers in the ILS segment and the
remainder was due to increased orders from Manufactured Products' customers. Of
the growth in net sales attributable to the 1997 acquisitions, the majority
applies to the ILS segment and primarily pertains to Arden which was acquired as
of August 1, 1997.
Gross profit from continuing operations increased by $14.1 million, or 24%,
from $58.3 million in 1996 to $72.4 million in 1997. Of the increase, 79%
relates to the 1997 Acquisitions and 21% was due to internal growth. A majority
of the increase attributable to the 1997 Acquisitions was related to Arden. The
Company's consolidated gross margin from continuing operations decreased to
16.4% in 1997 from 16.8% in 1996. This decrease in consolidated gross margin was
primarily due to a change in the Company's revenue mix.
Selling, general and administrative costs from continuing operations
increased by 16% to $44.4 million in 1997 from $38.1 million in 1996.
Approximately 93% of such increase was related to the 1997 Acquisitions.
Consolidated selling, general and administrative expenses decreased as a
percentage of net sales to 10.1% in 1997 from 11.0% in 1996 due to economies of
scale resulting from higher sales volume.
Interest expense from continuing operations increased by $2.2 million from
$6.9 million in 1996 to $9.1 million in 1997 due to average debt outstanding in
1997 increasing by $19.9 million and to the reclassification in 1996 of
approximately $.8 million of interest expense to discontinued operations
11
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resulting from the sale of Bennett Industries. Average interest rates for the
period were approximately the same in 1997 and 1996.
As a result of the early extinguishment of the Company's 7 1/4% Convertible
Senior Subordinated Debentures due June 15, 2004, and its then existing bank
credit facility, the Company recorded an extraordinary charge of $1.5 million,
net of income taxes, in 1997.
At December 31, 1997, subsidiaries of the Company had net operating loss
carryforwards for tax purposes of approximately $9.4 million, subject to certain
limitations that expire between 2001 and 2007.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity needs are primarily for working capital and capital
expenditures. The Company's primary sources of liquidity have been funds
provided by operations and funds available from existing bank credit
arrangements. On November 2, 1998, Park-Ohio amended and restated its credit
agreement with a group of banks under which it may borrow up to $150 million on
an unsecured basis. This agreement, the proceeds of which will be used for
general corporate purposes, expires on April 30, 2001. Amounts borrowed under
the agreement may be at Park-Ohio's election at either (i) the bank's prime
lending rate less 100-30 basis points or (ii) LIBOR plus 90-170 basis points
depending on the aggregate amount borrowed under the agreement. As of December
31, 1998, $86.0 million was outstanding under the facility.
On November 25, 1997, the Company sold $150 million of its 9.25% Senior
Subordinated Notes due 2007. The Company used the net proceeds of the Senior
Subordinated Notes along with borrowings under its new credit facility to (i)
redeem its 7 1/4% Convertible Senior Subordinated Debentures due June 15, 2004
and (ii) to repay substantially all amounts of its then existing credit
facility.
Current financial resources (working capital and available bank borrowing
arrangements) and anticipated funds from operations are expected to be adequate
to meet current cash requirements. Capital expenditures for 1999 are projected
to be approximately $15 million which will be used to invest in the Company's
current facilities for projected new business, for scheduled improvements and
new equipment to expand existing products.
The ratio of current assets to current liabilities was 3.19 at December 31,
1998, compared to 2.83 at December 31, 1997. Working capital increased by $30.5
million to $176.9 million at December 31, 1998 from $146.4 million at December
31, 1997 as a result of the inclusion of acquisitions completed in 1998 and to
support the internal growth of the Company.
During 1998, the Company generated $32.3 million of cash from operations
before changes in operating assets and liabilities. After giving effect to the
use of $28.6 million in the operating accounts, the Company provided $3.7
million from operating activities. During the year, the Company invested $22.7
million in facilities, machinery and equipment, and information systems, used
$40.2 for acquisitions and used $2.8 million to purchase common shares for the
treasury. These activities were funded by a net increase in bank borrowings of
$64.3 million offset by a $2.5 million increase in cash during the period.
During 1997, the Company generated $27.0 million from continuing operations
before changes in operating assets and liabilities. After giving effect to the
use of $37.0 million in the operating accounts, the Company used $10.0 million
for operating activities. During the period, the Company invested $15.9 million
in capital expenditures and $60.4 million for acquisitions and investments
including the acquisition of Arden for $44.0 million. During the year, the
Company bought 221,494 shares of its common stock in the open market for $3.0
million. As of December 31, 1997, after issuing 199,000 common shares from the
treasury for the exercise of stock options, the Company had 148,719 shares of
its common stock in the treasury. During the year, 351,000 shares of common
stock were issued under stock option agreements for which the Company received
$3.2 million from the option holders. In addition, the Company purchased in the
open market $1.2 million of its convertible senior subordinated debentures.
12
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These activities were funded by a net increase in long-term borrowings of $85.4
million and a decrease in cash balances of $2.8 million.
During 1996, the Company generated $20.4 million from continuing operations
before changes in operating assets and liabilities. After giving effect to the
use of $14.7 million in the operating accounts and $2.0 million provided from
discontinued operations, the Company provided $7.7 million from operating
activities. During 1996, the Company invested $15.6 million in capital
expenditures and purchased 126,225 shares of its common stock for $1.8 million,
all of which were funded by internally generated cash flow and bank borrowings.
IMPACT OF INFLATION
Although inflation was not a significant factor in 1998, the Company
continues to seek ways to cope with its impact. To the extent permitted by
competition, the Company's operations generally attempt to pass on increased
costs by increasing sales prices over time. The Company primarily uses the FIFO
method of accounting for its inventories. Under this method, current costs are
generally reflected in cost of products. The charges to operations for
depreciation represent the allocation of historical costs incurred over past
years and are significantly less than if they were based on the current cost of
productive capacity being consumed.
YEAR 2000 CONVERSION
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
During 1996, the Company developed a Y2K Task Force, which was established
to monitor and track the Y2K compliance at its operating units. The Task Force
developed a Y2K plan in order to minimize the risk to the Company's operating
units and its customers. The plan to resolve the Y2K issues involves four
phases: assessment, remediation, testing and implementation.
To date, the Task Force has completed its assessment of the Company's
computer hardware and software applications, process control equipment, and
other non-information technology equipment. After taking into consideration
investments in new equipment and systems that have already been made, this
assessment has determined that with only a few exceptions, the systems are Y2K
compliant. The exceptions require upgrades of software programs or changes to
existing programs. The remediation and testing phases are currently underway,
and upgrades and software corrections are being completed. The target for
completion of all phases is by the second quarter of 1999. The Company also
expects critical contingency plans to be developed by the end of the second
quarter of 1999. Based upon the assessments and remediations completed to date,
the Company does not expect that the Y2K issue will have a material effect on
its business operations, consolidated financial condition, cash flows, or
results of operations.
In addition, the Task Force is reviewing the Y2K compliance of the
Company's key suppliers, customers and service providers ("significant third
parties") in an effort to reduce the potential adverse effect on its operations
from non-compliance by such parties. This significant third party review has
begun and is expected to be completed by June 30, 1999. Interfaces to external
suppliers and customers are part of this assessment and validation process. As
these significant third parties are reviewed, the Task Force intends to develop
contingency plans, if necessary, for significant third parties that exhibit
possible Y2K problems. The Company has identified the most likely risks of Y2K
non-compliance as the risk that significant third parties will not be Y2K
compliant. Due to the general uncertainty inherent in the Y2K problem, the
Company is unable to determine at this time whether the consequences of Y2K
compliance failures will have a material effect on the Company's results of
operations or financial
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condition. If Y2K compliance is not achieved by these significant third parties,
over which the Company has no control, it could, depending on duration, have a
material adverse effect on the Company's operations.
The Company is utilizing both internal and external resources to remedy,
test, and implement the software and operating equipment for Y2K modifications.
The total cost to achieve Y2K compliance is estimated at $9 million.
Approximately 75% of this cost represents new systems, which the Company may
have initiated during the period, notwithstanding the Y2K issue. To date, the
Company has incurred approximately $8.0 million for new systems and equipment,
with the majority of these costs for the conversion/development of systems. The
remaining $1.0 million will be funded through operating cash flows. The Company
generally does not separately identify the direct costs of internal employees
working on Y2K projects.
ENVIRONMENTAL
The Company has been identified as a potentially responsible party at
certain third-party sites under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or comparable state laws
which provide for strict and, under certain circumstances, joint and several
liability. The Company is participating in the cost of certain clean-up efforts
at several of these sites. However, the Company's share of such costs has not
been material and based on available information, the Company does not expect
its exposure at any of these locations to have a material adverse effect on its
results of operations, liquidity or financial condition.
SEASONALITY; VARIABILITY OF OPERATING RESULTS
As a result of the significant growth in the Company's net sales and
operating income in recent years, seasonal fluctuations have been substantially
mitigated. The Company, however, performs scheduled plant maintenance in the
third quarter to coincide with customer plant shut downs.
The timing of orders placed by the Company's customers has varied with,
among other factors, orders for customers' finished goods, customer production
schedules, competitive conditions and general economic conditions. The
variability of the level and timing of orders has, from time to time, resulted
in significant periodic and quarterly fluctuations in the operations of the
Company's business units. Such variability is particularly evident at the
Capital Equipment businesses, included in the Manufactured Products segment,
which typically ship a few large systems per year.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Certain statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations contain
forward-looking statements, including without limitation, discussion regarding
the Company's anticipated levels and funding of capital expenditures and the Y2K
conversion. Forward-looking statements are necessarily subject to risks,
uncertainties and other factors, many of which are outside the control of the
Company, that could cause actual results to differ materially from such
statements. These uncertainties and other factors include such things as:
general business conditions, competitive factors, including pricing pressures
and product innovation and quality; raw material availability and pricing;
changes in the Company's relationships with customers and suppliers; the ability
of the Company to successfully integrate recent and future acquisitions into its
existing operations; changes in general domestic economic conditions such as
inflation rates, interest rates and tax rates; increasingly stringent domestic
and foreign governmental regulations including those affecting the environment;
inherent uncertainties involved in assessing the Company's potential liability
for environmental remediation-related activities; the outcome of pending and
future litigation and other claims; dependence on the automotive industry;
dependence on key management; dependence on information systems; and the ability
of the Company, its vendors and customers to achieve Y2K compliance. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no
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obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. In light of these and other
uncertainties, the inclusion of a forward-looking statement herein should not be
regarded as a representation by the Company that the Company's plans and
objectives will be achieved.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk including changes in interest rates.
The Company is subject to interest rate risk on its fixed rate debt consisting
of $150 million, 9.25% Senior Subordinated Notes. The estimated fair value of
these notes at year end 1998 would be $2 million higher than the recorded value
based on current borrowing rates available for financings with similar terms and
maturities.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
PAGE
----
Report of Independent Auditors.............................. 17
Consolidated Balance Sheets -- December 31, 1998 and
December 31, 1997......................................... 18
Consolidated Statements of Income -- Years Ended December
31, 1998, 1997 and 1996................................... 19
Consolidated Statements of Shareholders' Equity -- Years
Ended December 31, 1998, 1997 and 1996.................... 20
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1998, 1997 and 1996.......................... 21
Notes to Consolidated Financial Statements.................. 22
Supplementary Financial Data:
Selected Quarterly Financial Data (Unaudited) -- Years
Ended December 31, 1998 and 1997....................... 35
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Park-Ohio Holdings Corp.
We have audited the accompanying consolidated financial statements of
Park-Ohio Holdings Corp. and subsidiaries listed in the Index at Item 14(a)(1).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Park-Ohio
Holdings Corp. and subsidiaries at December 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 15, 1999
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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current Assets
Cash and cash equivalents................................. $ 4,320 $ 1,814
Accounts receivable, less allowances for doubtful accounts
of $2,803 in 1998 and $2,060 in 1997.................... 95,718 86,787
Inventories............................................... 150,052 129,512
Deferred tax assets....................................... 2,232 3,240
Other current assets...................................... 5,468 5,075
-------- --------
Total Current Assets............................... 257,790 226,428
Property, Plant and Equipment
Land and land improvements................................ 4,460 4,126
Buildings................................................. 25,912 24,782
Machinery and equipment................................... 130,253 103,956
-------- --------
160,625 132,864
Less accumulated depreciation............................. 70,468 59,795
-------- --------
90,157 73,069
Other Assets
Excess purchase price over net assets acquired, net of
accumulated amortization of $8,105 in 1998 and $5,749 in
1997.................................................... 99,351 68,996
Deferred taxes............................................ 8,900 12,960
Other..................................................... 33,356 31,656
-------- --------
$489,554 $413,109
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable.................................... $ 46,410 $ 49,470
Accrued expenses.......................................... 32,076 28,291
Current portion of long-term liabilities.................. 2,372 2,223
-------- --------
Total Current Liabilities.......................... 80,858 79,984
Long-Term Liabilities, less current portion
Long-term debt............................................ 237,483 172,283
Other postretirement benefits............................. 26,286 27,537
Other..................................................... 3,740 4,295
-------- --------
267,509 204,115
Shareholders' Equity
Capital stock, par value $1 a share
Serial preferred stock:
Authorized -- 632,470 shares; Issued -- none......... -0- -0-
Common stock:
Authorized -- 40,000,000 shares Issued and
outstanding -- 11,147,462 shares in 1998 and
10,959,962 in 1997.................................... 11,148 10,960
Additional paid-in capital................................ 55,755 53,476
Retained earnings......................................... 80,420 67,486
Treasury stock, at cost, 336,206 shares in 1998 and
148,719 in 1997......................................... (4,554) (2,087)
Accumulated other comprehensive earnings (loss)........... (1,582) (825)
-------- --------
141,187 129,010
-------- --------
$489,554 $413,109
======== ========
See notes to consolidated financial statements.
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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net sales.................................................. $551,793 $441,110 $347,679
Cost of products sold...................................... 455,167 368,734 289,400
-------- -------- --------
Gross profit............................................. 96,626 72,376 58,279
Selling, general and administrative expenses............... 56,478 44,396 38,131
Restructuring charge....................................... -0- -0- 2,652
-------- -------- --------
Operating income......................................... 40,148 27,980 17,496
Other income............................................... -0- (320) (4,204)
Interest expense........................................... 17,488 9,101 6,947
-------- -------- --------
Income from continuing operations before income
taxes............................................... 22,660 19,199 14,753
Income taxes............................................... 9,726 7,903 5,060
-------- -------- --------
Income from continuing operations before extraordinary
charge.............................................. 12,934 11,296 9,693
Extraordinary charge for early retirement of debt, net of
tax benefit of $928...................................... -0- (1,513) -0-
Income from discontinued operations, net of tax............ -0- -0- 11,642
-------- -------- --------
Net income....................................... $ 12,934 $ 9,783 $ 21,335
======== ======== ========
Per common share:
Basic earnings per share:
Continuing operations.................................... $ 1.18 $ 1.06 $ .93
Extraordinary charge..................................... -0- (.14) -0-
Discontinued operations.................................. -0- -0- 1.12
-------- -------- --------
Net Income....................................... $ 1.18 $ .92 $ 2.05
======== ======== ========
Diluted earnings per share:
Continuing operations.................................... $ 1.16 $ 1.01 $ .88
Extraordinary charge..................................... -0- (.13) -0-
Discontinued operations.................................. -0- -0- .96
-------- -------- --------
Net income....................................... $ 1.16 $ .88 $ 1.84
======== ======== ========
See notes to consolidated financial statements.
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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED TREASURY EARNINGS
STOCK CAPITAL EARNINGS STOCK (LOSS) TOTAL
------- ---------- -------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1, 1996.......... $10,402 $49,184 $36,368 $ -0- $ (412) $ 95,542
Comprehensive income:
Net income........................ 21,335 21,335
Foreign currency translation
adjustment..................... (217) (217)
--------
Comprehensive income.............. 21,118
Exercise of stock options........... 31 153 184
Purchase of treasury stock.......... (1,775) (1,775)
------- ------- ------- ------- ------- --------
Balance at December 31, 1996........ 10,433 49,337 57,703 (1,775) (629) 115,069
Comprehensive income:
Net income........................ 9,783 9,783
Foreign currency translation
adjustment..................... (196) (196)
--------
Comprehensive income.............. 9,587
Issuance of General Aluminum Mfg.
Company earn-out shares........... 375 3,600 3,975
Exercise of stock options........... 152 539 2,673 3,364
Purchase of treasury stock.......... (2,985) (2,985)
------- ------- ------- ------- ------- --------
Balance at December 31, 1997........ 10,960 53,476 67,486 (2,087) (825) 129,010
Comprehensive income:
Net income........................ 12,934 12,934
Foreign currency translation
adjustment..................... (757) (757)
--------
Comprehensive income.............. 12,177
Issuance of General Aluminum Mfg.
Company earn-out shares........... 188 2,306 2,494
Exercise of stock options........... (27) 294 267
Purchase of treasury stock.......... (2,761) (2,761)
------- ------- ------- ------- ------- --------
Balance at December 31, 1998........ $11,148 $55,755 $80,420 $(4,554) $(1,582) $141,187
======= ======= ======= ======= ======= ========
See notes to consolidated financial statements.
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PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net Income................................................ $ 12,934 $ 9,783 $ 21,335
Adjustments to reconcile net income to net cash provided
(used) by continuing operations:
Extraordinary charge................................. -0- 1,513 -0-
Discontinued operations.............................. -0- -0- (11,642)
Gain on sale of investments.......................... -0- (320) (1,552)
Depreciation and amortization........................ 12,753 10,365 7,998
Deferred income taxes................................ 6,659 5,686 4,310
-------- -------- --------
32,346 27,027 20,449
Changes in operating assets and liabilities excluding
acquisitions of businesses:
Accounts receivable.................................. (2,312) (14,008) (3,643)
Inventories.......................................... (10,404) (21,021) (3,056)
Accounts payable and accrued expenses................ (7,810) 5,623 (1,214)
Other................................................ (8,193) (7,660) (6,850)
-------- -------- --------
Net Cash Provided (Used) by Continuing Operations.... 3,627 (10,039) 5,686
Net Cash Provided by Discontinued Operations......... -0- -0- 2,040
-------- -------- --------
Net Cash Provided (Used) by Operating Activities..... 3,627 (10,039) 7,726
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net........... (22,681) (15,947) (15,590)
Costs of acquisitions, net of cash acquired............... (40,175) (60,389) -0-
Purchase of investments................................... (101) (1,432) (5,427)
Proceeds from sales of investments........................ -0- 551 6,315
Proceeds from sale of discontinued operations, net of
$4,500 of income taxes................................. -0- -0- 46,313
-------- -------- --------
Net Cash Provided (Used) by Investing Activities..... (62,957) (77,217) 31,611
FINANCING ACTIVITIES
Proceeds from bank arrangements........................... 66,000 106,500 9,500
Payments on long-term debt................................ (1,670) (166,657) (45,249)
Issuance of 9.25% senior notes, net of deferred financing
costs.................................................. -0- 145,604 -0-
Cash paid to retire subordinated debentures............... -0- (1,245) -0-
Issuance of common stock under stock option plan.......... 267 3,194 184
Purchase of treasury stock................................ (2,761) (2,985) (1,775)
-------- -------- --------
Net Cash Provided (Used) by Financing Activities..... 61,836 84,411 (37,340)
Increase (decrease) in Cash and Cash Equivalents..... 2,506 (2,845) 1,997
Cash and Cash Equivalents at Beginning of Year....... 1,814 4,659 2,662
-------- -------- --------
Cash and Cash Equivalents at End of Year............. $ 4,320 $ 1,814 $ 4,659
======== ======== ========
Taxes paid................................................ $ 2,326 $ 1,215 $ 6,925
Interest paid............................................. 16,272 7,713 8,321
See notes to consolidated financial statements.
21
24
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts
of the Company and all of its subsidiaries. All significant intercompany
accounts and transactions have been eliminated upon consolidation.
Accounting 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.
Cash Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (principally the
first-in, first-out method) or market value. If the first-in, first-out method
of inventory accounting had been used exclusively by the Company, inventories
would have been approximately $4,869 and $4,895 higher than reported at December
31, 1998 and 1997, respectively.
Major Classes of Inventories
DECEMBER 31
-------------------
1998 1997
-------- --------
In-process and finished goods....................... $124,783 $100,283
Raw materials and supplies.......................... 25,269 29,229
-------- --------
$150,052 $129,512
======== ========
Property, Plant and Equipment: Property, plant and equipment are carried at
cost. Major additions and associated interest costs are capitalized and
betterments are charged to accumulated depreciation; expenditures for repairs
and maintenance are charged to operations. Depreciation of fixed assets is
computed principally by the straight-line method based on the estimated useful
lives of the assets. The Company capitalized interest of $1.0 million in 1998.
Interest capitalized in 1997 and 1996 was immaterial.
Excess Purchase Price Over Net Assets Acquired: The Company records
amortization of excess purchase price over the fair value of net assets acquired
(see Note C) over periods from twenty-five to forty years using the
straight-line method. Management periodically evaluates for possible impairment
the current value of these intangibles through cash flow and income analyses of
the acquired businesses as required by Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which established accounting standards for determining the impairment of
long-lived assets to be held and used, certain identifiable intangibles, and
goodwill related to those assets and for long-lived assets and certain
identifiable intangibles to be disposed of.
Pensions and Other Postretirement Benefits: The Company and its
subsidiaries have pension plans, principally noncontributory defined benefit or
noncontributory defined contribution plans, covering substantially all
employees. The Company has two non-pension and postretirement benefit plans. For
the defined benefit plans, benefits are based on the employee's years of service
and the Company's policy is to fund that amount recommended by its independent
actuaries. For the defined contribution
22
25
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
plans, the costs charged to operations and the amount funded are based upon a
percentage of the covered employees' compensation.
Stock-Based Compensation: The Company has elected to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Income Taxes: The Company accounts for income taxes under the liability
method whereby deferred tax assets and liabilities are determined based on
temporary differences between the financial reporting and the tax bases of
assets and liabilities and are measured using the current enacted tax rates.
Revenue Recognition: For the majority of its operations, the Company
recognizes revenues upon shipment of its product. Revenues on long-term
contracts are recognized using the percentage of completion method of
accounting, under which the sales value of performance is recognized on the
basis of the percentage each contract's cost to date bears to the total
estimated cost. The recognition of profit, based upon anticipated final costs,
is made only after evaluation of the contract status at critical milestones. The
Company's contracts generally provide for billing to customers at various points
prior to contract completion. Revenues earned on contracts in process in excess
of billings are classified in other current assets in the accompanying balance
sheet.
Environmental: The Company accrues environmental costs related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Costs which extend the life of the related
property or mitigate or prevent future environmental contamination are
capitalized. The Company records a liability when environmental assessments
and/or remedial efforts are probable and can be reasonably estimated. The
estimated liability of the Company is not discounted or reduced for possible
recoveries from insurance carriers.
Concentration of Credit Risk: The Company sells its products to customers
in diversified industries. The Company performs ongoing credit evaluations of
its customers' financial condition but does not require collateral to support
customer receivables. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information. As of December 31, 1998 the Company had
uncollateralized receivables with six customers in the automotive and truck
industry each with several locations approximating $25,995 which represents 27%
of the Company's trade accounts receivable. During 1998, sales to these
customers amounted to approximately $135,241 which represents 25% of the
Company's net sales.
Impact of Recently Issued Accounting Standards: The Company adopted FASB
Statement No. 130 "Reporting Comprehensive Income", at the beginning of 1998.
Statement 130 establishes standards for the reporting and display of
comprehensive earnings and its components in financial statements; however, the
adoption of this statement had no impact on the Company's net earnings.
Statement 130 requires foreign currency translation adjustments, which prior to
adoption were immaterial and included in accrued expenses, to be included in
other comprehensive earnings. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
The FASB has issued two accounting pronouncements which the Company adopted
in the fourth quarter of 1998. FASB Statement No. 131 "Disclosures about
Segments of an Enterprise and Related Information" and FASB Statement No. 132
"Employers' Disclosures about Pensions and Other Post Retirement Benefits -- an
amendment of FASB Statements No. 87, 88 and 106" both expand or modify
disclosures and accordingly, have no impact on the Company's financial position,
results of operations or cash flows.
23
26
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". The SOP requires
companies to capitalize qualifying computer software costs incurred during the
application development stage. The statement will be applied prospectively and
is effective for financial statements for fiscal years beginning after December
15, 1998. This new standard is not expected to have a significant effect on the
Company's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Accounting for the Costs of
Start-up Activities". The SOP requires that costs of start-up activities be
expensed as incurred. The SOP is effective for fiscal years beginning after
December 15, 1998. The Company expects to adopt the SOP in the first quarter of
1999. The impact of adoption of the SOP on the Company's financial position,
results of operations or cash flows is expected to be immaterial.
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998. Statement 133 requires derivatives to be
recorded on the balance sheet at fair value and establishes accounting for three
different types of hedges: hedges of changes in fair value of assets,
liabilities, or firm commitments; hedges of the variable cash flows of
forecasted transactions; and hedges of foreign currency exposures of net
investments in foreign operations. Statement 133 is effective for years
beginning after June 15, 1999 and is not expected to have a significant impact
on the Company's financial position or results of operations.
Reclassification: Certain amounts in the prior period's financial
statements have been reclassified to be consistent with the current
presentation.
NOTE B -- CORPORATE REORGANIZATION
At the 1998 Annual Meeting of Shareholders of Park-Ohio Industries, Inc.
("Park-Ohio") held on May 28, 1998, the shareholders of Park-Ohio approved an
agreement of Merger ("Merger Agreement") dated February 20, 1998 by and among
Park-Ohio, PKOH Holdings Corp. ("Holdings") and PKOH Merger Corp. ("Merger
Corp.") providing for a reorganization of Park-Ohio into a holding company form
of ownership with Holdings as its sole parent. On June 10, 1998, Holdings
amended and restated its articles of incorporation to increase its authorized
shares from 100 shares of common stock, $1.00 par value per share, to 40,000,000
shares of common stock and 632,470 shares of preferred stock, all $1.00 par
value per share, and changed its name from PKOH Holding Corp. to Park-Ohio
Holdings Corp. Effective as of the close of business on June 15, 1998, Merger
Corp. was merged with and into Park-Ohio upon the terms and conditions of the
Merger Agreement. At the effective time of the Merger, (i) all of the shares of
Park-Ohio's common stock issued and outstanding immediately prior to the Merger
were converted into an equal number of shares of Holding's common stock(on a
share-for-share basis), (ii) all of the shares of Merger Corp.'s common stock
issued and outstanding immediately prior to the Merger were converted into 100
shares of Park-Ohio's common stock and (iii) all of the shares of Holdings'
common stock issued and outstanding immediately prior to the Merger were
canceled.
Prior to the Merger, there was no public market for Holdings' common stock,
and Park-Ohio's common stock was listed for trading on the NASDAQ National
Market under the symbol "PKOH". Upon the opening of the market after the
effective time of the Merger: (i) Holdings' common stock was registered under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and was listed for trading on the NASDAQ National Market under the symbol
"PKOH"; (ii) Park-Ohio common stock was simultaneously delisted from the NASDAQ
National Market and ceased to be registered under Section 12(g) of the Exchange
Act; and (iii) Holdings assumed Park-Ohio's reporting obligations under the
Exchange Act.
24
27
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE C -- ACQUISITIONS
The Company completed two acquisitions for cash of approximately $40.2
million in 1998. In April 1998, the Company acquired all of the shares of Direct
Fasteners Limited ("Direct") a distributor of fasteners located in Ontario,
Canada. In October 1998, the Company acquired all of the shares of GIS
Industries, Inc. ("Gateway"), a distributor of fasteners and other industrial
products and a manufacturer of metal products and fasteners. Both Direct and
Gateway are included in the Company's Integrated Logistics Solutions ("ILS")
segment. Each of the transactions were accounted for as a purchase. The
aggregate purchase price and the results of operations of both Direct and
Gateway prior to the date of acquisition were not material to the Company.
In January 1999, the Company acquired all of the shares of The Metalloy
Corporation ("Metalloy") for cash. Metalloy is a full service aluminum casting
and machining company and will be included in the Company's Manufactured
Products segment. The transaction will be accounted for as a purchase. The
purchase price and the results of operations of Metalloy prior to the date of
acquisition were not material to the Company.
On August 1, 1997, the Company acquired substantially all of the shares of
Arden Industrial Products, Inc. ("Arden") for cash of approximately $44 million.
The transaction has been accounted for as a purchase. Arden is a national
distributor of specialty and standard fasteners to the industrial market. Arden
is included in the Company's ILS segment.
The following is the estimated value of the net assets of Arden as of
August 1, 1997:
Cash........................................................ $ 2,711
Accounts receivable......................................... 11,503
Inventories................................................. 17,764
Property, plant and equipment............................... 4,468
Excess purchase price over net assets acquired.............. 19,599
Other assets................................................ 6,680
Trade accounts payable...................................... (6,437)
Accrued expenses............................................ (5,930)
Long-term liabilities....................................... (6,358)
-------
Total estimated cost of acquisition......................... $44,000
=======
During the year ended December 31, 1997, the Company acquired four other
businesses for an aggregate purchase price of approximately $18.6 million. Each
of these transactions was accounted for as a purchase, resulting in excess
purchase price over net assets acquired of $8.6 million. The following unaudited
pro forma results of operations assume the acquisitions of Arden and the other
businesses discussed above occurred on January 1, 1996. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisition occurred on the date indicated, or which may result in the
future.
YEAR ENDED
-------------------
1997 1996
-------- --------
Net sales....................................... $508,724 $476,693
Gross profit.................................... 93,547 98,190
Income from continuing operations............... 12,454 8,777
Income from continuing operations per common
share assuming dilution....................... $ 1.10 $ .80
======== ========
25
28
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On October 15, 1993, the Company acquired General Aluminum Mfg. Company
(GAMCO), by issuing 250,000 shares of its common stock valued at $3,127 in
exchange for the outstanding shares of GAMCO. An additional 187,500 shares of
common stock valued at $1,931, were issued in March, 1995; an additional 375,000
shares of common stock valued at $3,975 were issued in January, 1997; an
additional 187,500 shares of common stock valued at $2,494, representing the
final earn-out shares to be issued under the GAMCO purchase agreement, were
issued in 1998. The additional $8,400 represents purchase price in excess of net
assets acquired.
NOTE D -- DISPOSITIONS
On July 31, 1996, the Company completed the sale of substantially all of
the assets of Bennett Industries, Inc. ("Bennett"), a wholly-owned subsidiary
which manufactures plastic containers, to North America Packaging Corporation, a
wholly-owned subsidiary of Southcorp Holdings Limited, an Australian company,
for $50.8 million in cash, resulting in a pre-tax gain of $13.8 million. The
results of operations and changes in cash flows for Bennett have been classified
as discontinued operations for all periods presented in the related consolidated
statements of income and consolidated statements of cash flows, respectively.
Interest expense has been allocated to discontinued operations based on the
ratio of net assets discontinued to the total net assets of the consolidated
entity plus consolidated debt.
Summary operating results of the discontinued operations, excluding the
above gain on sale, for the year ended December 31, 1996 were as follows:
YEARS ENDED
DECEMBER 31, 1996
-----------------
Sales....................................................... $49,448
Costs and expenses.......................................... 44,502
-------
Income from discontinued operations before income taxes..... 4,946
Income taxes................................................ 1,820
-------
Net income from discontinued operations..................... $ 3,126
=======
During September, 1998 the Company completed the sale of the assets of
Friendly and Safe Packaging Systems, Inc. to Kerr Group. The transaction had an
immaterial effect on the consolidated results of operations and financial
position of the Company.
NOTE E -- ACCRUED EXPENSES
Accrued expenses include the following:
DECEMBER 31
------------------
1998 1997
------- -------
Self-insured liabilities.................................... $ 2,911 $ 2,827
Warranty and installation accruals.......................... 3,156 3,401
Accrued payroll and payroll-related items................... 2,586 4,820
State and local taxes....................................... 2,101 2,324
Advance billings............................................ 2,229 2,215
Acquisition liabilities..................................... 5,930 1,906
Interest payable............................................ 1,695 1,498
Sundry...................................................... 11,468 9,300
------- -------
Totals............................................ $32,076 $28,291
======= =======
26
29
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE F -- FINANCING ARRANGEMENTS
Long-term debt consists of the following:
DECEMBER 31,
--------------------
1998 1997
-------- --------
9.25% Senior Subordinated Notes due 2007.................... $150,000 $150,000
Revolving credit maturing on April 30, 2001................. 86,000 20,000
Other....................................................... 2,105 2,755
-------- --------
238,105 172,755
Less current maturities..................................... 622 472
-------- --------
Total............................................. $237,483 $172,283
======== ========
During 1998 Park-Ohio entered a new credit agreement with a group of banks
under which it may borrow up to $150 million on an unsecured basis. Interest is
payable quarterly at the prime lending rate less 1% to .3% (6.75% at December
31, 1998) or at Park-Ohio's election at LIBOR plus .9% to 1.7% (which aggregated
6.5% at December 31, 1998). The interest rate is dependent on the aggregate
amounts borrowed under the agreement. The weighted average rate on borrowings
was 8.2% at December 31, 1998. The credit agreement expires on April 30, 2001.
Provisions of the Senior Subordinated Notes and the revolving credit
agreement contain restrictions on the Company's ability to incur additional
indebtedness, to create liens or other encumbrances, to make certain payments,
investments, loans and guarantees and to sell or otherwise dispose of a
substantial portion of assets to or merge or consolidate with, an unaffiliated
entity. The revolving credit agreement also requires maintenance of specific
financial ratios.
On November 25, 1997, the Company sold $150 million of its 9.25% Senior
Subordinated Notes due 2007 at a price of 97.375% of face value. Interest on the
Senior Subordinated Notes is payable semi-annually on June 1 and December 1 of
each year beginning on June 1, 1998. The fair market value of fixed rate debt
securities at December 31, 1998 was approximately $152,625. The Company used the
net proceeds of the Senior Subordinated Notes along with borrowings under its
new credit facility to (i) redeem its 7 1/4% Convertible Senior Subordinated
Debentures due June 15, 2004 and (ii) to repay substantially all amounts of its
then existing credit facility. The early extinguishment of the 7 1/4%
Convertible Senior Subordinated Debentures and the then existing credit facility
resulted in an extraordinary charge of $1.5 million consisting of the following:
Discount on prepayment of 7 1/4% Convertible Senior
Subordinated Debentures................................... $1,245
Write-off related unamortized financing costs............... 1,196
------
Extraordinary charge before income tax benefit.............. 2,441
Income tax benefit.......................................... 928
------
Net extraordinary charge.................................... $1,513
======
The Company has agreements on which up to $5 million in standby letters of
credit and commercial letters of credit may be issued. In addition to the bank's
customary letter of credit fees, a 3/4% fee is assessed on standby letters of
credit on an annual basis. As of December 31, 1998, in addition to amounts
borrowed under the revolving credit agreement, there is $2.8 million outstanding
primarily for standby letters of credit. A fee of 1/4% to 3/8% is imposed by
the bank on the unused portion of available borrowings.
27
30
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Maturities of long-term debt during each of the five years following
December 31, 1998 are approximately $622 in 1999, $537 in 2000, $86,278 in 2001,
$427 in 2002 and $123 in 2003.
NOTE G -- INCOME TAXES
Significant components of the Company's net deferred tax assets and
liabilities are as follows:
DECEMBER 31,
------------------
1998 1997
------- -------
Deferred tax assets:
Postretirement benefit obligation......................... $ 9,900 $10,200
Inventory................................................. 6,800 6,500
Tax net operating loss carryforwards and credits.......... 1,500 4,100
Other -- net.............................................. 4,832 4,100
------- -------
Total deferred tax assets......................... 23,032 24,900
Deferred tax liabilities:
Tax over book depreciation................................ 6,900 5,200
Pension................................................... 5,000 3,500
------- -------
Total deferred tax liabilities.................... 11,900 8,700
------- -------
Net deferred tax assets..................................... $11,132 $16,200
======= =======
Income taxes consisted of the following:
YEARS ENDED DECEMBER 31
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
Current:
Federal................................................ $1,023 $ 775 $ (150)
State.................................................. 1,037 733 500
Foreign................................................ 1,007 709 400
------ ------ ------
3,067.. 2,217 750
Deferred:
Federal................................................ 6,195 5,175 4,010
State.................................................. 464 511 300
------ ------ ------
6,659 5,686 4,310
------ ------ ------
Income taxes................................................ $9,726 $7,903 $5,060
====== ====== ======
The reasons for the difference between income taxes and the amount computed
by applying the statutory Federal income tax rate to income from continuing
operations before income taxes are as follows:
YEARS ENDED DECEMBER 31
--------------------------
1998 1997 1996
------ ------ ------
Computed statutory amount................................... $7,700 $6,500 $5,000
Effect of state income taxes payable........................ 1,000 800 600
Other....................................................... 1,026 603 (540)
------ ------ ------
Income taxes................................................ $9,726 $7,903 $5,060
====== ====== ======
28
31
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
At December 31, 1998, subsidiaries of the Company have net operating loss
carryforwards for income tax purposes of approximately $1.1 million subject to
certain limitations, which expire in 2001 to 2007.
NOTE H -- STOCK PLANS
Under the provisions of the Company's Amended and Restated 1992 Stock
Option Plan, incentive stock options or non-statutory options to purchase
850,000 shares of the Company's stock may be granted to officers and other key
employees at the market price on the respective date of grant. The option rights
are exercisable only if and after the employee shall have remained in the employ
of the Company for one year from the date the option is granted.
The 1996 Non-Employee Director Stock Option Plan authorized the granting of
options on 250,000 shares of common stock to directors who are not employees of
the Company. Annually, each non-employee director will automatically receive
options to acquire 6,000 shares at the market price on the date of grant.
Options under this plan are exercisable six months from the date of grant. Also
during 1996 the Chairman and Chief Executive Officer of the Company was granted
a non-statutory stock option to purchase 500,000 shares of common stock at
$13.625 per share which was the market price at the date of grant. The options
become 100% exercisable after five years and terminate fifteen years from the
option date.
Under the provisions of the 1998 Long-Term Incentive Plan ("1998 Plan"),
which is administered by the Compensation Committee, incentive stock options,
non-statutory stock options, stock appreciation rights ("SARs") restricted
shares, performance shares or stock awards may be awarded to all employees of
the Company and its subsidiaries. Stock options will be exercisable in whole or
in installments as may be determined provided that no options will be
exercisable more than ten years from date of grant. The exercise price will be
the market price at the date of grant. The aggregate number of shares of the
Company's stock which may be awarded under the 1998 Plan is 550,000, all of
which may be incentive stock options. No more than 250,000 shares shall be the
subject of awards to any individual participant in any one calendar year. During
1998, there were no awards under the 1998 Plan.
Had the compensation cost for the stock options granted in 1998, 1997 and
1996 been determined based on the fair value method of FASB Statement No. 123,
the Company's net income and diluted earnings per share would have been reduced
by $1,235 ($.11 per share) in 1998, $1,304 ($.11 per share) in 1997, and $1,290
($.11 per share) in 1996. The effects on 1998, 1997 and 1996 net earnings may
not be representative of the effect on future years net earnings amounts as the
compensation cost on each year's grant is recognized over the vesting period.
Fair value was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1998, 1997 and
1996, respectively: risk-free interest rates of 4.75%, 5.25% and 5.25%; zero
dividend yield; expected volatility of 39% in 1998, 40% in 1997 and 43% in 1996
and expected option lives of 6 years for 1998 and 1997 and 6 to 10 years for
1996.
29
32
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table reflects activity under all stock plans from January 1,
1996 through December 31, 1998, and the weighted average exercise prices:
WEIGHTED
NUMBER AVERAGE PRICE
OF SHARES PER SHARE
--------- -------------
Outstanding,
January 1, 1996.......................................... 540,500 $ 8.79
Granted.................................................. 698,000 13.62
Exercised................................................ (31,167) 5.92
Forfeited................................................ (1,333) 10.62
Outstanding,
December 31, 1996........................................ 1,206,000 11.63
Granted.................................................. 60,000 13.02
Exercised................................................ (351,000) 7.97
Forfeited................................................ -0- -0-
Outstanding,
December 31, 1997........................................ 915,000 13.13
Granted.................................................. 145,000 18.45
Exercised................................................ (20,817) 12.82
Forfeited................................................ (3,333) 13.62
---------
Outstanding at December 31, 1998........................... 1,035,850 $13.88
=========
The following table summarizes information about options outstanding as of
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
--------------- ------------------ ----------- -------- ------------ --------
$ 9.125-$13.000 159,000 6.02 $10.78 148,983 $10.65
13.125- 14.250 716,850 10.55 13.62 363,928 13.62
14.500- 19.375 160,000 9.31 18.08 34,950 18.07
--------- -------
1,035,850 547,861
========= =======
NOTE I -- LEGAL PROCEEDINGS
The Company is subject to various pending and threatened lawsuits in which
claims for monetary damages are asserted in the ordinary course of business.
While any litigation involves an element of uncertainty, in the opinion of
management, liabilities, if any, arising from currently pending or threatened
litigation will not have a material adverse effect on the Company's financial
condition, liquidity and results of operations.
30
33
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE J -- PENSIONS AND OTHER POSTRETIREMENT BENEFITS
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year......... $ 45,473 $ 45,049 $ 21,673 $ 19,888
Service cost.................................... 403 304 133 118
Amendments and other............................ 116 158 -0- -0-
Interest cost................................... 3,136 3,251 1,496 1,541
Plan participants' contributions................ -0- -0- 118 118
Actuarial losses................................ 731 995 497 2,207
Benefits paid................................... (4,158) (4,284) (2,199) (2,199)
-------- -------- -------- --------
Benefit obligation at end of year............... $ 45,701 $ 45,473 $ 21,718 $ 21,673
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair Value of plan assets at beginning of
year.......................................... $ 80,274 $ 63,139 $ -0- $ -0-
Actual return on plan assets.................... 7,832 21,204 -0- -0-
Company contributions........................... 12 215 2,081 2,081
Plan participants' contributions................ -0- -0- 118 118
Benefits paid................................... (4,158) (4,284) (2,199) (2,199)
-------- -------- -------- --------
Fair value of plan assets at end of year........ $ 83,960 $ 80,274 $ -0- $ -0-
======== ======== ======== ========
Funded status of the plan (underfunded)......... $ 38,259 $ 34,801 $(21,718) $(21,673)
Unrecognized net transition obligation.......... (329) (279) -0- -0-
Unrecognized net actuarial gain................. (21,027) (21,654) (5,595) (6,812)
Unrecognized prior service cost................. 1,395 1,429 (723) (802)
-------- -------- -------- --------
Prepaid benefit cost............................ $ 18,298 $ 14,297 $(28,036) $(29,287)
======== ======== ======== ========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate................................... 7.00% 7.25% 7.00% 7.25%
Expected return on plan assets.................. 8.50% 8.50% N/A N/A
Rate of compensation increase (decrease)........ 2.50% 2.50% N/A N/A
For measurement purposes, an 8.0% percent annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1999. The rate
was assumed to decrease gradually to 5.5% for 2004 and remain at that level
thereafter.
PENSION BENEFITS OTHER BENEFITS
--------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service costs...................... $ 403 $ 302 $ 296 $ 133 $ 118 $ 106
Interest costs..................... 3,136 3,252 3,294 1,496 1,541 1,457
Expected return on plan assets..... (6,642) (5,181) (4,879) -0- -0- -0-
Transition obligation.............. 77 77 -0- -0- -0- -0-
Amortization of prior service
cost............................. 181 170 156 (79) (79) (79)
Recognized net actuarial gain...... (1,225) (332) (26) (343) (407) (464)
------- ------- ------- ------- ------- -------
Benefit costs...................... $(4,070) $(1,712) $(1,159) $ 1,207 $ 1,173 $ 1,020
======= ======= ======= ======= ======= =======
31
34
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company has two non-pension postretirement benefit plans. Health care
benefits are provided on both a contributory and noncontributory basis. The life
insurance plan is primarily noncontributory.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage-point change in the assumed health care cost
trend rate would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE
POINT POINT
INCREASE DECREASE
------------- ------------
Effect on total of service and interest cost components
in 1998................................................ $ 124,000 $ 124,000
Effect on post retirement benefit obligation as of
December 31, 1998...................................... $1,373,000 $1,373,000
The total contribution charged to pension expense for the Company's defined
contribution plans was $876 in 1998, $687 in 1997 and $796 in 1996.
NOTE K -- LEASES
Rental expense for 1998, 1997 and 1996 was $7,056, $6,696 and $4,751,
respectively. Future minimum lease commitments during each of the five years
following December 31, 1998 are as follows: $6,858 in 1999, $5,687 in 2000,
$4,824 in 2001, $3,594 in 2002 $2,322 in 2003 and $4,977 thereafter.
NOTE L -- INDUSTRY SEGMENTS
The Company conducts its business through two segments: Integrated
Logistics Solutions ("ILS") and Manufactured Products. ILS is a leading national
supplier of fasteners (e.g., nuts, bolts and screws) and other industrial
products to OEMs, other manufacturers and distributors. In connection with the
supply of such industrial products, ILS provides a variety of value-added,
cost-effective procurement solutions. The principal customers of ILS are in the
transportation, industrial, electrical, lawn and garden equipment industries.
Manufactured Products designs and manufactures a broad range of high quality
products engineered for specific customer applications. The principal customers
of Manufactured Products are OEMs and end-users in the automotive, railroad,
truck and aerospace industries.
The Company's sales are made through its own sales organization,
distributors and representatives. Intersegment sales from the manufactured
products segment to the ILS segment are immaterial and eliminated in
consolidation and are not included in the figures presented. Intersegment sales
are accounted for at values based on market prices. Income allocated to segments
excludes certain corporate expenses, interest expense and amortization of excess
purchase price over net assets acquired. Identifiable assets by industry segment
include assets directly identified with those operations.
Corporate assets generally consist of cash and cash equivalents, deferred
tax assets, and other assets.
32
35
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED DECEMBER 31
--------------------------------
1998 1997 1996
-------- -------- --------
Net sales
ILS................................................... $364,546 $266,292 $188,306
Manufactured products................................. 187,247 174,818 159,373
-------- -------- --------
$551,793 $441,110 $347,679
======== ======== ========
Income from continuing operations before income taxes
ILS................................................... $ 34,595 $ 23,310 $ 15,282
Manufactured products................................. 12,004 10,763 10,257
-------- -------- --------
46,599 34,073 25,539
Amortization of excess purchase price over net assets
acquired............................................ (2,277) (2,211) (1,902)
Corporate costs....................................... (4,174) (3,562) (1,937)
Interest expense...................................... (17,488) (9,101) (6,947)
-------- -------- --------
$ 22,660 $ 19,199 $ 14,753
======== ======== ========
Identifiable assets
ILS................................................... $288,713 $252,763 $134,107
Manufactured products................................. 187,095 140,278 136,701
General corporate..................................... 13,746 20,068 12,102
-------- -------- --------
$489,554 $413,109 $282,910
======== ======== ========
Depreciation and amortization expense
ILS................................................... $ 6,124 $ 4,352 $ 2,623
Manufactured products................................. 6,629 6,013 5,375
-------- -------- --------
$ 12,753 $ 10,365 $ 7,998
======== ======== ========
Capital expenditures
ILS................................................... $ 4,274 $ 3,938 $ 5,261
Manufactured products................................. 18,316 11,870 9,163
General corporate..................................... 91 139 1,166
-------- -------- --------
$ 22,681 $ 15,947 $ 15,590
======== ======== ========
The Company had sales of $33,728 in 1996 to Ford Motor Company which
represented 10% of consolidated net sales.
Approximately 89% of the Company's net sales are within the United States.
None of the net sales to any foreign country represented more than 6% of the
Company's total sales. Approximately 96% of the Company's assets are maintained
in the United States.
NOTE M -- RESTRUCTURING CHARGES AND OTHER INCOME
During the fourth quarter of 1996, the Company reorganized certain
manufacturing operations which resulted in the realignment of two manufacturing
facilities and the discontinuance of certain products lines. As a result of
these actions, the Company recorded a charge of $2,700 primarily for the
writedown of property and equipment and inventory to estimated net realizable
value.
In December 1996, the Company negotiated full settlement of subordinated
notes receivable, resulting from the sale of two manufacturing facilities, which
were fully reserved at the date of sale. The
33
36
PARK-OHIO HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
net proceeds received of $2,700 were recorded in income in the fourth quarter.
In the third quarter of 1996, the Company sold certain securities purchased
during 1996 for $6,315 which resulted in a gain of $1,500.
NOTE N -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
NUMERATOR
Numerator for basic earnings per share -- income from
continuing operations before extraordinary charge......... $12,934 $11,296 $ 9,693
Effect of dilutive securities:
Amortization of imputed goodwill associated with the earnout
shares.................................................... -0- (63) (84)
Interest (net of income taxes) associated with convertible
senior subordinated debentures............................ -0- 886 999
------- ------- -------
Numerator for diluted earnings per share-income from
continuing operations after assumed conversions........... $12,934 $12,119 $10,608
======= ======= =======
Discontinued operations..................................... $ -0- $ -0- $11,642
======= ======= =======
Extraordinary item, net of tax.............................. $ -0- $(1,513) $ -0-
======= ======= =======
Numerator for basic earnings per share-net income........... $12,934 $ 9,783 $21,335
======= ======= =======
Numerator for diluted earnings per share-net income after
assumed conversions....................................... $12,934 $10,606 $22,250
======= ======= =======
DENOMINATOR
Denominator for basic earnings per share-weighted average
shares.................................................... 10,958 10,691 10,401
Effect of dilutive securities:
Effect of General Aluminum Mfg. Company earnout shares
deemed to be issued.................................... -0- 140 188
Employee stock options.................................... 203 204 340
Convertible subordinated debentures....................... -0- 1,019 1,151
------- ------- -------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions........ 11,161 12,054 12,080
Basic earnings (loss) per share:
Continuing operations..................................... $ 1.18 $ 1.06 $ .93
======= ======= =======
Extraordinary item, net of tax............................ $ -0- $ (.14) $ -0-
======= ======= =======
Discontinued operations................................... $ -0- $ -0- $ 1.12
======= ======= =======
Net income................................................ $ 1.18 $ .92 $ 2.05
======= ======= =======
Diluted earnings (loss) per share:
Continuing operations..................................... $ 1.16 $ 1.01 $ .88
======= ======= =======
Extraordinary item, net of tax............................ $ -0- $ (.13) $ -0-
======= ======= =======
Discontinued operations................................... $ -0- $ -0- $ .96
======= ======= =======
Net income................................................ $ 1.16 $ .88 $ 1.84
======= ======= =======
34
37
SUPPLEMENTARY FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
---------------------------------------------------------
1998 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- ------- -------- -------
Net sales............................... $136,503 $140,765 $133,370 $141,155
Gross profit............................ 23,332 23,586 23,896 25,812
Net Income.............................. $ 2,874 $ 3,336 $ 2,916 $ 3,808
======== ======== ======== ========
Diluted Earnings Per Share.............. $ .26 $ .30 $ .26 $ .35
======== ======== ======== ========
QUARTER ENDED
---------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- ------- -------- -------
Net sales............................... $93,806 $103,785 $114,325 $129,194
Gross profit............................ 15,043 16,820 17,993 22,520
Income from continuing operations....... 2,242 3,035 2,526 3,493
Extraordinary charge, net of tax........ -0- -0- -0- (1,513)
Net Income.............................. $ 2,242 $ 3,035 $ 2,526 $ 1,980
======= ======== ======== ========
Diluted Earnings Per Share:
Continuing Operations................. $ .20 $ .27 $ .22 $ .31
Extraordinary charge.................. -0- -0- -0- (.13)
------- -------- -------- --------
Net Income............................ $ .20 $ .27 $ .22 $ .18
======= ======== ======== ========
NOTE 1 -- On August 1, 1997, the Company acquired substantially all of the
shares of Arden Industrial Products, Inc. ("Arden") for cash of
approximately $44.0 million. The transaction has been accounted for as
a purchase. Arden is a national distributor of speciality and standard
fasteners to the industrial market. Arden is included in the Company's
ILS segment.
NOTE 2 -- The extraordinary charge relates to the Company's decision to enter
into a new bank agreement, issue 9 1/4% Senior Subordinated Notes due
2007 and redeem the Convertible Senior Subordinated Debentures.
NOTE 3 -- During September 1998, the Company completed the sale of Friendly &
Safe Packaging Systems, Inc. to Kerr Group. The transaction had an
immaterial effect on the consolidated financial position and
operations of the Company.
NOTE 4 -- On October 8, 1998, the Company acquired all of the shares of GIS
Industries, Inc. dba Gateway Industrial Supply ("Gateway"). The
transaction has been accounted for as a purchase. Gateway is a
distributor of fasteners and a manufacturer of fabricated metal
products and fasteners.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in nor disagreements with Park-Ohio's independent
auditors on accounting and financial disclosure matters within the two-year
period ended December 31, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors required under this item is
incorporated herein by reference from the material contained under the caption
"Election of Directors" in the registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
not
35
38
later than 120 days after the close of the fiscal year. Information relating to
executive officers is contained under Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation contained under the
headings "Certain Matters Pertaining to the Board of Directors" and "Executive
Compensation" in the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference from the material contained under the caption "Principal Shareholders"
in the registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference from the material contained under the caption "Certain Transactions"
in the registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A, not later than 120 days
after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Part II, Item 8:
PAGE
----
Report of Independent Auditors............................ 17
Financial Statements
Consolidated balance sheets -- December 31, 1998 and
1997.................................................. 18
Consolidated statements of income -- years ended
December 31, 1998, 1997 and 1996...................... 19
Consolidated statements of shareholders'
equity -- years ended December 31, 1998, 1997 and
1996.................................................. 20
Consolidated statements of cash flows -- years ended
December 31, 1998, 1997 and 1996...................... 21
Notes to consolidated financial statements............. 22
Selected quarterly financial data (unaudited) -- years
ended December 31, 1998 and 1997....................... 35
(3) Exhibits:
The Exhibits filed as part of this Form 10-K are listed on the Exhibit
Index immediately preceding such exhibits, incorporated herein by reference.
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
None
36
39
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.
PARK-OHIO HOLDINGS CORP
(Registrant)
By: /s/ RONALD J. COZEAN
--------------------
Ronald J. Cozean, Secretary
Date: March 26, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ EDWARD F. CRAWFORD Chairman, Chief Executive Officer and
- ------------------------------------------------ President (Principal Executive Officer)
Edward F. Crawford and Director
/s/ JAMES S. WALKER Vice President -- and Chief Financial
- ------------------------------------------------ Officer (Principal Financial and
James S. Walker Accounting Officer)
/s/ MATTHEW V. CRAWFORD Director
- ------------------------------------------------
Matthew V. Crawford
/s/ KEVIN R. GREENE Director
- ------------------------------------------------ March 26, 1999
Kevin R. Greene
/s/ LEWIS E. HATCH, JR. Director
- ------------------------------------------------
Lewis E. Hatch, Jr.
/s/ THOMAS E. MCGINTY Director
- ------------------------------------------------
Thomas E. McGinty
/s/ LAWRENCE O. SELHORST Director
- ------------------------------------------------
Lawrence O. Selhorst
/s/ FELIX J. TARORICK Director
- ------------------------------------------------
Felix J. Tarorick
/s/ JAMES W. WERT Director
- ------------------------------------------------
James W. Wert
37
40
ANNUAL REPORT ON FORM 10-K
PARK-OHIO HOLDINGS CORP.
FOR THE YEAR ENDED DECEMBER 31, 1998
EXHIBIT INDEX
EXHIBIT
- -------
2.0 Agreement of Merger dated February 20, 1998 by and among
Park-Ohio Industries, Inc., PKOH Merger Corp. and PKOH
Holding Corp. (filed as appendix A to the Registration
Statement on Form S-4 of Park-Ohio Industries, Inc., filed
on February 26, 1998, SEC File No. 333-46931 and
incorporated by reference and made a part hereof)
3.1 Amended and Restated Articles of Incorporation of Park-Ohio
Holdings Corp.
3.2 Code of Regulations of Park-Ohio Holdings Corp.
4.1 Indenture, dated November 25, 1997 by and among Park-Ohio
Industries, Inc. and Norwest Bank Minnesota, N.A. as trustee
(filed as Exhibit 4.1 of the Company's Registration
Statement on Form S-4, filed on December 23, 1997, SEC File
No. 333-43005 and incorporated by reference and made a part
hereof)
4.2 Amended and Restated Credit Agreement among Park-Ohio
Industries, Inc., and various financial institutions dated
November 2, 1998 (filed as Exhibit 4 to the Form 10-Q of
Park-Ohio Holdings Corp., filed on November 13, 1998, SEC
File No. 000-03134 and incorporated by reference and made a
part hereof)
10.1 Form of Indemnification Agreement entered into between
Park-Ohio Holdings Corp. and each of its directors and
certain officers
10.2 Park-Ohio Industries, Inc. Amended and Restated 1992 Stock
Option Plan (filed as Exhibit A to Schedule 14A of Park-Ohio
Industries, Inc. filed on May 12, 1995, SEC File No.
000-03134 and incorporated by reference and made a part
hereof)
10.3 Non-Statutory Stock Option Agreement dated February 22, 1996
by and between Park-Ohio Industries, Inc., and Edward F.
Crawford (filed as Appendix A to the Definitive Proxy
Statement of Park-Ohio Industries, Inc., filed on April 16,
1996, SEC File No. 000-03134 and incorporated by reference
and made a part hereof)
10.4 1996 Non-employee Director Stock Option Plan (filed as
Appendix B to the Definitive Proxy Statement of Park-Ohio
Industries, Inc., filed on April 16, 1996, Sec File No.
000-03134 and incorporated by reference and made a part
hereof)
10.5 1998 Long-Term Incentive Plan (filed as appendix E to the
Definitive Proxy Statement of Park-Ohio Industries, Inc.,
filed on April 24, 1998, SEC File No. 000-03134 and
incorporated by reference and made a part hereof)
12.1 Computation of Ratios
21.1 List of Subsidiaries of Park-Ohio Holdings Corp.
23.1 Consent of Ernst & Young, LLP
27.1 Financial Data Schedule for period ended December 31, 1998
(Electronic Filing Only)
38