Securities and Exchange Commission,
Washington, DC 20549
AMENDMENT NO. 2 TO
SCHEDULE 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
BOWLES FLUIDICS CORPORATION
(Name of the Issuer)
BOWLES FLUIDICS CORPORATION, WILLIAM EWING, III,
JAMES T. PARKINSON, III, AND FREDERIC EWING,II
(Name of Person(s) Filing Statement)
COMMON STOCK $.10 PAR VALUE
(Title of Class of Securities)
10259010
(CUSIP Number of Class of Securities)
Ronald D. Stouffer, President Patrick K. Arey, Esquire
Bowles Fluidics Corporation Miles & Stockbridge P.C.
6625 Dobbin Road 10 Light Street, 8th Floor
Columbia, Maryland 21405-4707 Baltimore, Maryland 21202-1487
Telephone: 410-381-0400 Telephone: 410-385-3485
Telecopier: 410-381-2718 Telecopier: 410-385-3700
E-Mail: rstouffer@bowlesfluidics.com E-Mail: parey@milesstockbridge.com
(Name, address and telephone number of person authorized to
receivenotices and communications on behalf of persons(s) filing
statement)
This statement is filed in connection with (check the appropriate box):
a. { } The filing of solicitation materials or an information
statement subject to Regulation 14A (17 CFR 240.14a-1 to
240.14b-1), Regulation 14C (17 CFR 240.14c-1 to 240.14c-101) or
Rule 13e-3(c) (Sec. 240.13e-3(c)) under the Securities Exchange
Act of 1934.
b. { } The filing of a registration statement under the Securities
Act of 1933.
c. { } A tender offer.
d. {X} None of the above.
1
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: { }
CALCULATION OF FILING FEE
TRANSACTION VALUATION* AMOUNT OF FILING FEE
$ 212,656.00 $ 42.53
* Fee based upon 1/50th of 1% of the anticipated purchase price of
fractional shares resulting from the proposed reverse stock split.
[X] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: $48.52
Form or Registration No.: Schedule 13E-3
Filing Party: Bowles Fluidics Corporation
Date Filed: December 21, 1998
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The name of the issuer is "Bowles Fluidics Corporation" (the "Company")
and the address of its principal executive offices is: 6625 Dobbin Road,
Columbia, Maryland 21045-4707.
(b) The class of security which is the subject of the Rule 13e-3
transaction is the Company's Common Stock, $0.10 par value per share (the
"Common Stock"). As of October 15, 1998, 12,685,011 shares of the Common Stock
were outstanding and held of record by approximately 430 persons.
(c) The Common Stock of the Company is traded in the "over-the-counter"
market and is quoted on the NASD OTC Bulletin Board; symbol BOWE. The Preferred
Stock is unregistered and is not publicly traded.
2
The high and low bid and asked prices of the Common Stock over the last two
fiscal years are listed below:
BID ASKED
----------------------------------- ------------------------------
FY High Low High Low
1998 1st Quarter 1 3/4 1 1/4 2 1/16 1 3/8
2nd Quarter 1 3/4 1 1/16 2 1/2 1 3/8
3rd Quarter 1 3/4 1 2 1 3/8
4th Quarter 1 1/32 23/32 1 1/2 1 1/8
1997 1st Quarter 1 3/8 13/16 1 5/8 1 1/4
2nd Quarter 1 3/8 5/8 1 9/16 3/4
3rd Quarter 13/16 7/16 7/8 9/16
4th Quarter 3 1/8 3/4 3 1/2 7/8
Note: The above quotes represent prices between dealers and do not include
retail mark-up, mark-down, or commissions. They do not represent actual
transactions.
(d) The Company has never paid cash dividends on its Common Stock. Payment
of dividends on Common Stock is within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements, and the operating financial condition of the Company.
(e) Not applicable.
(f) Neither the Company nor any of its controlling persons, William Ewing,
III, James T. Parkinson, III, or Frederic Ewing, II, has purchased any of the
Company's securities within the past two full fiscal years of the Company.
ITEM 2. IDENTITY AND BACKGROUND.
This Schedule is being filed by the Company, which is the issuer of the
equity securities that are the subject of the Rule 13e-3 transaction, and
William Ewing, III, James T. Parkinson, III, and Frederic Ewing, II, each of
whom is a controlling person and an affiliate of the Company. The Company, a
Maryland corporation, is a designer, manufacturer and supplier of windshield and
rear window washer nozzles for passenger cars and light trucks in North America.
The Company also
3
designs and sells defroster nozzles for a limited number of these same light
vehicles. The address of the Company is 6625 Dobbin Road, Columbia, Maryland
21045-4707.
The controlling stockholders, directors and executive officers of the
Company are:
William Ewing, III Chairman of the Board of Directors, Controlling Person
Ronald D. Stouffer President, Chief Executive Officer, Director
Eric W. Koehler Executive Vice President, Director
John E. Searle, Jr. Director (Resigned December 8, 1998)
David C. Dressler Director
Neil Ruddock Director
James T. Parkinson, III Director, Controlling Person
Frederic Ewing, II Director, Controlling Person
Melvyn J. L. Clough Vice President, Operations
Richard W. Hess Vice President, Automotive Products Engineering
Eleanor M. Kupris Secretary and Vice President, Administration
David A. Quinn Vice President, Finance and Treasurer
Dharapuram N. Srinath Vice President, Advanced Engineering
Arlene M. Hardy Corporate Controller
(a) - (d) The information required by this Item 2 with respect to each of
the above-named persons is attached hereto as Exhibit 1, and is incorporated
herein by this reference. The information disclosed in Exhibit 1 is included
pursuant to General Instruction D to Schedule 13E-3.
(e) During the past five years, neither the Company nor, to its knowledge,
any of the controlling persons, directors and executive officers of the Company
has been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors) or was a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of such proceeding
was or is subject to a judgment, decree or final order enjoining further
violations of, or prohibiting activities subject to, federal or state securities
laws or finding any violation of such laws.
(g) Except as noted on Exhibit 1 attached hereto, all of the persons named
above are citizens of the United States of America.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
There have been no contacts or negotiations which have been entered into or
which have occurred since the commencement of the Company's second full fiscal
year preceding the date of this Schedule (i) between any affiliates of the
Company; or (ii) between the Company or any of its affiliates and any person who
is not affiliated with the Company and who would have a direct interest in such
matters.
ITEM 4. TERMS OF THE TRANSACTION.
4
(a) The Company proposes, subject to stockholder approval, an amendment to
the Company's Articles of Incorporation which would decrease the number of
shares of Common Stock authorized and outstanding by means of a reverse stock
split in the ratio of 1,000 shares of "Old Common Stock" to 1 share of "New
Common Stock". As used herein, the term "Old Common Stock" refers to the Common
Stock BEFORE the proposed reverse stock split and the term "New Common Stock"
refers to the Common Stock FOLLOWING the proposed reverse stock split. The par
value of the New Common Stock would be adjusted to $100 per share.
Any fractional shares resulting from the reverse stock split will be
purchased from holders thereof at the rate of $1,250 per share of New Common
Stock (I.E., post split).
(b) All holders of Common Stock will be treated identically in connection
with the reverse stock split, in that all fractional shares of New common Stock
will be purchased at the rate of $1,250 per share of New Common Stock.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a) On December 8, 1998, the Board of Directors of the Company adopted
resolutions authorizing the going-private transaction that is the subject of
this Schedule 13E-3. The Board of Directors authorized the submission to the
vote of the stockholders of the Company an amendment to the Articles of
Incorporation of the Company under which all outstanding shares of Old Common
Stock will be subject to a reverse stock split at the ratio of 1,000 shares of
Old Common Stock to 1 share of New Common Stock. Copies of the proposed
amendment to the Company's Articles of Incorporation (the "Proposed Amendment")
and the resolutions adopted by the Board of Directors are attached to this
Schedule as Exhibit 2.
The Company expects to submit the Proposed Amendment to the stockholders of
the Company at a special meeting expected to be held at 10:00 a.m. on April 14,
1999, at 6625 Dobbin Road, Columbia, Maryland.
If the Proposed amendment is approved by the stockholders, as a result of
the proposed reverse stock split the total authorized shares of Common Stock
will be reduced from 17,000,000 shares to 17,000 shares. Any resulting
fractional shares of Common Stock will be purchased from the holders thereof at
the rate of $1,250 per share of New Common Stock.
(b) The purchase price of fractional shares of New Common Stock will be
paid from available funds of the Company, which is expected to result in a use
of cash in the approximate amount of $212,656 and a reduction in shareholders'
equity in the same amount.
(c) John E. Searle, Jr., resigned as a member of the Board of Directors of
the Company effective on December 8, 1998, following the meeting of the Board of
Directors on that date, resulting in a vacancy on the Board of Directors. Mr.
Searle's resignation is not related to the proposed reverse stock split.
(d) The Company does not expect that any material change in the present
dividend rate or policy or indebtedness of the Company will occur as a result of
the reverse stock split. A change in the Company's capitalization will not occur
as a result of the adjustment in par value to $100 per share of New Common
Stock.
(e) There will be no other material change in the Company's corporate
structure or business.
(f) Not applicable.
5
(g) Following the reverse stock split and purchase of resulting fractional
shares of New Common Stock, it is expected that the number of record
shareholders of the Company's Common Stock will be reduced from approximately
430 (as of October 15, 1998) to less than 200. The number of holders of the
Company's Preferred Stock will remain unchanged at approximately 18. As a result
of the reduction in number of record shareholders below 300, the Company intends
to suspend its obligation to file periodic reports with the Securities and
Exchange Commission pursuant to section 15(d) of the Exchange Act of 1934.
ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
(a) The Company expects to spend its own funds to purchase fractional
shares of the New Common Stock following the reverse stock split. The Company
anticipates that as a result of the reverse stock split, there will be
approximately 170.125 aggregate fractional shares of the New Common Stock to be
purchased by the Company. The expected aggregate purchase price of such shares
is approximately $212,656, based upon the purchase price of $1,250 per share of
New Common Stock. Such price per share was determined based upon the report of
Ferris Baker Watts, Incorporated as to value of the Common Stock of the Company
which report is further described in Item 9(a) to this Schedule.
(b) The following is a statement of all expenses incurred or estimated to
be incurred in connection with the going private transaction. The Company will
be responsible for paying any or all of such expenses.
Filing Fees $ 43
Legal Fees 125,000
Accounting Fees 2,000
Appraisal Fees 65,000
Administration of Share Buy Back 25,000
Printing Costs 2,000
-----
TOTAL $ 219,043
(c) All of the foregoing expenses and purchase price of fractional shares
of New Common Stock are expected to be paid from the available funds of the
Company.
(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The purpose of this Rule 13e-3 going private transaction, which is to
be accomplished through the reverse stock split, is to suspend the Company's
obligation to file reports under Section 15(d) of the Securities and Exchange
Act of 1934. The Board of Directors believes that such action is in the best
interests of the Company for the following reasons: (1) the filing of periodic
reports under Section 15(d) of the Securities and Exchange Act of 1934 allows
the Company's limited number of customers and competitors, all of which are
concentrated in a single industry, to obtain information concerning the
Company's profit margins, patent positions and operations which, in the
Company's opinion, has or may have an adverse effect on the Company's
performance; and (2)
6
the out-of-pocket and internal costs to the Company associated with the
preparation and filing of the periodic reports when compared to the limited
number of stockholders is, in the Company's opinion, unwarranted.
(b) The Company considered two alternative means to accomplish its
objective of suspending its obligation to file reports under Section 15(d) of
the Securities and Exchange Act of 1934.
TENDER OFFER. The Board of Directors considered making a tender offer
for shares of Common Stock in order to reduce the number of record holders
of Common Stock below 300. This alternative was viewed as undependable,
however, because it was not certain that the Company would sufficiently
reduce the number of its record stockholders to achieve its objective of
less than 300 shareholders. The costs which might be incurred in connection
with such a tender offer also appeared to be potentially higher than the
costs expected to be incurred in connection with the reverse stock split.
MERGER. The Board of Directors also considered the possibility of a
"cash out" merger. However, the anticipated costs of such a merger
(including the cost of obtaining the requisite shareholder approvals and
purchase of Common Stock) were also expected to be higher than the costs
expected to be incurred in connection with the reverse stock split.
(c) The Company has structured the Rule 13e-3 transaction as a reverse
stock split because it believes that this structure is the simplest and most
economical means of reducing the number of record holders of the Company's
Common Stock below 300, thereby achieving its goal of terminating its obligation
to file periodic reports with the Securities and Exchange Commission pursuant to
Section 15(d) of the Securities and Exchange Act of 1934. In addition, the
Company believes that the reverse stock split and purchase of fractional shares
of the New Common Stock will provide an easy and cost effective way for
shareholders holding less than one share of New Common Stock (1,000 shares of
Old Common Stock) to dispose of such fractional shares at a fair price without
incurring brokerage commissions and other transaction costs. The Company
believes that implementing the reverse stock split at this time so that it can
terminate its obligation to file periodic reports with the Securities and
Exchange Commission will improve its future performance.
(d) EFFECT UPON COMPANY. As described above, upon consummation of the
reverse stock split, the Company anticipates that the number of record
stockholders of the Company will be reduced from approximately 430 (as of
October 15, 1998) to less than 200 and the Company will achieve the purposes of
the reverse stock split described above. The Company incurs costs related to its
status as a public reporting corporation under the federal securities laws,
including indirect costs as a result of, among other things, the Company
personnel, including management, time expended to prepare and review various
filings, furnish information to stockholders, and attend to other stockholders
matters. Termination of the Company's obligation to file periodic reports will
eliminate the costs and expenses of such federal securities filings and reduce
the amount of time devoted by management in preparing and reviewing such
reports. The Company estimates that, upon termination of its obligation to file
periodic reports with the Securities and Exchange Commission, it will achieve
savings within a range of approximately $65,000 to $75,000 annually.
EFFECT UPON CERTAIN AFFILIATES OF THE COMPANY. The following individuals
are "controlling persons" with respect to the Company, and therefore
"affiliates" of the Company for purposes of this Schedule. Set forth in the
following table are the number of shares of Common Stock currently owned or
controlled by such persons, the percentage of total shares outstanding, the
number of
7
shares expected to be owned, and the percentage of total shares expected to be
outstanding following the proposed reverse stock split.
- ---------------------------------- ---------------------------------- ----------------------------------
SHARES CURRENTLY OWNED SHARES OWNED POST SPLIT
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
NAME AND TITLE NUMBER % OF TOTAL NUMBER % OF TOTAL
SHARES SHARES
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
William Ewing, III, Chairman of 437,329 (1) 3.5 436 (1) 3.5
the Board of Directors, 8,697,829 (2) 68.6 8,680 (2) 69.4
Controlling Person
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
James T, Parkinson, III, 1,176,849 (3) 9.3 1,175 (3) 9.4
Director, Controlling Person
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
Frederic Ewing, II, Director, 390,827 (4) 3.1 390 (4) 3.1
Controlling Person 344,540 (5) 2.7 344 (5) 2.7
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
Notes:
1. For own account, including 53,320 shares held by Mr. Ewing's
children for which he holds a power of attorney.
2. Owned by trusts of which Mr. Ewing is a trustee or owned by other
individuals for which he holds their powers of attorney,
excluding, however, shares owned by Frederic Ewing, II, which are
included under his name.
3. As trustee of trusts established under the will of Arthur Choate.
Mr. Parkinson disclaims any beneficial ownership of such shares.
4. For own account. Mr. William Ewing holds powers of attorney with
respect to these shares.
5. As trustee for two trusts.
Set forth in the following table are the book value and basic earnings per
share attributable to such ownership, in terms of both dollar amounts and
percentages, before and after the proposed stock split.
- ----------------------------- -------------------- --------------------- -------------------- --------------------
BOOK VALUE BOOK VALUE BASIC EARNINGS BASIC EARNINGS
PRE-SPLIT (1) POST-SPLIT (1) PRE-SPLIT (2) POST-SPLIT (2)
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
NAME AND TITLE AMOUNT % OF AMOUNT % OF AMOUNT % OF AMOUNT % OF
TOTAL TOTAL TOTAL TOTAL
AMOUNT AMOUNT AMOUNT AMOUNT
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
William Ewing, III, $ 291,155 3.4 $ 286,805 3.5 $ 29,622 3.5 $ 29,700 3.5
Chairman of the Board of
Directors, Controlling 5,790,643 68.6 5,709,791 69.4 589,144 68.7 591,282 69.5
Person
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
James T, Parkinson, III, 783,496 9.3 772,927 9.4 79,713 9.3 80,041 9.4
Director, Controlling
Person
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
Frederic Ewing, II, 260,196 3.1 256,546 3.1 26,473 3.1 26,567 3.1
Director, Controlling Person
229,380 2.7 226,287 2.7 23,337 2.7 23,434 2.8
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
Notes:
1. This amount represents the numbers of shares owned multiplied by the
book value per share as of October 31, 1998, the end of the most recent
fiscal year of the Company. Such amounts represent only the
stockholder's pro rata interest in the Company's book value and are not
payable to the stockholders of the Company in the ordinary course of
business.
2. This amount represents the numbers of shares owned multiplied by the
basic earnings per share of the Company for the fiscal year ended
October 31, 1998. Such amounts represent only the stockholder's pro rata
interest (if any) in the Company's net earnings and are not payable to
the stockholders of the Company in the ordinary course of business,
other than as dividends. The Company has never paid any dividend on its
Common Stock.
Messrs. William Ewing, III, James Parkinson, III, and Frederic Ewing, II,
are expected to continue in their present positions in the Company following the
reverse stock split. None of these persons will
8
receive any consideration in connection with the reverse stock split other than
amounts received as a result of the purchase by the Company of fractional shares
of New Common Stock.
EFFECT UPON UNAFFILIATED SHAREHOLDERS. Upon consummation of the reverse
stock split and termination of the Company's obligation to file periodic reports
under the federal securities laws, information now available to stockholders in
the annual, quarterly and other reports required to be filed by the Company with
the Securities and Exchange Commission would not be available to the Company's
stockholders as a matter of right. Under Maryland law, the Company is required
to prepare annually and submit to the annual meeting of stockholders a full and
complete statement of affairs of the Company, including a balance sheet and a
financial statement of operations for the preceding fiscal year. Such statement
is also required by law to be available to all stockholders of the Company for
inspection and copying.
All owners of fractional shares of New Common Stock following the reverse
stock split will receive cash in lieu of such fractional shares at the rate of
$1,250 for each whole share of New Common Stock, pro rated as to the fractional
share held by each such owner. The Company believes that the purchase price
represents a premium above the average price per share of the Company's Common
Stock which could be received if such shares were sold on the open market.
Further, stockholders receiving cash in lieu of fractional shares of New Common
Stock will not have to pay any brokerage fees or commissions in connection with
such transaction.
Stockholders owning only fractional shares of New Common Stock following
the reverse stock split will receive cash in lieu of such fractional shares,
will cease to have any ownership interest in the Company, and will cease to
participate in future earnings and growth, if any, of the Company.
FEDERAL INCOME TAX CONSEQUENCES. Upon consummation of the reverse stock
split, each 1,000 shares of Old Common Stock issued and outstanding immediately
prior to the effective time of such split will be converted into one share of
New Common Stock and all resulting fractional shares of New Common Stock will be
purchased by the Company at the price of $1,250 per share. The following
description of the federal income tax consequences of the reverse stock split is
included solely for the general information of the holders of the Company's
Common Stock. The federal income tax consequences for any particular stockholder
may be affected by matters not discussed herein, and each stockholder should
consult his or her personal tax advisor in determining the federal income tax
consequences of the reverse stock split and purchase of fractional shares. For
those stockholders receiving New Common Stock from consummation of the reverse
stock split, there will be no direct tax consequences as a result of the reverse
stock split, except for reallocation to the stockholders' per share tax basis.
The purchase of fractional shares of New Common Stock by the Company will be a
taxable transaction for federal income tax purposes. Each holder of fractional
shares of New Common Stock purchased by the Company subsequent to the reverse
stock split will recognize gain or loss upon the purchase of that stockholder's
fractional share of New Common Stock equal to the difference, if any, between
(i) the amount of the cash payment received for any fractional shares of New
Common Stock and (ii) that stockholder's tax basis in such fractional shares of
New Common Stock so long as the New Common Stock was held as a capital asset of
the stockholder. Any subsequent gain or loss resulting from the disposition of
New Common Stock should be treated as a capital gain or loss transaction. As
indicated previously, holders of New Common Stock are urged to consult their
personal tax advisors as to the tax consequences of the reverse stock split and
purchase of fractional shares under federal, state, local and any other
applicable laws.
9
The cash payments due to the holders of fractional shares of New Common
Stock (other than certain exempt entities and persons) will be subject to a
backup withholding tax at the rate of 31% under federal income tax law unless
certain requirements are met. Generally, the Company or its paying agent will be
required to deduct and withhold the tax on cash payments due at the effective
time of the purchase of fractional shares of New Common Stock subsequent to the
reverse stock split if (i) a stockholder fails to furnish a taxpayer
identification number ("TIN"; the TIN of an individual stockholder is his or her
Social Security number) to the paying agent or fails to certify under penalty of
perjury that such TIN is correct; (ii) the Internal Revenue Service ("IRS")
notifies the Paying Agent that the TIN furnished by the stockholder is
incorrect; (iii) the IRS notifies the paying agent that the stockholder has
failed to report interest, dividends, or original issue discount in the past; or
(iv) there has been a failure by the stockholder to certify under penalty of
perjury that such stockholder is not subject to the backup withholding tax. Any
amounts withheld by the paying agent in collection of the backup withholding tax
will reduce the federal income tax liability of the stockholders from whom such
tax was withheld.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) The Company and the Board of Directors believe that the proposed
reverse stock split and subsequent purchase of fractional shares is
substantively and procedurally fair to unaffiliated stockholders of the Company.
The Board of Directors of the Company by unanimous vote on December 8, 1998,
with no member of the Board of Directors dissenting or abstaining from such
approval, adopted a resolution declaring the terms and conditions of the reverse
stock split and purchase of fractional shares advisable and directing that a
proposed amendment to the Articles of Incorporation of the Company be submitted
to shareholders of the Company for consideration.
A special committee of the Board of Directors of the Company, comprised of
Directors who are non-controlling persons, as described in paragraph (d) below
(the "Special Committee"), recommended that the Board of Directors retain
Ferris, Baker Watts, Incorporated ("Ferris, Baker Watts"), and by letter
agreement dated June 23, 1998 such firm was retained, to act as its financial
advisor and to render its opinion to the Company's Board of Directors as to the
fairness of the fractional share purchase price, from a financial point of view,
to the shareholders of the Company following the reverse stock split (herein
referred to as the "Purchase Price").
The Special Committee was charged with the responsibility of recommending
to the Board of Directors a fair price to pay for the fractional shares
resulting from the reverse stock split of the Common Stock. It met on four
occasions with a representative of Ferris, Baker Watts during which discussions
occurred and information shared concerning the methodology of companies having
business and markets similar to those of the Company and the application of such
methodologies to the Company's financial and market position and future
prospects. Based upon these deliberations, the Special Committee believes that
the proposed reverse stock split and subsequent purchase of fractional shares is
substantively and procedurally fair to unaffiliated stockholders of the Company
and unanimously recommended to the Board of Directors of the Company that $1,250
per share of New Common Stock resulting from a reverse stock split would be a
fair price to pay. Ferris, Baker Watts concurred in this recommendation.
William Ewing, III, James T. Parkinson, III, and Frederic Ewing, II,
believe that the proposed reverse stock split and subsequent purchase of
fractional shares are substantively and procedurally fair to unaffiliated
stockholders of the Company and concur in the recommendation of the Board of
10
Directors that stockholders of the Company approve the proposed amendment to the
Articles of Incorporation of the Company to authorize the reverse stock split.
(b) In reaching their determination that the proposed reverse stock split
and subsequent purchase of fractional shares are substantively and procedurally
fair to unaffiliated stockholders of the Company, the Special Committee and the
Board of Directors considered the following factors:
(i) The written opinion of Ferris, Baker Watts delivered to the Special
Committee and the Board of Directors on December 8, 1998, to the effect
that, based upon and subject to certain factors and assumptions stated
therein, as of such date, the Purchase Price to be received by the
shareholders of the Company as a result of the reverse stock split and
purchase of resulting fractional shares was fair, from a financial point of
view. The full text of Ferris, Baker Watts' fairness opinion is attached
hereto as Exhibit 3.
(ii) The relationship of the Purchase Price to the current market price
of the Company's Common Stock, as of December 4, 1998, which was at a bid
price of $0.75 per share and an asked price of $1.0625 per share.
(iii) The relationship of the Purchase Price to the historical market
prices of the Company's Common Stock, as described under Item 1(c) of this
Schedule, taking into account that at certain times during the previous two
full fiscal years of the Company the price of the Company's Common Stock
exceeded the Purchase Price.
(iv) The book value of the Company's Common Stock, which was $0.67 per
share as of October 31, 1998 (the end of the Company's 1998 fiscal year).
(v) The relationship of the Purchase Price to the intrinsic value of
the Company based upon a discounted cash flow analysis prepared by Ferris,
Baker Watts in its reports to the Board of Directors, copies of which are
attached to this Schedule as Exhibit 4.
(vi) The relationship of the Purchase Price to the value of the Company
based upon a comparison to the value of publicly traded comparable
companies as analyzed by Ferris, Baker Watts in its reports to the Board of
Directors, copies of which are attached to this Schedule as Exhibit 4.
(vii) The advantages of and benefits to the Company of not being
required to file periodic reports with the Securities and Exchange
Commission pursuant to ss.15(d) of the Securities and Exchange Act of 1934,
the direct and indirect cost savings to be realized by the Company from not
having to file such periodic reports, and the benefits to be derived by the
remaining Company stockholders from the transactions described in this
Schedule.
(viii) The Company's financial projections as analyzed by Ferris, Baker
Watts which, in the view of the Special Committee and the
11
Board of Directors, support their determination that the Purchase Price is
fair to unaffiliated stockholders,
(ix) The purchase of fractional shares of New Common Stock at the
Purchase Price will enable owners of less than 1,000 shares of Old Common
Stock to sell such shares and receive a premium over the highest price
derived after applying the foregoing valuation analysis for such shares,
without paying brokerage fees and commissions and other expenses of selling
such shares.
The Board of Directors did not consider the liquidation value of the
Company in making its decision to recommend the reverse stock split, since the
value of the Company as a going concern far exceeded any liquidation value and
provided the best opportunity to maximize the Purchase Price.
In reaching its determination as to the fairness of the Purchase Price and
in view of the variety of factors considered in determining the fairness of the
Purchase Price, the Special Committee and the Board of Directors of the Company
did not assign any relative or specific weights to the various factors
considered by them.
In reaching their conclusion that the proposed reverse stock split and
subsequent purchase of fractional shares are substantively and procedurally fair
to unaffiliated stockholders of the Company, William Ewing, III, James T.
Parkinson, III, and Frederic Ewing, II, adopted the analysis of the factors
described above by the Board of Directors, did not assign any relative or
specific weights to the foregoing factors, and did not obtain any other analysis
of the fairness of the transaction.
(c) Pursuant to the provisions of ss.2-604(d) of the Corporations and
Associations Article of the Annotated Code of Maryland, any proposed amendment
to the Articles of Incorporation of the Company must be approved by the
stockholders of the Company by the affirmative vote of two thirds of all the
votes entitled to be cast on the matter. Holders of Common Stock are entitled to
cast one vote for each share of Common Stock. Holders of the Company's Preferred
Stock are entitled to cast four votes for each share of Preferred Stock.
The transaction is not structured so that approval of at least a majority
of unaffiliated stockholders is required. Section 3-602 of the Corporations and
Associations Article of the Annotated Code of Maryland requires that certain
transactions involving reclassification of securities (including reverse stock
splits) must be approved by two-thirds of the votes entitled to be cast by
unaffiliated stockholders. The Company is exempt from such provisions of law
because it had an existing interested stockholder on July 1, 1983, and the
Company has not elected to be subject to the requirements of said Section 3-602.
The Company has not voluntarily structured the
12
transaction to require the approval of at least a majority of unaffiliated
stockholders because it is not required by law to do so and believes that the
Purchase Price is fair to unaffiliated stockholders.
William Ewing, III, James T. Parkinson, III, and Frederic Ewing, II, all
controlling persons of the Company, have stated that they intend to vote in
favor of the proposed amendment to the Company's Articles of Incorporation
authorizing the reverse stock split. Such persons control sufficient votes to
assure approval of the proposed amendment.
(d) The decision to retain Ferris, Baker Watts to prepare a report
concerning the fairness of the Purchase Price was initially made by the Special
Committee and affirmed by the Board of Directors of the Company. The Special
Committee was established by the Board of Directors of the Company on March 12,
1998, to act solely on behalf of the unaffiliated stockholders of the Company
for purposes of reviewing the desirability of undertaking the "going private"
transaction which is the subject of this Schedule 13E-3. The Special Committee
consisted of the following persons: David C. Dressler, John E. Searle, Jr., and
Neil Ruddock. For reasons unrelated to this transaction, Mr. Searle resigned
from the Board of Directors of the Company effective December 8, 1998, following
the meeting of the Board of Directors on that date. Mr. Ruddock joined the
Special Committee on July 14, 1998, when he also joined the Board of Directors.
(e) The Board of Directors of the Company unanimously approved the Proposed
Amendment, which vote included all of the directors who were not employees of
the Company.
(f) During the 18 month period preceding the date of this Schedule 13E-3,
the Company has not received any firm offers from any unaffiliated person for
(a) the merger or consolidation of the Company into or with any person, (b) the
sale or other transfer of all or any substantial part of the assets of the
Company, or (c) securities of the Company which would enable the holder thereof
to exercise control of the Company.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) On June 23, 1998, the Board of Directors of the Company retained the
services of Ferris, Baker Watts to perform a valuation of the Company's Common
Stock and render its opinion as to the fairness of the Purchase Price, from a
financial point of view, to be paid to the holders of fractional shares of the
New Common Stock following the reverse stock split.
Ferris, Baker Watts delivered its written opinion on December 8, 1998, to
the Board of Directors of the Company to the effect that, as of such date, the
Purchase Price to be received by the shareholders of the Company as a result of
the reverse stock split and purchase of resulting fractional shares was fair,
from a financial point of view. No restrictions were imposed by the Special
Committee or the Board of Directors of the Company upon Ferris, Baker Watts with
respect to the investigations made or procedures followed by Ferris, Baker Watts
in rendering its opinions.
On February 26, 1999, Ferris, Baker Watts delivered to the Board of
Directors a supplemental written opinion confirming its opinion that, as of such
date, the Purchase Price to be received by the shareholders of the Company as a
result of the reverse stock split and purchase of resulting fractional shares
was fair, from a financial point of view. This supplemental opinion takes into
accounts events occurring after December 8, 1998, including the audited
financial statements of the Company for the fiscal year ended October 31, 1998.
The full text of Ferris, Baker Watts' fairness opinions, which set forth
certain assumptions made, certain procedures followed, and certain matters
considered by Ferris, Baker Watts, are
13
attached hereto as Exhibit 3. Copies of the reports provided by Ferris, Baker
Watts to the Special Committee and the Board of Directors of the Company at the
time the Board determined to proceed with the going private transaction on
December 8, 1998, are attached hereto as Exhibit 4.
(b) The following information is provided with respect to the fairness
opinion provided by Ferris, Baker Watts:
(1) Ferris, Baker Watts performed a valuation of the Company's Common
Stock and provided its opinion as to the fairness of the Purchase Price,
from a financial point of view, to be paid to the holders of fractional
shares of the New Common Stock following the reverse stock split.
(2) Ferris, Baker Watts is a Mid-Atlantic based investment bank whose
corporate finance activities are focused on small to middle market
companies. Ferris, Baker Watts provides a full range of investment banking
services to its clients, ranging from merger and acquisition services,
public offerings, private placements and advisory services.
(3) The Special Committee solicited proposals from three investment
bankers, interviewed two and unanimously agreed to retain the services of
Ferris, Baker Watts. The Special Committee retained Ferris, Baker Watts to
undertake the proposed valuation because of its familiarity with companies
such as the Company and its experience with companies having a market
capitalization below $100,000,000.
(4) Other than the engagement of Ferris, Baker Watts to provide the
services described in Item 9(a), there are no material relationships
between (i) Ferris, Baker Watts, its affiliates and/or unaffiliated
representative, and (ii) the Company or its affiliates, which existed
during the past two years or is materially understood to be contemplated.
The fee for Ferris, Baker Watts' services is $65,000.
(5) Ferris, Baker Watts provided to the Special Committee and the Board
of Directors a range of values of the fractional shares of Common Stock and
a recommendation to pay a price at the top of the range or at a premium to
the top end of the range. The Special Committee unanimously recommended to
the Board of Directors a price of $1,250 per share of New Common Stock and
the Board of Directors unanimously adopted such recommendation.
On December 8, 1998, Ferris, Baker Watts delivered an opinion (the
"Fairness Opinion") to the Special Committee and the Board of Directors of the
Company which concluded that based upon and subject to the considerations set
forth therein, as of such date the consideration to be received by the
shareholders of the Company for fractional shares of New Common Stock pursuant
to the reverse stock split was fair from a financial point of view. The Fairness
Opinion was based upon economic, market and other conditions in effect as of its
date. No limitations were imposed by the Board of Directors of the Company upon
Ferris, Baker Watts with respect to its investigation or procedures followed in
rendering the Fairness Opinion. The Fairness Opinion, which sets forth
14
assumptions made, material reviewed, matters considered, and the limits of the
review, is attached as Exhibit 3 and is incorporated into this Schedule by
reference.
The following is a summary of the Fairness Opinion. Stockholders of the
Company are urged to read the Fairness Opinion in its entirety. Ferris, Baker
Watts has consented to the inclusion of its opinion in this Schedule and
Information Statement provided to shareholders of the Company and has reviewed
the following summary.
In connection with the Fairness Opinion, Ferris, Baker Watts reviewed,
among other things: (i) the proposed reverse stock split; (ii) annual reports on
form 10-K for the fiscal years ended October 25, 1997, October 26, 1996, October
28, 1995, October 29, 1994, and October 25, 1993; (iii) quarterly reports on
form 10-Q for the periods ended July 25, 1998, April 25, 1998, January 24, 1998,
July 26, 1997, April 26, 1997, January 26, 1997, July 27, 1996, April 27, 1996,
January 27, 1996, July 29, 1995, April 29, 1995, January 28, 1995, July 30,
1994, April 30, 1994, January 29, 1994, July 31, 1993, May 1, 1993, January 30,
1993; and (iv) projected financial results for fiscal years 1998 through 2003
provided by management of the Company and approved by the Board of Directors of
the Company. Ferris, Baker Watts also held discussions with management of the
Company regarding its past and current business operations, financial condition
and future prospects. Ferris, Baker Watts reviewed the reported price and
trading activity of the Company's Common Stock, compared certain financial and
stock market information concerning the Company with similar information for
other parts manufacturers supplying the automotive industry, the securities of
which are publicly traded, and performed other studies and analyses which
Ferris, Baker Watts deemed appropriate.
Ferris, Baker Watts assumed and relied upon the accuracy and completeness
of all financial and other information reviewed for the purposes of the Fairness
Opinion, whether publicly available or provided to Ferris, Baker Watts by the
Company and did not independently verify any such information or make an
independent evaluation or appraisal of the assets or liabilities of the Company.
The preparation of a fairness opinion involves determinations as to the
appropriate and relevant methods of financial analysis and, therefore, reference
should be made to the Fairness Opinion in its entirety and not to a summary
description. In performing its analysis, Ferris, Baker Watts made numerous
assumptions with respect to industry performance, business and economic
condition and other matters, many of which are beyond the control of the
Company. The analyses performed by Ferris, Baker Watts are not necessarily
indicative of future results and do not purport to be appraisals or to reflect
prices at which businesses may actually be sold. The following paragraphs
summarize all material analyses performed by Ferris, Baker Watts.
Ferris, Baker Watts considered several methods to evaluate the value of the
Company, including: (i) the discounted future free cash flow of the Company, and
(ii) the earnings and book value to multiple comparisons to publicly traded
companies engaged in parts manufacturing supplying the automotive industry.
Ferris, Baker Watts also considered the market value of the Company's shares of
Common Stock as well as its trading history.
The discounted future free cash flow analysis ascribes value only to the
cash flows that can ultimately be taken out of the business. These free cash
flows are then discounted to the present at the firm's weighted average cost of
capital. The weighted average cost of capital can be described as the average
price a company must pay to attract both debt and equity to properly capitalize
its growth. These series of cash flows, when discounted to the present and after
subtracting claims by
15
debt holders and others, represent the economic value of a company to
its shareholders. This method of valuation depends upon the accuracy of the
financial projections. Ferris, Baker Watts reviewed and analyzed 5 year
projections provided by the Company and approved by the Company's Board of
Directors. These projections showed the following: (i) revenues growing to $39.6
million by year 2003, representing a 13.9% compound average annual growth rate,
(ii) gross profit margins ranging between 22.4% and 26.6%, and (iii) operating
profit margins at 3.7% for fiscal year 1999, 8.2% for fiscal year 2000, and in
excess of 11% after fiscal year 2000. Ferris, Baker Watts assumed that such
projections were reasonably prepared by the management of the Company on bases
reflecting the best currently available estimates and judgements as to the
Company's expected future financial performance. The table below summarizes the
projections provided by the Company.
- ------------------------------------ ------------ --------------------------------------------------------
Data in thousands Expected Projected
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
INCOME STATEMENT 1998 1999 2000 2001 2002 2003
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Revenues $20,715 $21,345 $24,998 $30,505 $36,152 $39,648
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Gross profit 5,626 4,778 6,368 8,117 9,629 10,186
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Operating profit 2,021 796 2,056 3,366 4,309 4,496
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
After tax income 1,359 618 1,436 2,306 2,977 3,221
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
BALANCE SHEET - ASSETS
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Accounts receivable 3,314 3,415 4,000 4,881 5,784 6,344
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Inventory 2,635 2,835 3,124 3,774 4,440 5,018
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Total current assets 8,491 8,283 9,348 11,072 13,905 17,214
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Net property and equipment 4,313 5,103 5,883 7,119 7,940 8,245
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Total assets 12,904 13,486 15,331 18,291 21,945 25,559
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
BALANCE SHEET - LIABILITIES AND NET WORTH
- ------------------------------------------------- ---------- ----------- ----------- ---------- ----------
Accounts payable 1,346 1,409 1,675 2,074 2,494 2,775
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Accrued expenses 1,243 1,281 1,500 1,830 2,169 2,379
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Total current liabilities 2,638 2,712 3,226 3,986 4,768 5,266
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Net worth 9,802 10,345 11,706 13,936 16,838 19,984
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Total liabilities and net worth 12,904 13,486 15,331 18,291 21,945 25,559
- ------------------------------------ ------------ ---------- ----------- ----------- ---------- ----------
Applying the discounted future free cash flow analysis to these projections
yields a per share value on a pre-split basis of $1.04 (fully diluted). Thus,
the repurchase price of $1.25 per share of Old Common Stock represents a premium
of 20.2% over the per share value determined from the discounted future free
cash flow analysis on a fully diluted basis.
Ferris, Baker Watts also considered the earnings and book multiple
comparisons of publicly traded comparable companies. Ferris, Baker Watts
selected 10 companies which design and manufacture parts for the automotive
industry having market capitalization below $250 million. The pertinent
performance measures are as follows:
o The Net Market Capital to Earnings Before Interest and Taxes (EBIT)
ratio measures the enterprise value to the net operating assets as a
multiple of a company's earnings before interest and taxes. By focusing
on EBIT instead of net income, it is possible to decrease distortions
among comparable companies that are due to different levels of debt in
capital
16
structures, extraordinary items, varying tax rates, and other line
items that occur below the operating profit line. EBIT is calculated to
represent the pre-tax net income that would have resulted had the
company been financed on a total equity basis.
o The price to earnings ("P/E") ratio is a commonly utilized valuation
ratio. It is also known as the earnings multiple and provides investors
with an indication of how much they are paying for a company's earnings
power and the accounting income available to the common equity holder.
However, net income is often a poor approximation of actual cash flow
ultimately available to common shareholders for reinvestment or for the
payment of dividends. Accounting differences may make net income
numbers less comparable.
o The price to forward earnings ratio is similar to the P/E ratio
discussed above, the difference being that it is based upon
expectations for future earnings, not historical earnings.
o The Market Value to Revenues (Price/Revenue) ratio compares what the
market is actually willing to pay for the revenue stream of a company
relative to the actual revenue stream. This ratio is far less
consistent among comparable companies than ratios that measure value in
relation to some measure of earnings.
o The Market Value of Equity to Book Value of Equity (Price/Book) ratio
compares what the market is actually willing to pay for the assets of a
company to what the value of the company's securities would be worth
relative to the historical costs of its assets and earnings history.
This ratio tends to be far less consistent among comparable companies
than ratios that measure value in relation to some measure of earnings.
It is important to note that all of the companies selected for comparison
with the Company were larger in terms of total revenues and market
capitalization and the majority of the companies had substantially larger
average daily trading volumes when compared to the Company. Shares of the
Company's Common Stock are publicly traded but trade infrequently. Approximately
90% of the shares of the Company's Common Stock are controlled by two families
and employees of the Company. This narrow ownership of the Company's Common
Stock makes it difficult for a shareholder to realize liquidity for their
shares. Therefore, Ferris, Baker Watts applied a 15% discount to the implied
equity values derived from the comparable company analysis. The table below
summarizes the implied equity results from the comparable company analysis.
PER SHARE VALUE
METHOD (FULLY DILUTED)
------
Net market Capital/EBIT 0.94
P/E 0.75
Fwd P/E `98 0.85
Fwd P/E '99 (Estimated) 0.35
Market Value to Book Value 0.78
Market Value to Revenues 0.58
The purchase price of $1.25 per share of Old Common Stock is at a premium
to all of the implied per share values derived from the comparable company
analysis.
17
Ferris, Baker Watts also examined the trading history of the Company. The
purchase price represented a 17.6% premium to the Ask price immediately prior to
the announcement of the transaction.
In determining whether the transaction was fair from a financial point of
view, Ferris, Baker Watts relied most heavily upon the discounted cash flow
method. The conclusion reached from the discounted cash flow method is supported
by the comparable company analysis.
From these analyses, Ferris, Baker Watts determined that (i) the
consideration to be received by the shareholders for the fractional shares of
New Common Stock was fair from a financial point of view, and (ii) the goal of
the reverse stock split could be accomplished at minimal cost to and would not
have an adverse impact on the Company.
On February 26, 1999, Ferris, Baker Watts delivered to the Board of
Directors a supplemental written opinion confirming its opinion that, as of such
date, the Purchase Price to be received by the shareholders of the Company as a
result of the reverse stock split and purchase of resulting fractional shares
was fair, from a financial point of view. This supplemental opinion takes into
account events occurring after December 8, 1998, including the audited financial
statements of the Company for the fiscal year ended October 31, 1998.
THE FAIRNESS OPINION RELATES ONLY TO WHETHER THE CONSIDERATION TO BE
RECEIVED BY THE SHAREHOLDERS OF THE COMPANY AS A RESULT OF THE REVERSE STOCK
SPLIT AND PURCHASE OF RESULTING FRACTIONAL SHARES IS FAIR FROM A FINANCIAL POINT
OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF THE
COMPANY AS TO HOW SUCH STOCKHOLDERS SHOULD VOTE WITH RESPECT TO THE REVERSE
STOCK SPLIT.
(c) Ferris, Baker Watts' Fairness Opinion and its supplemental opinion
dated February 26, 1999, are attached as Exhibit 3 to this Schedule. Copies of
the reports provided by Ferris, Baker Watts to the Special Committee and the
Board of Directors of the Company at the time the Board determined to proceed
with the going private transaction on December 8, 1998, are attached hereto as
Exhibit 4.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) As of the date of this Schedule 13E-3, the record and beneficial
ownership (except for beneficial ownership disclaimed as set forth in applicable
footnotes) of the Company's Common Stock, the percentage of the total number of
issued and outstanding Common Stock, and the number of shares of Common Stock
that there is a right to acquire of the person filing this Schedule, together
with any pension plan, profit or similar plan, and by each executive officer,
director, and each controlling stockholder are as follows:
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
NAME POSITION NO. COMMON PERCENTAGE OF NO. PERCENTAGE OF NO. SHARES PERCENTAGE
SHARES TOTAL COMMON PREFERRED TOTAL (FULLY OF FULLY
SHARES SHARES PREFERRED DILUTED DILUTED
SHARES BASIS) (6) SHARES
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
William Ewing, III Chairman of the 437,329 (1) 3.4 808,872 86.7 12,370,646 75.4
Board of Directors, 8,697,829 (2) 68.6
Controlling Person
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
18
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Ronald D. Stouffer President, Chief 129,431 1.0
Executive Officer,
Director
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Eric W. Koehler Executive Vice
President, Director
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
John E. Searle, Jr. Director (Resigned 20,000 .2
December 8, 1998)
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
David C. Dressler Director 20,000 .2
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
James T. Parkinson, Director, 1,176,849 (3) 9.3 28,509 3.1 1,290,885 7.9
III Controlling Person
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Frederic Ewing, II Director, 390,827 (4) 3.1 86,304 9.2 535,155 3.3
Controlling Person 344,540 (5) 2.7
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Melvyn J. L. Clough Vice President,
Operations
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Richard W. Hess Vice President, 5,000 .04
Automotive Products
Engineering
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Eleanor M. Kupris Secretary and Vice 38,040 .3
President,
Administration
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
David A. Quinn Vice President, 21,000 .2
Finance and
Treasurer
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Dharapuram N. Srinath Vice President, 6,500 .05
Advanced Engineering
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
19
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Arlene M. Hardy Corporate Controller
- ----------------------- --------------------- ---------------- --------------- ------------ -------------- ------------- -----------
Notes:
1. For own account, including 53,320 shares held by Mr. Ewing's children
for which he holds a power of attorney.
2. Owned by trusts of which Mr. Ewing is a trustee or owned by other
individuals for which he holds their powers of attorney, excluding,
however, shares owned by Frederic Ewing, II, which are included under
his name.
3. As trustee of trusts established under the will of Arthur Choate.
4. For own account. Mr. William Ewing holds powers of attorney with
respect to these shares.
5. As trustee for two trusts.
6. Combined total of Common Stock and Preferred Stock after conversion to
Common Stock at a ratio of 1:4.
(b) No transactions in any shares of the Common Stock of the Company were
effected during the 60 days immediately preceding the date of this Schedule
13E-3 by the Company or by any of the persons named in paragraph (a) of this
Item.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
There are no contracts, arrangements, understandings or relationships
between the Company or the persons listed above and any other person in
connection with the proposed reverse stock split concerning the transfer or
voting of the Company's Common Stock or Preferred Stock, joint ventures, loan or
option arrangements, puts or calls, guaranties or the giving or withholding of
proxies, consents or other authorizations.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) To the knowledge of the person filing this Schedule, after making
reasonable inquiry, no executive officer, director or affiliate of the Company
or any person enumerated in Exhibit 1 to this Schedule presently intends to
tender or sell any of the Company's Common Stock owned or held by such person,
except with respect to fractional shares of New Common Stock to be purchased by
the Company following the reverse stock split. Each of the persons enumerated in
Exhibit 1 presently intends to vote all shares of the Common Stock held by such
person and with respect to which such person holds proxies, in favor of the
Proposed Amendment, as described in Item 5 of this Schedule.
(b) As described in Items 7 and 8 above, all of the persons enumerated in
Exhibit 1 to this Schedule who are directors of the Company and all members of
the Special Committee voted in favor of the Proposed Amendment. To the knowledge
of the persons filing this statement, after making reasonable inquiry, except as
stated in the preceding sentence, none of the persons named in Exhibit 1 to this
Schedule has made a recommendation in support of or opposed to the Proposed
Amendment.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The Company believes that stockholders of the Company holding
fractional shares of New Common Stock are not entitled to appraisal rights under
Maryland law. However, in
20
redeeming fractional shares, Maryland law provides that a corporation may
purchase fractional shares of its stock for "fair value". Maryland courts have
suggested that under certain circumstances shareholders are not exclusively
limited to the statutory appraisal rights granted stockholders under Maryland
law and that equitable remedies may be available to stockholders in cases
involving no legitimate business purpose, ULTRA VIRES actions, failure to follow
applicable procedures, fraud or extreme violation of fiduciary duties.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) (1) Audited financial statements for the Company's 1997 and 1998 fiscal
years required to be filed with the Company's most recent annual report under
sections 13 and 15(d) of the Securities Exchange Act of 1934 were filed with the
Securities and Exchange Commission on January 29, 1999, as a part of Form 10-K,
SEC file number 002-37706, and were amended on February 22, 1999, SEC file
number 002-37706. Such audited financial statements appearing in Form 10-K, as
amended, are attached hereto as Exhibit 5.
(2) Not applicable.
(3) The ratios of earnings to fixed charges for the two most recent
fiscal years were not determined as there were no debt instruments or fixed
charges for either of these two years.
(4) The book value per share as of the fiscal year ended October 31,
1998, was $0.67.
(b) Pro forma data disclosing the effect of the reverse stock split and
buyback of fractional shares on (1) the Company's balance sheet as of the
most recent fiscal year end is attached as Exhibit 6; and (2) the Company's
statement of income, earnings per share amounts, and ratio of earnings to
fixed charges for the most recent fiscal year end is attached as Exhibit 7.
(3) The Company's book value per share as of the fiscal year ended
October 31, 1998, taking into account the effect of the reverse stock split
and buyback of fractional shares would be $657.81 per share of New Common
Stock.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) No officer, employee, class of employees or corporate asset of the
Company (excluding corporate assets which are proposed to be used as
consideration for purchases of securities or payment of expenses which are
disclosed in Item 6 of this Schedule) has been or is proposed to be employed,
availed of or utilized by the Company or affiliate in connection with the
Proposed Amendment and reverse stock split described in this Schedule.
(b) No person (excluding persons identified in Item 15(a) above), has been
employed, retained or is to be compensated by the Company, or by any person on
behalf of the Company, to make
21
solicitations or recommendations in connection with the Proposed Amendment and
reverse stock split described in this Schedule.
ITEM 16. ADDITIONAL INFORMATION.
It is expected that the owners of more than the necessary two-thirds of the
shares of Common Stock and Preferred Stock entitled to vote on the Proposed
Amendment (including, without limitation, all shares owned by the persons listed
on Exhibit 1 to this Schedule and any shares controlled by them) will vote in
favor of the Proposed Amendment, and, accordingly that such amendment will
receive the necessary approval from stockholders entitled to vote on the
question. Upon receipt of stockholder approval, the Company expects to move
quickly to implement the Proposed Amendment and the reverse stock split
authorized by such amendment.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a) Not applicable.
(b) The opinions and reports of Ferris, Baker Watts provided to the Special
Committee and the Board of Directors at the time the Board determined to proceed
with the going private transaction on December 8, 1998, and referred to in Items
8(d)(1) or 9 of this Schedule are attached hereto as Exhibits 3 and 4,
respectively.
(c) Not applicable.
(d) Any disclosure materials furnished to stockholders of the Company in
connection with the Proposed Amendment and reverse stock split pursuant to SEC
Rule 13e-3(d) (Sec. 240.13e-3(d)) are attached hereto as Exhibit 8.
(e) Not applicable.
(f) Not applicable.
22
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: March 1, 1999 /s/ Ronald D. Stouffer
-----------------------------------------
(Signature)
Ronald D. Stouffer, President
-----------------------------------------
(Name and Title)
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: March 1, 1999 /s/ William Ewing, III
-----------------------------------------
William Ewing, III
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: March 1, 1999 /s/ James T. Parkinson, III
-----------------------------------------
James T. Parkinson, III
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: March 1, 1999 /s/ Frederic Ewing, II
-----------------------------------------
Frederic Ewing, II
EXHIBIT INDEX
1. Identity and Background of Directors, Executive Officers and
Controlling Persons of the Company
2. Proposed Amendment to the Company's Articles of Incorporation and
Resolutions adopted by the Board of Directors on December 8, 1998
3. Fairness Opinion of Ferris, Baker Watts, dated December 8, 1998, and
Supplemental Opinion dated February 26, 1999
4. Reports of Ferris, Baker Watts submitted to the Special Committee and
Board of Directors on December 8, 1998
23
5. Company's Form 10K-A. Filed February 22, 1999.
6. Pro Forma Data Disclosing the Effect of the Reverse Stock Split and
Buyback of Fractional Shares on the Company's Balance Sheet as of the
Most Recent Fiscal Year End
7. Pro Forma Data Disclosing the Effect of the Reverse Stock Split and
Buyback of Fractional Shares on the Company's Statement of Income,
Earnings Per Share Amounts, and Ratio Of Earnings to Fixed Charges for
the Most Recent Fiscal Year End
8. Disclosure Materials to be Furnished to Company Stockholders
24
EXHIBIT 1
IDENTITY AND BACKGROUND OF DIRECTORS, EXECUTIVE OFFICERS
AND CONTROLLING PERSONS OF THE COMPANY
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
NAME POSITION PRESENT OCCUPATION OCCUPATION OR EMPLOYMENT DURING
PAST FIVE YEARS
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
William Ewing, III Chairman of the Board of Chairman of the Board Vice President and Treasurer,
Directors, 1996 - present, Bowles Fluidics Corporation 1995-1997
Controlling Person 6625 Dobbin Road Reeves Industries, Inc.
Columbia, Maryland 21045-4707 101 Merritt
Director, 1985 - present P. O. Box 5063
Chairman of the Board Norwalk, CT
Vacuum Instruments Corp.
2099 9th Ave. Managing Director, 1992-1994
Ronkonoma, NY 11779 Chemical Bank
New York, New York
Chairman of the Board
Actronics Inc.
166 Bear Hill Road
Waltham, MA 02154
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Ronald D. Stouffer President, 1994 - present President and Chief Executive Executive Vice President, 1982 to
Chief Executive Officer, Officer 1994
1994 - present Bowles Fluidics Corporation Bowles Fluidics Corporation
Director, 1978 - present
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Eric W. Koehler Executive Vice President, Executive Vice President Vice President, Marketing, 1994 -
1997 - present Bowles Fluidics Corporation 1997
Director of Marketing, 1990-1994
Director, 1997 - present Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
John E. Searle, Jr.* Director Retired
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
David C. Dressler Director Retired
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Neil Ruddock Director, 1998 - present President, N. T. Ruddock Co.
President, National Metal
Abrasives Co.
26123 Broadway Ave.
Cleveland, Ohio 44146
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
James T. Parkinson, III Director, Controlling Self Employed; Investment
Person, 1998 - present Management
P. O. Box 2247
Middleburg, VA 20118
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Frederic Ewing, II Director, Controlling Person President
Vacuum Instrument Corp.
2099 9th Avenue
Ronkonoma, NY 11779
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Melvyn J. L. Clough** Vice President, Operations, Vice President, Operations Engineering Manager, 1992-1995
1995 - present Bowles Fluidics Corporation A. Raymond, Inc.
3091 Research Dr.
Rochester Hills, Michigan
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Exhibit 1 - 1
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
NAME POSITION PRESENT OCCUPATION OCCUPATION OR EMPLOYMENT DURING
PAST FIVE YEARS
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Richard W. Hess Vice President, Automotive Vice President, Automotive Vice President, Engineering, 1992
Products Engineering, 1998 Products Engineering, 1998 - - 1998,
- present present Bowles Fluidics Corporation
Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Eleanor M. Kupris Secretary and Vice Corporate Secretary, March 1992 -
President, Administration, present
1982 - present Vice President, Administration,
since 1982 - present
Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
David A. Quinn Vice President, Finance, Vice President, Finance and Chief Financial Officer, 1991-1993
and Treasurer, 1993 - Treasurer, 1993 - present Bruning Paint Company
present Bowles Fluidics Corporation 301 South Haven Street
Baltimore, MD 21224
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Dharapuram N. Srinath*** Vice President, Advanced Vice President, Advanced Vice President, Quality Assurance,
Engineering, 1998 - present Engineering, 1998 - present 1995 - 1998
Bowles Fluidics Corporation Director of Quality Assurance and
Product Reliability, 1992-1995
Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Arlene M. Hardy Corporate Controller, 1990 Corporate Controller, 1990 -
- present present
Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
* Resigned December 8, 1998.
** Citizen of the United Kingdom.
*** Citizen of India.
Exhibit 1 - 2
EXHIBIT 2
PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION AND RESOLUTION ADOPTED BY THE BOARD OF
DIRECTORS ON DECEMBER 8, 1998
Article FOURTH of the Articles of Incorporation of the Corporation is hereby
amended by:
1. Cancelling the first two paragraphs thereof and inserting the following
in its place:
FOURTH: The total number of shares of all classes of stock the
Corporation has authority to issue is Three Million Seventeen Thousand
(3,017,000) shares divided into Three Million (3,000,000) shares of
cumulative, convertible Preferred Stock of a par value of One Dollar
($1.00) each and Seventeen Thousand (17,000) shares of Common Stock of
a par value of One Hundred Dollars ($100) each.
The Aggregate par value of all shares having par value of all classes
is Four Million Seven Hundred Thousand Dollars ($4,700,000).
2. Cancelling the paragraph immediately following the caption "Voting Rights"
and inserting the following in its place:
The Common Stock shall have one (1) vote per share and the Preferred
Stock shall have one-two hundred fiftieth (1/250) vote per share.
Except to the extent otherwise provided in the Articles of
Incorporation or provided by the laws of the State of Maryland, the
Common Stock and the Preferred Stock shall vote as a single class.
3. Cancelling the paragraph following the caption "Conversion" and
inserting the following in its place:
The cumulative Preferred Stock of the Corporation of One Dollar ($1.00)
par value, may at the option of the holder thereof, at any time
dividends are current be converted into Common Stock of the Corporation
of One Hundred Dollars ($100) par value upon the following terms:
(1) Any holder of any of the convertible Preferred
shares desiring to avail himself of the option for conversion
of his stock as herein provided, shall, deliver, duly endorsed
in blank, the certificate or certificates representing the
stock to be converted to the Secretary of the Corporation at
the Corporation Office and at the same time, notify the
Secretary in writing over his signature that he desires to
convert his stock into Common Stock of One Hundred Dollars
($100) par value pursuant to these provisions.
(2) Upon receipt by the Secretary of a certificate or
certificates representing shares of convertible Preferred
Stock and a notice that the holder thereof desired to convert
the same, the
Exhibit 2 - 1
Corporation shall forthwith cause to be issued
to the holder of the convertible Preferred shares surrendering
the same, one-two hundred fiftieth (1/250) share of Common
Stock for each share of convertible Preferred Stock
surrendered, and shall deliver to such holder a certificate in
due form for such Common Stock.
Exhibit 2 - 2
EXHIBIT 3
FAIRNESS OPINION OF FERRIS, BAKER WATTS, DATED DECEMBER 8, 1998
AND SUPPLEMENTAL OPINION DATED FEBRUARY 26, 1999
December 8, 1998
The Board of Directors
Bowles Fluidics Corporation
6625 Dobbin Road
Columbia, MD 21045
Gentlemen:
Bowles Fluidics Corporation ("Bowles" or the "Company") has requested a
review of the proposed transaction (the "Transaction") involving the reverse
split of its common stock and the subsequent repurchase by the Company of
fractional shares created through the Transaction. Specifically, you have
requested a review of the financial consideration to be received by the
shareholders who will have their fractional shares repurchased in the
Transaction. We were retained by the Board of Directors and commenced our
investigation of the Transaction on June 23, 1998.
Pursuant to the Transaction, the Company will effect a one for 1,000
reverse split of its common stock. Shareholders holding fractional shares shall
have their shares repurchased by the Company for $1.25 per pre-split share.
In connection with the opinion, we have reviewed, among other things,
(i) the proposed Transaction, (ii) historical operating results of the Company,
(iii) internally prepared projections of the Company, and (iv) the historical
trading performance of the Company's stock. We have held discussions with the
members of the management of the Company regarding the past and current business
operations as well as the future prospects of the Company. We have reviewed
industry specific data regarding the valuation of publicly traded companies in
the automotive supplier market as well as other such information as we consider
appropriate.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of all financial and other information reviewed by us for
purposes of this opinion whether publicly available or provided to us by the
Company or representatives of the Company, and we have not assumed any
responsibility for independent verification of such information. We express no
opinion as to the allocation to be received by holders of interests who may
perfect dissenters' statutory fair appraisal remedies. Based upon the foregoing
and based upon other such matters that we consider relevant, it is our opinion
that the consideration to be received by the shareholders of the Company as a
result of the Transaction is fair from a financial point of view as of the date
hereof.
Exhibit 3 - 1
Our opinion is necessarily based upon economic, market and other
conditions as in effect on, and the information made available to us as of
December 8, 1998. Our opinion is directed to the Board of Directors of the
Company and does not constitute a recommendation to any stockholder of the
Company as to how the stockholder should vote at the stockholder's meeting held
in connection with the Transaction. It is understood that subsequent
developments may affect the conclusions reached in this opinion and that we do
not have any obligation to update, revise or reaffirm this opinion.
Very truly yours,
Ferris, Baker Watts, Incorporated
Exhibit 3 - 2
February 26, 1999
The Board of Directors
Bowles Fluidics Corporation
6625 Dobbin Road
Columbia, MD 21045
Gentlemen:
Bowles Fluidics Corporation ("Bowles" or the "Company") has requested a
review of the proposed transaction (the "Transaction") involving the reverse
split of its common stock and the subsequent repurchase by the Company of
fractional shares created through the Transaction. Specifically, you have
requested a review of the financial consideration to be received by the
shareholders who will have their fractional shares repurchased in the
Transaction. We were retained by the Board of Directors and commenced our
investigation of the Transaction on June 23, 1998.
Pursuant to the Transaction, the Company will effect a one for 1,000
reverse split of its common stock. Shareholders holding fractional shares shall
have their shares repurchased by the Company for $1.25 per pre-split share.
In connection with the opinion, we have reviewed, among other things,
(i) the proposed Transaction, (ii) historical operating results of the Company,
including the Company's Form 10-K filed with the Securities and Exchange
Commission on February 22, 1999, (iii) internally prepared projections of the
Company, and (iv) the historical trading performance of the Company's stock. We
have held discussions with the members of the management of the Company
regarding the past and current business operations as well as the future
prospects of the Company. We have reviewed industry specific data regarding the
valuation of publicly traded companies in the automotive supplier market as well
as other such information as we consider appropriate.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of all financial and other information reviewed by us for
purposes of this opinion whether publicly available or provided to us by the
Company or representatives of the Company, and we have not assumed any
responsibility for independent verification of such information. We express no
opinion as to the consideration which might be received by holders of fractional
shares of common stock pursuant to any fair appraisal remedies available under
applicable law. Based upon the foregoing and based upon other such matters that
we consider relevant, it is our
The Board of Directors
Bowles Fluidics Corporation
February 26, 1999
Page 2
opinion that the consideration to be received by the shareholders of the Company
as a result of the Transaction is fair from a financial point of view as of the
date hereof.
Our opinion is necessarily based upon economic, market and other
conditions as in effect on, and the information made available to us as of
February 26, 1999. Our opinion is directed to the Board of Directors of the
Company and does not constitute a recommendation to any stockholder of the
Company as to how the stockholder should vote at the stockholder's meeting held
in connection with the Transaction. It is understood that subsequent
developments may affect the conclusions reached in this opinion and that we do
not have any obligation to update, revise or reaffirm this opinion.
Very truly yours,
Ferris, Baker Watts, Incorporated
Exhibit 3 - 3
Exhibit 4
CONFIDENTIAL
BOWLES FLUIDICS CORPORATION
SUPPLEMENTAL INFORMATION
FOR THE BOARD OF DIRECTORS
DECEMBER 8, 1998
BOWLES FLUIDICS CORPORATION
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
SECTION DESCRIPTION
- ------- -----------
I. Discounted Cash Flow Analysis
II. Comparable Company Analysis
III. Stock Price Performance
IV. Financial Impact of Transaction
BOWLES FLUIDICS CORPORATION
- --------------------------------------------------------------------------------
This document is based upon information provided by Bowles Fluidics Corporation
as well as sources deemed to be reliable. The information set forth in this
document is intended solely for the use by the Board of Directors of Bowles
Fluidics Corporation. Possession of this document, or a copy thereof, does not
carry with it the right of publication of all or part of it, nor may it be used
for any purpose by anyone but the Board of Directors of Bowles Fluidics
Corporation without the previous written consent of Ferris, Baker Watts,
Incorporated ("FBW") or the Board of Directors of Bowles Fluidics Corporation,
and in any event only with attribution to FBW. The compensation received by FBW
from this engagement is not dependent on the consummation of the transaction
evaluated herein.
Steven L. Shea R. Mark Rust
Senior Vice President Vice President
(410) 659-4639 (410) 659-4630
Ferris, Baker Watts, Incorporated
100 Light Street
Baltimore, MD 21202
Fax: (410) 659-4632
BOWLES FLUIDICS CORPORATION
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
Ferris, Baker Watts, Incorporated ("FBW") has been retained by Bowles
Fluidics Corporation ("Bowles" or the "Company") to advise the Company and to
provide an opinion as to the fairness, from a financial point of view, of the
consideration to be paid to the Company's shareholders in connection with the
acquisition of fractional shares as a result of the proposed reverse split (the
"Transaction"). FBW has (i) reviewed the proposed Transaction, (ii) reviewed
selected internal and public information of the Company, (iii) interviewed
management of the Company, (iv) utilized our own independent research, and (v)
utilized our expertise in valuations. The valuation methods utilized included
the discounted future free cash flow method and the public comparable company
analysis.
The Transaction calls for the Company to effect a one for 1,000 reverse
split of its common stock. Fractional shares created in the Transaction shall be
repurchased by the Company. The repurchase price shall equal $1.25 per share on
a pre-split basis.
Based upon our analysis, the consideration to be paid in the
Transaction to the shareholders represents a 20.2% premium to the intrinsic
value based upon the discounted future free cash flow analysis and is above the
valuation range established by the public comparable company analysis. Moreover,
the consideration to be paid is at a premium to the Company's current trading
range.
THE TRANSACTION
The major elements of the Transaction as of December 8, 1998 are as
follows:
o The Company shall effect a one for 1,000 reverse split of its common stock.
o Shareholders holding fractional shares post split shall have their fractional
shares repurchased by the Company.
o The repurchase price shall equal $1.25 per pre-split share.
DUE DILIGENCE REVIEW
As an integral part of determining the fair market value of Bowles, FBW
conducted an extensive review of the material provided by the Company, including
its historical financial results and projections. In addition, FBW conducted
interviews with management. In general, our discussions centered on the
following issues:
o The history and historical operating results of the business.
o The outlook for the Company, including new product initiatives and the lead
times and capital required for the initiatives.
o The historical trading performance of the Company's common stock.
1
BOWLES FLUIDICS CORPORATION
- --------------------------------------------------------------------------------
VALUATION
FBW has considered several methods to evaluate the fair market value of
the Company's common stock. These methods are (i) the discounted future free
cash flow of the Company, and (ii) the earnings and multiple comparisons to
publicly traded comparable companies. FBW has considered appropriate discounts
applicable when valuing securities which, although public, trade infrequently.
FREE CASH FLOW ANALYSIS
This methodology is premised on the assumption that a buyer purchases a
time series of free cash flows that are generated by the assets of a business.
This analysis separates and ascribes value only to the cash flows that can
ultimately be taken out of the business. Cash that is generated but used to
sustain the business (such as increases in working capital and capital
expenditures) creates no incremental value to the buyer. These free cash flows
are then discounted to the present at the firm's weighted average cost of
capital. The weighted average cost of capital can be described as the average
price a company must pay to attract both debt and equity to properly capitalize
the firm's growth. It is this series of free cash flows that, when discounted to
the present, and after subtracting claims by debt holders and others, represents
the economic value of a firm to its shareholders.
The accuracy of this method of valuation depends largely on the
integrity of the projections. Management of the Company provided FBW with
detailed five year income statement and balance sheet projections which were
scrutinized and approved by the Company's Board of Directors. These projections
are outlined in Exhibit I and show the following:
o Revenues grow to $39.6 million in the year 2003, representing a 13.9% average
annual growth rate.
o Gross profit margins are approximately 26% by 2000.
o Operating profit margins grow to 11% by 2001.
PUBLICLY TRADED COMPARABLE COMPANIES
FBW examined the financial results and market multiples of publicly
traded comparable companies. The pertinent performance measures are as follows:
o The Net Market Capital to Earnings Before Interest and Taxes (EBIT) ratio
measures the enterprise value to the net operating assets as a multiple of
the company's earnings before interest and taxes. By focusing on EBIT
instead of net income, it is possible to decrease distortions among
comparable companies that are due to different levels of debt in capital
structures, extraordinary items, varying tax rates, and other line items
that occur below the operating profit line. EBIT is calculated to represent
the pre-tax net income that would have resulted had the company been
financed on a total equity basis.
o The price to earnings ("P/E") ratio is a commonly utilized valuation ratio.
It is also known as the earnings multiple and provides investors an
indication of how much they are paying for a company's earnings power and
the accounting income available to the common equity
2
BOWLES FLUIDICS CORPORATION
- --------------------------------------------------------------------------------
holder. However, net income is often a poor approximation of actual cash
flow ultimately available to common shareholders for reinvestment or for
the payment of dividends. Accounting differences may make net income
numbers less comparable.
o The price to forward earnings ratio is similar to the P/E ratio discussed
above, the difference being that it is based upon expectations for future
earnings, not historical earnings.
o The Market Value to Revenues (Price/Revenue) ratio compares what the market
is actually willing to pay for the revenue stream of a company relative to
the actual revenue stream. This ratio is far less consistent among
comparable companies than ratios that measure value in relation to some
measure of earnings.
o The Market Value of Equity to Book Value of the Equity (Price/Book) ratio
compares what the market is actually willing to pay for the assets of a
company to what the value of the company's securities would be worth
relative to the historical costs of its assets and earnings history. This
ratio is far less consistent among comparable companies than ratios that
measure value in relation to some measure of earnings.
ILLIQUIDITY DISCOUNT
All other things being equal, ownership interests which are not freely
marketable are worth less than the same shares if they were publicly traded or
shares of comparable public companies. Empirical evidence concerning the degree
of the discount is subject to a wide range of results (10% to 90%) and depend
entirely on the ability of the owner to convert such shares to cash within a
reasonable time frame. Numerous studies have been conducted and conclude that
restricted public company shares tend to trade in private transactions at
discounts ranging from 30% to 40% of the price of the same stock which trades
freely on an exchange. The discounts tend to be greater when trading
restrictions approach 24 months, the typical duration of "letter stock" under
SEC rule 144. Several studies also indicate that the discounts for "letter
stocks" were least for NYSE listed stocks, and increased in order for AMEX
listed stocks OTC reporting companies and OTC non-reporting companies.
Most financial professionals agree that discounts for shares of closely
held companies are greater than those for restricted shares of publicly held
companies, since closely held shares have no established market in which they
could eventually sell following the removal of certain trading restrictions.
During the 1980's, an investment banking firm and a national valuation firm
independently utilized data from SEC registration statements to compare the
prices of "arms length" private transactions prior to initial public offerings
relative to the public offering prices and the market prices following the
initial public offering. One set of studies focused on transactions that were
completed up to five months prior to the public offering and determined that the
discounts ranged from approximately 40% to 60%. Another study examined
transactions that were completed up to 36 months prior to the public offering
and determined that the average discounts ranged from 60% to 80%.
The shares of Bowles are publicly traded but trade infrequently.
Approximately 90% of the shares are controlled by two families or employees.
Therefore we have applied an illiquidity discount of 15% to the values derived
from the public comparable company analysis.
3
BOWLES FLUIDICS CORPORATION
- --------------------------------------------------------------------------------
Valuation Summary
Data in thousands, except per share data INTRINSIC NUMBER PER
EQUITY OF SHARE
VALUE SHARES VALUE
----- ------ -----
DISCOUNTED FREE CASH FLOW $16,956 16,372 $1.04
POST
IMPLIED DISCOUNT
INTRINSIC ILLIQUIDITY EQUITY NUMBER OF PER
Data in thousands, except per share data EQUITY VALUE DISCOUNT VALUE SHARES SHARE VALUE
------------ -------- ----- ------ -----------
COMPARABLE COMPANY ANALYSIS
Net Market Capital/EBIT 18,066 15.0% 15,356 16,372 0.94
Price/Earnings 14,460 15.0% 12,291 16,372 0.75
Price/Forward Earnings 1998 16,440 15.0% 13,974 16,372 0.85
Price/Forward Earnings 1999 6,769 15.0% 5,753 16,372 0.35
Price/Book 14,934 15.0% 12,694 16,372 0.78
Price/Revenues 11,127 15.0% 9,458 16,372 0.58
Summary and Conclusion
o The repurchase price is at a premium to the range of values established by
the valuation methodologies.
o The repurchase price is at a premium to the Ask price for the Company's
common stock.
o The repurchase will not have a detrimental impact on the Company. Based
upon share data provided by the Company, it is estimated that a maximum
total of 194,077 shares will be repurchased. The total cost to repurchase
the shares is estimated to be $242,596. There is no impact on earnings per
share and the discounted cash flow valuation improves to $1.06.
4
INCOME STATEMENT
BOWLES FLUIDICS CORPORATION REVISED
DOLLARS IN THOUSANDS
FERRIS, BAKER WATTS, INCORPORATED EXPECTED FORECAST
October 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
WINDSHIELD WASHER NOZZLES 13,366 15,960 15,312 16,741 17,200 16,912
DEFROSTERS 0 0 1,978 1,370 1,060 1,153
AIR CONDITIONING OUTLETS 0 0 0 0 0 196
HOUSEHOLD PRODUCTS 0 0 0 0 0 347
TECHNICAL SERVICES 1,746 1,013 836 732 2,455 2,737
WINDSHIELD WASHER NOZZLES 9,201 10,853 8,095 8,567 9,075 9,024
DEFROSTERS 0 0 1,355 973 848 935
AIR CONDITIONING OUTLETS 0 396
HOUSEHOLD PRODUCTS 0 0 0 0 0 173
COST OF TECHNICAL SERVICES 0 0 1,104 1,325 3,000 3,339
APPLICATION ENGINEERING 0 0 1,441 2,201 2,166 2,700
GROSS PROFIT 5,911 6,120 6,131 5,777 5,626 4,778
MARKETING AND SALES 2,603 2,610 1,149 1,160 809 902
GENERAL AND ADMINISTRATIVE 0 0 1,724 1,935 1,982 2,145
Research & Development 842 636 1,176 1,005 814 935
NET OPERATING PROFIT 2,466 2,874 2,082 1,677 2,021 796
Interest Expense 89 39 0 6 0 0
Non-Operating Int. Income A 30 99 89 118 75 100
Created Interest Income 0 0 0 0 0 20
Operating Interest Income 0 0 (11) 10 78 75
TOTAL INTEREST INCOME 30 99 78 128 153 195
INCOME BEFORE TAXES 2,408 2,934 2,160 1,799 2,174 991
Income Tax Provision 680 1,149 789 657 815 374
INCOME AFTER TAXES 1,728 1,785 1,371 1,142 1,359 618
Preferred Dividends 75 75 75 75 75 75
INCOME AVAIL TO COMMON 1,653 1,710 1,297 1,067 1,284 543
================================================================================================
TO RETAINED EARNINGS 1,653 1,710 1,297 1,067 1,284 543
================================================================================================
INCOME STATEMENT
BOWLES FLUIDICS CORPORATION REVISED
Dollars in Thousands
FERRIS, BAKER WATTS, INCORPORATEDFORECAST FORECAST FORECAST FORECAST
October 2000 2001 2002 2003
---- ---- ---- ----
WINDSHIELD WASHER NOZZLES 16,057 16,601 17,163 16,898
DEFROSTERS 855 812 772 733
AIR CONDITIONING OUTLETS 1,719 3,831 8,206 11,006
HOUSEHOLD PRODUCTS 3,867 6,761 7,761 7,761
TECHNICAL SERVICES 2,500 2,500 2,250 3,250
WINDSHIELD WASHER NOZZLES 8,339 8,746 9,096 9,018
DEFROSTERS 693 659 626 594
AIR CONDITIONING OUTLETS 1,461 3,065 6,155 7,704
HOUSEHOLD PRODUCTS 1,934 3,381 3,881 3,881
COST OF TECHNICAL SERVICES 3,050 3,050 2,745 3,965
APPLICATION ENGINEERING 3,153 3,487 4,020 4,300
GROSS PROFIT 6,368 8,117 9,629 10,186
MARKETING AND SALES 962 1,031 1,124 1,204
GENERAL AND ADMINISTRATIVE 2,350 2,500 2,750 2,900
Research & Development 1,000 1,220 1,446 1,586
NET OPERATING PROFIT 2,056 3,366 4,309 4,496
Interest Expense 0 0 0 0
Non-Operating Int. Income A 100 125 200 300
Created Interest Income 45 52 86 169
Operating Interest Income 100 150 175 200
TOTAL INTEREST INCOME 245 327 461 669
INCOME BEFORE TAXES 2,301 3,693 4,770 5,165
Income Tax Provision 865 1,388 1,793 1,944
INCOME AFTER TAXES 1,436 2,306 2,977 3,221
Preferred Dividends 75 75 75 75
INCOME AVAIL TO COMMON 1,361 2,231 2,902 3,146
==============================================================================
TO RETAINED EARNINGS 1,361 2,231 2,902 3,146
==============================================================================
BALANCE SHEET
BOWLES FLUIDICS CORPORATION REVISED
Dollars in Thousands
FERRIS, BAKER WATTS, INCORPORATED EXPECTED FORECAST
October 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Operating Cash 1,557 677 1,287 756 1,000 1,000
Investments 485 680 578 1,563 1,135 0
Created Mkt Securities 0 0 0 0 0 820
Accounts Receivable 1,917 2,761 2,776 3,112 3,314 3,415
COMPONENT INVENTORY 1,697 1,899 1,784 1,265 1,885 2,000
TOOLING INVENTORY 0 0 202 866 750 835
Current Deferred Taxes 137 173 398 475 200 0
Other Current Assets 23 134 159 159 207 213
TOTAL CURRENT ASSETS 5,815 6,323 7,183 8,196 8,491 8,283
Plant & Equipment 6,426 7,326 8,582 9,509 11,409 13,442
Accum Depreciation 3,926 4,504 5,153 6,015 7,096 8,339
NET PROP PLANT & EQUIP 2,500 2,822 3,429 3,494 4,313 5,103
OTHER ASSETS 163 147 108 95 100 100
=======================================================================================================================
TOTAL ASSETS 8,478 9,292 10,720 11,785 12,904 13,486
=======================================================================================================================
Current Portion LTD 284 69 0 0 0 0
Accounts Payable 1,066 995 1,105 1,122 1,346 1,409
Accrued Expenses 720 777 1,389 1,610 1,243 1,281
Income Taxes Payable 543 111 40 48 49 22
Other Current Liabs 75 75 0 0 0 0
TOTAL CURRENT LIABS 2,688 2,028 2,534 2,780 2,638 2,712
Senior Long-Term Debt 513 203 0 0 0 0
Other Senior Liabs 220 193 711 288 260 230
TOTAL SENIOR LIABS 3,420 2,423 3,245 3,068 2,898 2,942
TOTAL LIABILITIES 3,420 2,423 3,245 3,068 2,898 2,942
Deferred Taxes 150 149 35 205 205 200
Convertible Preferred 933 933 933 933 933 933
Common Stock 1,259 1,261 1,261 1,264 1,271 1,271
Addtl Paid in Capital 2,716 2,727 2,726 2,728 2,728 2,728
Retained Earnings 0 1,709 2,519 3,586 4,870 5,413
COMMON EQUITY 3,975 5,697 6,506 7,578 8,869 9,412
NET WORTH 4,908 6,630 7,439 8,511 9,802 10,345
=======================================================================================================================
TOTAL LIAB & NET WORTH 8,478 9,202 10,719 11,784 12,905 13,487
=======================================================================================================================
BALANCE SHEET
BOWLES FLUIDICS CORPORATION REVISED
Dollars in Thousands
FERRIS, BAKER WATTS, INCORPORATED FORECAST FORECAST FORECAST FORECAST
October 2000 2001 2002 2003
---- ---- ---- ----
Operating Cash 1,000 1,000 1,000 1,000
Investments 0 0 0 0
Created Mkt Securities 974 1,112 2,319 4,456
Accounts Receivable 4,000 4,881 5,784 6,344
COMPONENT INVENTORY 2,361 3,011 3,754 4,027
TOOLING INVENTORY 763 763 686 991
Current Deferred Taxes 0 0 0 0
Other Current Assets 250 305 362 396
TOTAL CURRENT ASSETS 9,348 11,072 13,905 17,214
Plant & Equipment 15,678 18,629 21,454 24,033
Accum Depreciation 9,795 11,510 13,514 15,788
NET PROP PLANT & EQUIP 5,883 7,119 7,940 8,245
OTHER ASSETS 100 100 100 100
==========================================================================================
TOTAL ASSETS 15,331 18,291 21,945 25,559
==========================================================================================
Current Portion LTD 0 0 0 0
Accounts Payable 1,675 2,074 2,494 2,775
Accrued Expenses 1,500 1,830 2,169 2,379
Income Taxes Payable 51 82 105 112
Other Current Liabs 0 0 0 0
TOTAL CURRENT LIABS 3,226 3,986 4,768 5,266
Senior Long-Term Debt 0 0 0 0
Other Senior Liabs 200 170 140 110
TOTAL SENIOR LIABS 3,426 4,156 4,908 5,376
TOTAL LIABILITIES 3,426 4,156 4,908 5,376
Deferred Taxes 200 200 200 200
Convertible Preferred 933 933 933 933
Common Stock 1,271 1,271 1,271 1,271
Addtl Paid in Capital 2,728 2,728 2,728 2,728
Retained Earnings 6,774 9,004 11,906 15,052
COMMON EQUITY 10,773 13,003 15,905 19,051
NET WORTH 11,706 13,936 16,838 19,984
==========================================================================================
TOTAL LIAB & NET WORTH 15,332 18,292 21,946 25,560
==========================================================================================
NOPAT OPERATING APPROACH
BOWLES FLUIDICS CORPORATION REVISED
Dollars in Thousands
FERRIS, BAKER WATTS, INCORPORATED FORECAST
October 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Sales 15,112 16,973 18,126 18,843 20,715 21,345
Cost of Goods Sold 9,201 10,853 10,554 10,865 12,923 13,867
Operating Expenses 0 0 1,441 2,201 2,166 2,700
Selling Gen & Admin 2,603 2,610 2,873 3,095 2,791 3,047
Research & Development 842 636 1,176 1,005 814 935
Total Operating Expenses N/A 14,099 16,044 17,166 18,694 20,549
Operating Interest Income 0 0 (11) 10 78 75
ADJUSTED EBIT N/A 2,874 2,071 1,687 2,099 871
CASH OPERATING TAX N/A 1,162 1,094 521 511 132
======================================================================================================================
NOPAT N/A 1,712 977 1,166 1,588 739
======================================================================================================================
FERRIS, BAKER WATTS, INCORPORATED FORECAST FORECAST FORECAST FORECAST
October 2000 2001 2002 2003
---- ---- ---- ----
Sales 24,998 30,505 36,152 39,648
Cost of Goods Sold 15,477 18,901 22,503 25,162
Operating Expenses 3,153 3,487 4,020 4,300
Selling Gen & Admin 3,312 3,531 3,874 4,104
Research & Development 1,000 1,220 1,446 1,586
Total Operating Expenses 22,942 27,139 31,843 35,152
Operating Interest Income 100 150 175 200
ADJUSTED EBIT 2,156 3,516 4,484 4,696
CASH OPERATING TAX 809 1,319 1,682 1,761
=========================================================================================
NOPAT 1,348 2,198 2,803 2,935
=========================================================================================
CAPITAL - OPERATING APPROACH
BOWLES FLUIDICS CORPORATION REVISED
Dollars in Thousands
FERRIS, BAKER WATTS, INCORPORATED FORECAST
October 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Operating Cash 1,557 677 1,287 756 1,000 1,000
Net Accts Receivable 1,917 2,761 2,776 3,112 3,314 3,415
Net Inventory 1,697 1,899 1,986 2,131 2,635 2,835
Other Current Assets 23 134 159 159 207 213
Current Operating Assets 5,193 5,471 6,208 6,158 7,156 7,463
Accounts Payable 1,066 995 1,105 1,122 1,346 1,409
Accrued Expenses 720 777 1,389 1,610 1,243 1,281
Income Taxes Payable 543 111 40 48 49 22
Other Current Liabs 75 75 0 0 0 0
NIBCLs 2,404 1,959 2,534 2,780 2,638 2,712
NET WORKING CAPITAL 2,789 3,512 3,674 3,378 4,518 4,751
Net Prop Plant & Equip 2,500 2,822 3,429 3,494 4,313 5,103
Other Assets 163 147 108 95 100 100
=======================================================================================================================
CAPITAL 5,452 6,481 7,211 6,967 8,931 9,954
=======================================================================================================================
CAPITAL - OPERATING APPROACH
BOWLES FLUIDICS CORPORATION REVISED
Dollars in Thousands
FERRIS, BAKER WATTS, INCORPORATED FORECAST FORECAST FORECAST FORECAST
October 2000 2001 2002 2003
---- ---- ---- ----
Operating Cash 1,000 1,000 1,000 1,000
Net Accts Receivable 4,000 4,881 5,784 6,344
Net Inventory 3,124 3,774 4,440 5,018
Other Current Assets 250 305 362 396
Current Operating Assets 8,374 9,960 11,586 12,758
Accounts Payable 1,675 2,074 2,494 2,775
Accrued Expenses 1,500 1,830 2,169 2,379
Income Taxes Payable 51 82 105 112
Other Current Liabs 0 0 0 0
NIBCLs 3,226 3,986 4,768 5,266
NET WORKING CAPITAL 5,148 5,974 6,818 7,492
Net Prop Plant & Equip 5,883 7,119 7,940 8,245
Other Assets 100 100 100 100
==========================================================================================
CAPITAL 11,131 13,193 14,858 15,837
==========================================================================================
FREE CASH FLOW VALUATION
BOWLES FLUIDICS CORPORATION REVISED
Dollars in Thousands
FERRIS, BAKER WATTS, INCORPORATED
NOPAT - INV PV FACTOR X FCF
Year NOPAT Investment FCF PV Factor Present Value
of FCF
- ------------------------------------------------------------------------------------------------
1999 739 1,023 (284) 0.9416 (267)
2000 1,348 1,177 171 0.8348 142
2001 2,198 2,062 136 0.7401 100
2002 2,803 1,665 1,137 0.6561 746
2003 2,935 979 1,956 0.5817 1,138
2004 & BEYOND 3,128 0 3,128 4.5461 14,222
INTRINSIC OPERATING VALUE 16,081
Marketable Securities 1,135
-------------------
INTRINSIC TOTAL VALUE 17,216
Other Liabilities 260
-------------------
INTRINSIC COMMON EQUITY VALUE 16,956
Fully Diluted Shares Outstanding 16,372
INTRINSIC SHARE VALUE $1.04
--------------------------------------------
(1) Cash flows discounted from mid-year
(2) Present Value of $1 in perpetuity beginning
in 2004
(3) NOPAT increases by $193.4 based on a return
of 19.75% on 2003 investment of $979.0
COST OF CAPITAL SIMULATION
BOWLES FLUIDICS CORPORATION REVISED
Dollars in Thousands
FERRIS, BAKER WATTS, INCORPORATED
COST OF EQUITY (Y)
- ------------------
Risk Free Rate (RF) = 4.66%
Equity Risk Index (ERI) = 1.04
Mkt Risk Premium (PREM) = 7.80%
Cost of Equity (y) = RF + ( ERI x PREM )
y = 4.66% + ( 1.04 x 7.80% )
y = 4.66% + 8.14%
y = 12.80%
COST OF DEBT (1 - T )*B
- ------------------------
Marginal Debt Rate (b) = 8.00%
Marginal Tax Rate (t) = 38.00%
(1-t)*b = (1 - 38.00%) x 8.00%
(1-t)*b = 4.96%
COST OF PREFERRED (P)
- ---------------------
Cost of Preferred (p) = 8.00%
WTD AVG CAP COST (C*)
- ---------------------
(1) (2) (3)=(1) x (2)
After-Tax Cost Capital Weight Weighted Cost
Debt 4.96% 0.00% 0.00%
Preferred 8.00% 0.00% 0.00%
Equity 12.80% 100.00% 12.80%
------- ------
100.00% C* 12.80%
CAP COST BUS RISK (C)
- ---------------------
Wtd Average Cap Cost (C*) = Cost of Cap Bus Risk ( x 1 - Tax Rate x Target Debt/Cap )
12.80% = (C) x ( 1 - 38.00% x 0.00% )
= 12.80%
BOWLES FLUIDICS CORPORATION
- --------------------------------------------------------------------------------------------------------------------------
COMPARABLE COMPANY ANALYSIS
-----------------------------------------------
MARKET
DATA
Fiscal Four Stock Shares Market
Year Quarters Price Out. Value
Company Ticker End Ended 12/04/98 (000's) ($000's)
- --------------------------------------------------------------------------------------------------------------------------
Donnelly Corporation DON Jun Sep 14.88 5,790 86,126
Excel Industries, Inc. EXC Dec Sep 16.38 12,200 199,775
Federal Screw Works FSCR Jun Sep 49.00 1,090 53,410
Hastings Manufacturing Co. HMF Dec Sep 17.50 784 13,720
Hilite Industries, Inc. HILI Jun Sep 8.88 4,900 43,488
IMPCO Technologies, Inc. IMCO Apr Jul 13.63 7,190 97,964
OEA, Inc. OEA Jul Jul 13.13 20,600 270,375
Simpson Industries SMPS Dec Sep 10.00 18,300 183,000
Strattec Security Corporation STRT Jun Sep 30.50 5,610 171,105
Walbro Corporation WALB Dec Sep 7.00 8,690 60,830
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
BOWLES FLUIDICS CORPORATION BOWE OCT JUL 0.75 16,372 12,279
- --------------------------------------------------------------------------------------------------------------------------
BOWLES FLUIDICS CORPORATION
- --------------------------------------------------------------------------------------------------------------------------
COMPARABLE COMPANY ANALYSIS
--------------------------------------------------------------------------------------------
FINANCIAL DATA
(TRAILING FOUR QUARTERS, IN $ THOUSANDS)
Net Total Total Common Total
Company Revenues EBIT (1) Income Assets Debt (2) Equity Capital (3)
- --------------------------------------------------------------------------------------------------------------------------
Donnelly Corporation 787,738 16,172 10,033 398,717 135,694 102,161 276,929
Excel Industries, Inc. 991,557 25,626 14,622 606,835 166,209 192,353 410,711
Federal Screw Works 107,640 11,924 7,907 74,989 2,920 45,753 61,160
Hastings Manufacturing Co. 38,210 2,793 1,363 35,802 6,600 6,223 30,872
Hilite Industries, Inc. 87,451 8,963 4,914 60,055 19,838 27,220 50,036
IMPCO Technologies, Inc. 74,666 8,389 5,063 60,562 12,186 36,307 56,143
OEA, Inc. 245,375 -5,588 -19,316 328,759 124,000 161,506 297,298
Simpson Industries 487,319 31,509 15,131 346,188 120,754 124,572 274,612
Strattec Security Corporation 184,299 21,323 13,904 107,583 0 70,059 82,943
Walbro Corporation 668,597 -14,486 -37,782 650,255 312,019 72,681 469,706
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
BOWLES FLUIDICS CORPORATION 20,333 1,886 1,262 11,614 0 9,350 10,757
- --------------------------------------------------------------------------------------------------------------------------
(1) Earnings Before Interest.
(2) Total Debt includes Current Portion of Long Term Debt.
(3) Includes Total Debt, Common and Preferred Equity, Other Liabilities and
Deferred Taxes.
BOWLES FLUIDICS CORPORATION
- ----------------------------------------------------------------------------------------------------------------------------------
COMPARABLE COMPANY ANALYSIS
-------------------------- ------------------------------------------------------
MARGIN PROFITABILITY RATIOS
ANALYSIS
Return on NOPAT/ Return on
EBIT Net Common Ending Total
Company Margin Margin Equity Capital (4) Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Donnelly Corporation 2.1% 1.3% 9.8% 3.5% 2.5%
Excel Industries, Inc. 2.6% 1.5% 7.6% 3.7% 2.4%
Federal Screw Works 11.1% 7.3% 17.3% 11.7% 10.5%
Hastings Manufacturing Co. 7.3% 3.6% 21.9% 5.4% 3.8%
Hilite Industries, Inc. 10.2% 5.6% 18.1% 10.7% 8.2%
IMPCO Technologies, Inc. 11.2% 6.8% 13.9% 9.0% 8.4%
OEA, Inc. -2.3% -7.9% -12.0% -1.1% -5.9%
Simpson Industries 6.5% 3.1% 12.1% 6.9% 4.4%
Strattec Security Corporation 11.6% 7.5% 19.8% 15.4% 12.9%
Walbro Corporation -2.2% -5.7% -52.0% -1.9% -5.8%
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE 6.7% 3.2% 12.1% 7.3% 5.2%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
BOWLES FLUIDICS CORPORATION 9.3% 6.2% 13.5% 10.5% 10.9%
- -----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------
LIQUIDITY & LEVERAGE
Total Total
Debt/ Debt/
Current Common Total
Company Ratio Equity Capital
- ----------------------------------------------------------------------------------------
Donnelly Corporation 1.4 132.8% 49.0%
Excel Industries, Inc. 1.5 86.4% 40.5%
Federal Screw Works 2.0 6.4% 4.8%
Hastings Manufacturing Co. 3.1 106.1% 21.4%
Hilite Industries, Inc. 2.3 72.9% 39.6%
IMPCO Technologies, Inc. 3.5 33.6% 21.7%
OEA, Inc. 3.7 76.8% 41.7%
Simpson Industries 1.6 96.9% 44.0%
Strattec Security Corporation 2.8 0.0% 0.0%
Walbro Corporation 1.5 429.3% 66.4%
- ----------------------------------------------------------------------------------------
AVERAGE 2.3 104.1% 32.9%
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
BOWLES FLUIDICS CORPORATION 4.0 0.0% 0.0%
- ----------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
VALUATION RATIOS
Mkt. Val.
Net Mkt. Mkt. Val. to Book Mkt. Val.
Capital (5) to Earnings P/E Valueate to
-------------------------
Company to EBIT (P/E) 98 99 (Equity) Revenues
- -------------------------------- --------------------------------------------------------------------------------------
Donnelly Corporation 13.5 8.6 NM 15.0 0.8 0.11
Excel Industries, Inc. 13.7 13.7 13.8 9.6 1.0 0.20
Federal Screw Works 4.7 6.8 NA NA 1.2 0.50
Hastings Manufacturing Co. 7.2 10.1 NA NA 2.2 0.36
Hilite Industries, Inc. 7.1 8.8 NM 8.9 1.6 0.50
IMPCO Technologies, Inc. 13.5 19.3 NM 17.0 2.7 1.31
OEA, Inc. NM NM NM 13.5 1.7 1.10
Simpson Industries 9.5 12.1 9.8 7.8 1.5 0.38
Strattec Security Corporation 7.5 12.3 NM 11.2 2.4 0.93
Walbro Corporation NM NM 12.7 6.1 0.8 0.09
- -------------------------------- --------------------------------------------------------------------------------------
AVERAGE 9.6 11.5 12.1 11.2 1.6 0.55
- -------------------------------- --------------------------------------------------------------------------------------
- -------------------------------- --------------------------------------------------------------------------------------
BOWLES FLUIDICS CORPORATION 6.5 9.7 9.0 20.2 1.3 0.60
- -------------------------------- --------------------------------------------------------------------------------------
(4) NOPAT= net operating profit after tax (EBIT x (1-40% tax rate)); NOPAT can
be compared directly to the firm's after-tax cost of capital to determine
if a firm is earning its cost of capital.
(5) Market Value Common and Preferred Equity plus Debt less Cash.
BOWLES FLUIDICS CORPORATION
- -----------------------------------------------------------------------------------------------------------------------------------
VALUATION NUMBERS
-------------------------------------------------------------------------------------------
VALUATION RATIOS
-------------------------------------------------------------------------------------------
MKT. VAL.
NET MKT. MKT. VAL. TO BOOK MKT. VAL.
CAPITAL TO EARNINGS P/E ESTIMATE VALUE TO
-------------------------------
Company to EBIT (P/E) 98 99 (Equity) Revenues
- -------------------------------- ------- ----- -- -- -------- --------
Donnelly Corporation 13.5 8.6 NM 15.0 0.8 0.11
Excel Industries, Inc. 13.7 13.7 13.8 9.6 1.0 0.20
Federal Screw Works 4.7 6.8 NA NA 1.2 0.50
Hastings Manufacturing Co. 7.2 10.1 NA NA 2.2 0.36
Hilite Industries, Inc. 7.1 8.8 NM 8.9 1.6 0.50
IMPCO Technologies, Inc. 13.5 19.3 NM 17.0 2.7 1.31
OEA, Inc. NM NM NM 13.5 1.7 1.10
Simpson Industries 9.5 12.1 9.8 7.8 1.5 0.38
Strattec Security Corporation 7.5 12.3 NM 11.2 2.4 0.93
Walbro Corporation NM NM 12.7 6.1 0.8 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE 9.6 11.5 12.1 11.2 1.6 0.55
BOWLES FLUIDICS CORPORATION
- ----------------------------------------------------------------------------------------------------------------------------------
IMPLIED VALUATION ANALYSIS
POST
IMPLIED DISCOUNT IMPLIED
AVERAGE EQUITY LIQUIDITY EQUITY NUMBER PER SHARE
MULTIPLE VALUE DISCOUNT VALUE OF SHARES VALUE
--------- ------ ----------- ------ --------- --------
Net Market Capital/EBIT 9.6 18,066 15.0% 15,356 16,372 0.94
P/E 11.5 14,460 15.0% 12,291 16,372 0.75
Fwd P/E '98 12.1 16,440 15.0% 13,974 16,372 0.85
Fwd P/E '99 11.2 6,769 15.0% 5,753 16,372 0.35
Mkt. Val. to Book 1.6 14,934 15.0% 12,694 16,372 0.78
Mkt Val. to Revenues 0.5 11,127 15.0% 9,458 16,372 0.58
BOWLES FLUIDICS CORPORATION
TRADING SUMMARY
[GRAPH APPEARS HERE]
Price and volume data presented represents data through December 4, 1998.
BOWLES FLUIDICS CORPORATION
FINANCIAL IMPACT OF TRANSACTION
ONE FOR 1,000 REVERSE SPLIT WITH REPURCHASE OF ALL FRACTIONAL SHARES
o Based upon available data to the Company, shareholder base reduced to 175
shareholders. Shareholder count based upon SEC rules for going private
transaction.
o Estimated total of 194,077 shares repurchased.
REPURCHASE TOTAL DCF EPS
PRICE COST VALUATION IMPACT
----- ----- --------- ------
$1.04 $201,840 $1.06 NONE
$1.13 $218,337 $1.06 NONE
$1.25 $242,596 $1.06 NONE
BOWLES FLUIDICS CORPORATION
PRESENTATION TO THE BOARD OF DIRECTORS
December 8, 1998
1
BOWLES FLUIDICS CORPORATION
SUMMARY OF TRANSACTION
o Bowles will effect a reverse split of its common stock.
o All fractional shares will be redeemed by the Company.
o The intent of the transaction is to reduce the number of shareholders
to less than 300 to enable Bowles to be a private company.
o Obligation to redeem shares at fair market value.
2
BOWLES FLUIDICS CORPORATION
ISSUES TO RESOLVE
o What is the intrinsic value of Bowles?
o What is the financial impact of the share repurchase?
o What is the magnitude of the reverse split?
o What is the capital required?
3
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE
DISCOUNTED CASH FLOW ANALYSIS
o All value derived from future expectation of cash flow and discounted to
the present at the commensurate level of risk.
o Cash flow is important, earnings are not.
o Shareholder value is created by:
* Increasing net operating cash flow,
* Reducing level of capital investment,
* Lowering cost of capital.
PUBLIC COMPARABLE COMPANY ANALYSIS
o Value determined through a comparison to the multiples of publicly traded
comparable companies.
4
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE - DISCOUNTED CASH FLOW
KEY ASSUMPTIONS
o Revenues grow to $39.6 million in year 2003, representing a 13.9%
average annual growth rate.
o Gross profit margins are approximately 26% by 2000.
o Operating profit margins grow to 11% by 2001.
5
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE - DISCOUNTED CASH FLOW
NET OPERATING PROFITS AFTER TAXES (NOPAT)
EXPECTED FORECAST
------------------------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
Sales 20,715 21,345 24,998 30,505 36,152 39,648
Total Operating Expenses 18,694 20,549 22,942 27,139 31,843 35,152
Other Operating Income 78 75 100 150 175 200
ADJUSTED EBIT 2,099 871 2,156 3,516 4,484 4,696
CASH OPERATING TAX 511 132 809 1,319 1,682 1,761
=========================================================================================================
NOPAT 1,588 739 1,348 2,198 2,803 2,935
=========================================================================================================
6
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE - DISCOUNTED CASH FLOW
CAPITAL
EXPECTED FORECAST
------------------------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
Current Operating Assets 7,156 7,463 8,374 9,960 11,586 12,758
NIBCLs 2,638 2,712 3,226 3,986 4,768 5,266
------ ------ ------ ------ ------ -----
NET WORKING CAPITAL 4,518 4,751 5,148 5,974 6,818 7,492
Net Prop Plant & Equip 4,313 5,103 5,883 7,119 7,940 8,245
Other Assets 100 100 100 100 100 100
CAPITAL 8,931 9,954 11,131 13,193 14,858 15,837
7
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE - DISCOUNTED CASH FLOW
COST OF CAPITAL
= Weighted Average + Weighted Average
Cost of Debt Cost of Equity
= Incremental Borrowing + Risk Free + Equity Risk + Small Cap.
Cost X (1-Tax Rate) Rate Premium Premium
= (8.5% X (1-37.5%)) + 4.66% + (7.8% X 0.62) + 3.3%
Weighting = 0% Weighting = 100%
= 0% + 12.80%
= 12.80%
8
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE - DISCOUNTED CASH FLOW
DISCOUNTED CASH FLOW VALUATION SUMMARY
NOPAT - INV PV FACTOR X FCF
Year NOPAT Investment FCF PV Factor Present Value
of FCF
- ------------------------------------------------------------------------------------------------
1999 739 1,023 (284) 0.9416 (267)
2000 1,348 1,177 171 0.8348 142
2001 2,198 2,062 136 0.7401 100
2002 2,803 1,665 1,138 0.6561 746
2003 2,935 979 1,956 0.5817 1,138
2004 & BEYOND 3,128 0 3,128 4.5461 14,222
INTRINSIC OPERATING VALUE 16,081
Marketable Securities 1,135
-------------------
INTRINSIC TOTAL VALUE 17,216
Other Liabilities 260
-------------------
INTRINSIC COMMON EQUITY VALUE 16,956
Fully Diluted Shares Outstanding 16,372
INTRINSIC SHARE VALUE $1.04
9
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE - COMPARABLE COMPANY ANALYSIS
o Selected parts manufacturers supplying the automotive industry.
o Market capitalization below $250 million.
10
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE - COMPARABLE COMPANY ANALYSIS
COMPARABLE COMPANY VALUATION SUMMARY
VALUATION RATIOS
- --------------------------------------------------------------------------------
MKT. MKT.VAL. MKT.
NET MKT. VAL. TO P/E ESTMIATE TO BOOK VAL.
CAPITAL EARNINGS ---------------- VALUE TO REV-
COMPANY TO EBIT (P/E) 98 99 (EQUITY) NUES
- --------------------------- ------- ----- -- -- ------ ----
Donnelly Coroporation 13.5 8.6 NM 15.0 0.8 0.11
Excel Industries 13.7 13.7 13.8 9.6 1.0 0.20
Federal Screw Works 4.7 6.8 NA NA 1.2 0.50
Hasting MManufacturing Co. 7.2 10.1 NA NA 2.2 0.36
Hilite Industries, Inc. 7.1 8.8 NM 8.9 1.6 0.50
IMPCO Technologies, Inc. 13.5 19.3 NM 17.0 2.7 1.31
OEA, Inc. NM NM NM 13.5 1.7 1.10
Simpson Industries 9.5 12.1 9.8 7.8 1.5 0.38
Stratlec Security Corporation 7.5 12.3 NM 11.2 2.4 0.93
Walbro Corporation NM NM 12.7 6.1 0.8 0.09
- --------------------------------------------------------------------------------
AVERAGE 9.6 11.5 12.1 11.2 1.6 0.55
- --------------------------------------------------------------------------------
11
BOWLES FLUIDICS CORPORATION
INTRINSIC VALUE - COMPARABLE COMPANY ANALYSIS
COMPARABLE COMPANY IMPLIED VALUATION ANALYSIS
POST
IMPLIED DISCOUNT IMPLIED
AVEARGE EQUITY LIQUIDITY EQUITY NUMBER PER SHARE
MULTIPLE VALUE DISCOUNT VALUE OF SHARES VALUE
--------- ----- -------- ----- --------- ------
Net Market Capital/EBIT 9.6 18,066 15.0% 15,356 16,372 0.94
P/E 11.5 14,460 15.0% 12,291 16,372 0.75
Fwd P/E '98 12.1 16,440 15.0% 13,974 16,372 0.85
Fwd P/E '99 11.2 6,769 15.0% 5,753 16,372 0.35
Mkt. Val . to Book 1.6 14,934 15.0% 12,694 16,372 0.78
Mkt. Val. to Revenues 0.5 11,127 15.0% 9,458 16,372 0.58
Range: $0.35 to $0.94
Median: $0.77
Mean: $0.71
12
BOWLES FLUIDICS CORPORATION
VALUATION SUMMARY
PRICE
PER
VALUATION METHODOLOGY SHARE
---------------------- -----
DISCOUNTED CASH FLOW 1.04
COMPARABLE COMPAN ANALYSIS
Net Market Capital/EBIT 0.94
P/E 0.75
Fwd P/E '98 0.85
Fwd P/E '99 0.35
Mkt. Val to Book 0.78
Mkt Val. to Revenues 0.58
Bid/Ask Range (at December 4, 1998): $0.75 to $1.0625
13
BOWLES FLUIDICS CORPORATION
TRADING SUMMARY
[GRAPH APPEARS HERE]
Price and volume data presented represents data through December 4, 1998.
14
BOWLES FLUIDICS CORPORATION
FINANCIAL IMPACT OF TRANSACTION
ONE FOR 1,000 REVERSE SPLIT WITH REPURCHASE OF ALL FRACTIONAL SHARES
o Based upon available data to the Company, shareholder base reduced to 175
shareholders. Shareholder count based upon SEC rules for going private
transaction.
o Estimated total of 194,077 shares repurchased.
REPURCHASE TOTAL DCF EPS
PRICE COST VALUATION IMPACT
----- ---- --------- ------
$1.04 $201,840 $1.06 NONE
$1.13 $218,337 $1.06 NONE
$1.25 $242,596 $1.06 NONE
15
BOWLES FLUIDICS CORPORATION
FINANCIAL IMPACT OF TRANSACTION
ONE FOR 2,000 REVERSE SPLIT WITH REPURCHASE OF ALL FRACTIONAL SHARES
o Based upon available data to the Company, shareholder base reduced to 119
shareholders. Shareholder count based upon SEC rules for going private
transaction.
o Estimated total of 412,078 shares repurchased.
REPURCHASE TOTAL DCF EPS
PRICE COST VALUATION IMPACT
----- ---- --------- ------
$1.04 $428,561 $1.06 NONE
$1.13 $463,588 $1.06 NONE
$1.25 $515,098 $1.06 NONE
16
BOWLES FLUIDICS CORPORATION
CONCLUSION
o Valuation range derived from Discounted Cash Flow Analysis and Comparable
Company Analysis is consistent with Bid/Ask range.
o Goal of the transaction can be accomplished at minimal cost.
o Recommend repurchase price at the top of the range or at a premium to the
top end of the range.
17
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 31, 1998
------------------------------------------------------
Commission File Number 2-37706
------------------------------------------------------
Bowles Fluidics Corporation
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Maryland 52-0741762
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6625 Dobbin Road, Columbia, Maryland 21045
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (410) 381-0400
-----------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
--- ---
The aggregate market value of the registrant's voting stock held by
non-affiliate persons and entities as of December 24, 1998, computed by
reference to the closing price for such stock on the composite reporting system
on such date, was $908,274 based on 1,038,027 shares.
The number of shares of the registrant's common stock outstanding as of December
24, 1998, was 12,685,011.
PART I
Item 1. BUSINESS
Bowles Fluidics Corporation was incorporated under Maryland law in
1961 (originally as Bowles Engineering Corporation) for the purpose of
advancing and exploiting the technology of fluidics. For about ten years
the principal business of the Company was research and development
primarily under contracts with agencies of the U.S. government. From
1972 to 1979 its principal income was derived from the sale of
proprietary consumer products it had developed based upon fluid
oscillators, including massaging showers and oral irrigation devices.
These consumer products have since been discontinued. Since 1979 its
principal product has been proprietary windshield and rear window washer
nozzles for the automotive industry. Late in FY 1989, the Company
extended the automotive product line to include shipments of fluidic
defroster nozzles. The Company also provides its automotive customers
with tooling and application engineering services related to its
products.
The Company has continued to expend efforts on the research and
development of new fluidic products for the automotive and other
industries. The air conditioning outlet in the instrument panel of
automotive vehicles has been a particular focus. Prototypes have been
developed and presented to a number of potential customers. At present,
two customers have selected the Company as the supplier of these
outlets, one for a vehicle scheduled to start production in August 1999
and the other for production in February 2000.
Principal Products and Markets
The Company is the leading designer, manufacturer and supplier of
windshield and rear window washer nozzles for passenger cars and light
trucks in North America. Defroster nozzles for a limited number of these
same light vehicles are also being manufactured and sold.
The Company's principal market for its fluidic nozzles, both
windshield washer and defroster, consists of North America, i.e., the
"Big Three" U.S. automotive manufacturers and foreign transplants. The
Company believes that it supplies about 80% of the total windshield
washer nozzle requirements for light vehicles (cars and light trucks)
manufactured in the United States, Canada and Mexico. The defroster
nozzle is currently being supplied to a number of vehicle models in this
market.
The Company has a licensing agreement covering Europe with a major
German automotive parts supplier for its windshield washer systems. The
Company itself has no international operations.
In North America, over 90% of the Company's production of nozzles
is incorporated in vehicles produced by General Motors, Ford and
Chrysler, each of whom typically represents over 10% of the Company's
sales volume. The Company is, therefore, dependent upon the requirements
of the U.S. automotive
2
industry producing cars and light trucks. Although the Company enters
into agreements with its customers to meet 100% of their production
requirements, notice of firm shipping requirements for the coming week
generally takes place weekly from the assembly plants and at somewhat
longer intervals from the first-tier suppliers. The Company's monthly
sales follow the seasonal pattern dictated by the production levels of
its customers. Consequently, sales for the second and fourth quarters of
the Company's fiscal year are typically higher than for the first and
third.
Sales also include technical services, i.e., design, tooling, and
prototyping services for the Company's customers. The requirements of
the automotive customers are for designs and tools to meet the needs of
forthcoming vehicle models or changes in existing models, as well as for
prototypes of new products desired for testing. These sales are, for the
most part, undertaken as a service to the customers, and the Company
contracts these services and tools so as to recover projected costs.
Patents and Competitive Products
The Company has engaged, since its inception, in research and
development in the fields of fluidics and fluid effect devices,
encompassing both gases and liquids. Over the past 19 years, 52 U.S.
patents have been granted to the Company's employees and assigned to the
Company. Ten applications are presently in process for additional U.S.
patents. Patents in selected other countries have also been granted for
most of the art covered by the U.S. patents. Although these patents
embody new and novel technology or product, there is available
competitive technology and alternative product. The extent to which the
expiration of an individual patent may affect the Company's competitive
position is difficult to determine.
In the past, U.S. patents were granted for a period of 17 years
from the date of issue. However, beginning in June 1995, those granted
in the past can be for a period of either 17 years from date of issue or
20 years from date of filing the application, whichever expiration date
is later. Those granted on applications filed after June 1995 are for a
period of 20 years from date of filing.
The Company's fluidic windshield washer and defroster nozzles,
which are covered by issued U.S. and international patents, are in
direct competition with conventional nozzles of traditional design. The
Company believes that its products have advantages both in performance
and in economy of assembly to the vehicle by the car manufacturers.
The Company is of the opinion that, in the long run, a history of
service, delivery, quality and economic supply is the most important
factor in binding its customers to it. Customers of the Company place a
great deal of emphasis on quality. The Company has maintained Ford's
preferred supplier rating (Q1 award) since 1985, has been rated an
excellent status in a supplier assessment by
3
General Motors, and has been a self-certified supplier for Chrysler
since 1991. The Company's material testing laboratory has been
accredited by General Motors since 1992.
In addition, the Company's customers required that the Company put
into place a QS-9000-compliant quality system, the automotive version of
ISO 9000. The Company went through the initial independent assessment in
September 1996, received certification in December 1996 as a QS-9000
supplier with ISO 9001 addendum, and has maintained that certification
since then.
The Company does not grant North American licenses for its own
patents in which it has an interest in marketing a product. The Company
does pursue interests expressed by others in the Company's technology in
an attempt to broaden its use. To the extent that there may be
additional uses in markets not related to those of primary interest to
the Company, efforts are made to license the patents for such use.
Raw Material Sources and Availability
Raw materials, primarily plastic resin, are sourced within the
United States. Their market prices were generally stable during the
current year and adequate supply is expected to be available in the
coming year. The resins purchased are restricted to those approved by
the Company's customers.
Working Capital Requirements
The Company's standard credit terms for receivables are net 30
days. Adequate levels of inventories are normally maintained in order to
ensure compliance with the stringent delivery requirements of our
customers.
The design and acquisition of production tools, which represent
the major portion of technical services sales, normally take several
months to complete, during which period the Company accumulates such
costs which are included in work-in-process inventories. Sales invoices
for these tools and services are rendered only after completion and
customers' acceptance of qualified products produced by the tools.
Research and Development
The Company's research and development costs, all Company-funded,
were:
% of Sales
FY 1998 $ 866,390 4.1
FY 1997 $ 1,005,183 5.3
FY 1996 $ 1,175,890 6.5
4
In FY 1998, the Company's research and development efforts were
directed primarily toward basic research and the design of new fluidic
nozzles intended for a variety of purposes resulting in the filing of a
number of patent applications.
In FY 1997 and FY 1996, the Company's research and development
efforts were directed primarily toward the further development of
fluidic air conditioning outlets for cars and light trucks, and the
advancement of its knowledge of the workings of fluidic washer nozzles,
including wind tunnel testing. These efforts resulted in a number of
patent filings.
Potential sales of products still in the development stage cannot
be predicted since product capability and customer acceptance of the new
technology are difficult to determine.
Employees
The Company averaged approximately 275 employees during FY 1998
and employed 278 people on a full-time basis on October 31, 1998. The
increase from the 252 employed on October 25, 1997, was primarily in the
manufacturing departments.
Compliance with Environmental Regulations
The Company believes it is in compliance with all known
environmental regulations and has no plans for significant expenditures
to meet these requirements in the future.
Item 2. PROPERTIES
The Company entered into an amended lease in September 1993 for,
in effect, all of the space at its facility in Columbia, Maryland, its
principal location until April 16, 2004. The lease amendment further
provides an option to continue the lease for an additional ten years or
to purchase the premises at 94% of fair market value at the end of the
initial term of the lease.
The facility provides for the Company's current needs for
manufacturing windshield washer and defroster nozzles at levels adequate
to meet projected customer needs and for manufacturing committed air
conditioning outlets. Additional space for warehousing, however, will be
required in the near future.
The Columbia facilities are currently utilized as follows:
Manufacturing, Materials, Quality Control 66,264 sq. ft.
Administration and Sales 8,883 sq. ft.
Laboratories and Engineering 13,679 sq. ft.
Total Area 88,826 sq. ft.
5
Beginning April 15, 1997, the Company leased for three years 1,617
sq. ft. of office space in Southfield, Michigan, to be used by its sales
staff.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None were submitted during the fourth quarter of the Company's
fiscal year.
6
PART II
Item 5. MARKET FOR REGISTRANT'S STOCK AND RELATED STOCKHOLDER
MATTERS
Stock Price and Markets
The common stock of the Company is traded in the
"over-the-counter" market and is quoted on the NASD OTC Bulletin Board;
symbol BOWE. The preferred stock is unregistered and is not publicly
traded.
The high and low bid and asked prices of the common stock over the
last two fiscal years are listed below:
Bid Asked
--- -----
FY High Low High Low
-- ---- --- ---- ---
1997 1st Quarter 1 3/8 13/16 1 5/8 1 1/4
2nd Quarter 1 3/8 5/8 1 9/16 3/4
3rd Quarter 13/16 7/16 7/8 9/16
4th Quarter 3 1/8 3/4 3 1/2 7/8
1998 1st Quarter 1 3/4 1 1/4 2 1/16 1 3/8
2nd Quarter 1 3/4 1 1/16 2 1/2 1 3/8
3rd Quarter 1 3/4 1 2 1 3/8
4th Quarter 1 1/32 23/32 1 1/2 1 1/8
Note: The above quotes represent prices between dealers and do not
include retail mark-up, mark-down, or commissions. They do not represent
actual transactions.
On December 8, 1998, the Board of Directors of the Company adopted
a resolution authorizing the submission to the vote of the stockholders
of the Company of a proposed amendment to the Articles of Incorporation
of the Company under which all outstanding shares of common stock will
be subject to a reverse stock split at the ratio of 1,000 shares of
common stock before the reverse split to 1 share of common stock after
the reverse split. The Board of Directors also adopted a resolution
authorizing the redemption of all fractional shares of common stock
resulting from the reverse stock split at the rate of $1,250 per post
reverse split share. This proposed amendment to the Articles of
Incorporation is pending subject to stockholder approval.
Following the reverse stock split and purchase of resulting
fractional shares of common stock, it is expected that the number of
record shareholders of the Company's common stock will be reduced from
approximately 430 (as of October 15, 1998) to less than 200. The number
of holders of the Company's preferred
7
stock will remain unchanged at approximately 18. As a result of the
reduction in number of record shareholders below 300, the Company
intends to suspend its obligation to file periodic reports with the
Securities and Exchange Commission pursuant to section 15(d) of the
Exchange Act of 1934.
Approximate Number of Equity Security Holders
Approximate Number of
Record Holders
Title of Class (as of October 31, 1998)
-------------- ------------------------
Common Stock
$.10 Par Value 430
Preferred Stock
8% Cumulative 18
Included in the number of stockholders of record are shares held
in "nominee" or "street" name.
Dividends
The Company has never paid cash dividends on its common stock.
Payment of dividends on common stock is within the discretion of the
Company's Board of Directors and will depend, among other factors, on
current and forecasted earnings, investment requirements, and the
financial condition of the Company.
For information concerning dividends on preferred stock, see Note
6 of Notes to Consolidated Financial Statements.
8
Item 6. SELECTED FINANCIAL DATA
October 31, 1998 October 25, 1997 October 26, 1996 October 28, 1995 October 29, 1994
---------------- ---------------- ---------------- ---------------- ----------------
Net sales $21,084,804 $18,842,673 $18,128,274 $16,972,876 $15,111,829
Net income 932,186 1,142,023 884,306 1,783,875 1,727,020
Basic earnings
per share .07 .08 .06 .14 .14
Diluted earnings
per share .06 .07 .05 .11 .11
Working capital 5,389,165 5,414,955 4,649,328 4,296,368 3,126,959
Total assets 12,355,321 11,784,701 10,719,852 9,292,446 8,478,227
Long-term debt -- -- -- 202,811 512,831
Stockholders' equity $ 9,378,219 $ 8,511,429 $ 7,439,552 $ 6,629,891 $ 4,907,664
9
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
FY 1998 vs. FY 1997
Total FY 1998 sales of $21,084,804 increased 12% over FY 1997
sales of $18,842,673, almost all due to higher technical services sales.
Net income for FY 1998 was $932,186, an 18% decrease from the FY 1997
net income of $1,142,023. The principal reasons for the decrease were
higher manufacturing costs of the windshield washer nozzles and the
unfavorable effect of the General Motors strike during the Company's
third quarter.
Product sales of light vehicle windshield washer and defroster
nozzles increased 1.5% or $275,410 to $18,385,924 in FY 1998 from
$18,110,514 in FY 1997. Sales of washer nozzles provided an increase of
$595,206, while those of defroster nozzles decreased $319,797 due to
declining sales of the related older vehicle models. Sales of washer
nozzles to the Big Three U.S. car manufacturers were approximately equal
to the prior year. The Company's third quarter sales of both washer and
defroster nozzles in FY 1998 were significantly affected by the strike
at the General Motors auto plants in June and July.
The Company's operating plans for the 1999 fiscal year assume that
production requirements for light vehicle production in North America
will be approximately equal to FY 1998.
Technical services sales increased 269% to $2,698,880 in FY 1998
from $732,159 in FY 1997. In FY 1998 tooling and design services
included those related to the new air conditioning outlets scheduled to
start production for two vehicles during the next two fiscal years and
those for newly designed washer nozzles for future car production, both
of which were an increase over the prior year.
For the 1999 fiscal year, technical services are forecasted to be
somewhat higher than FY 1998 due to continuing tooling sales related to
the new air conditioning outlets and washer nozzles.
Gross profit on total sales declined 15% to $4,938,956 in FY 1998
from $5,777,299 in FY 1997. As a percentage of total sales, gross profit
was 23.4% in FY 1998 versus 30.7% in FY 1997. Manufacturing costs were
higher as a number of newly designed washer nozzles began production and
a number of initiatives were taken including the introduction of cell
manufacturing to improve the manufacturing processes. The decline in
sales due to the General Motors strike also caused the gross profit to
decline. In addition, the significantly larger technical sales in FY
1998 described above versus FY 1997 which have essentially no profit
margin negatively impacted the gross profit percentage on
10
total sales. These sales are undertaken as a service to the Company's
customers and are contracted so as to recover only projected costs.
Selling, general and administrative expenses declined 13% in FY
1998 from FY 1997 due to the savings from the elimination of the higher
sales commissions paid to the manufacturer's representatives and their
replacement with the Company's own sales force in the Detroit area.
Research and development costs decreased 14% to $866,390 in FY
1998 from $1,005,183 in the prior year due to a decline in the spending
on the design and development of the automotive air conditioning
outlets. The Company's plans call for the maintenance of this level of
R&D spending in FY 1999.
Interest income declined in FY 1998 due principally to lower cash
and cash equivalents and investments available for sale. Other income
increased because of higher royalties and license income generated by
the sales of the Company's licensee outside North America.
The provision for income taxes of $575,953 in FY 1998 reflects the
lower income before taxes as compared to FY 1997. The effective income
tax rate for FY 1998 was higher than FY 1997 due to increases in state
taxes.
FY 1997 vs. FY 1996
Total FY 1997 sales of $18,842,673 increased 4% above FY 1996
sales of $18,128,274. Net income for FY 1997 rose to $1,142,023,
representing a 29% gain over FY 1996 net income of $884,306. Adjusting
for the FY 1996 nonrecurring accrual of $760,000, (which reduced the
Company's after-tax net income by $465,400) for the expenses related to
the termination of the sales agreement with its manufacturer's
representatives, net income for FY 1997 declined 15% principally due to
higher application engineering and tooling costs.
Product sales of light vehicle windshield washer and defroster
nozzles increased 5% to $18,110,514 in FY 1997 from $17,292,030 in FY
1996. Higher volume of shipments of newly and previously designed washer
nozzles to the Big Three U.S. car manufacturers as well as the
transplant manufacturers in the U.S. was the reason for the gain, even
though defroster outlet sales declined due to discontinuation of certain
models. This 5% increase compares favorably with the 2% gain in North
American light vehicle production during the same period.
In contrast to the increase in product sales for FY 1997,
technical services sales decreased 12% to $732,159 from FY 1996's
$836,244. Sales of tooling for new windshield washer nozzles were down
due to deferrals in the completion and approvals of these tooling
programs.
Gross profit on total sales declined 6% to $5,777,299 in FY 1997.
The margin on sales diminished to 30.7% in FY 1997 from 33.8% in the
previous fiscal year. The declines occurred principally due to increased
application engineering
11
expenses associated with the customization of new windshield and rear
window washer nozzles. In addition, higher tooling costs over and above
amounts billed to customers were incurred for the development and
support of both washer nozzle and air conditioning outlet tooling
projects.
Selling, general and administrative expenses declined $548,359 or
15% in FY 1997 from FY 1996 because of the accrual in fiscal year 1996
of $760,000 for expenses related to the termination of the Company's
sales agreement with its manufacturer's representatives. Excluding this
nonrecurring accrual, selling, general and administrative expenses
increased 7% in fiscal year 1997 principally due to professional fees
for services related to strategic and financial planning for the
Company.
Research and development costs decreased 15% to $1,005,183 from
$1,175,890 the previous fiscal year. Spending on various new product
programs was cut back and larger amounts were spent on the design and
development of the automotive air conditioning outlets.
In FY 1997, the provision for income taxes was $657,420,
reflecting the higher income before taxes and approximately the same
effective tax rate as in the previous fiscal year.
Liquidity and Capital Resources
Current assets at the 1998 fiscal year end were $7,825,174
compared with $8,195,361 at the end of the prior fiscal year. The
decline of $370,187 was principally related to the decline of $584,385
in cash and cash equivalents and investments available for sale
partially offset by the addition of the income taxes receivable of
$194,213.
Inventories rose by 6% during the fiscal year. Finished goods were
built up to reach more comfortable levels to meet the stringent customer
service requirements, and the tooling work-in-process declined since the
tools were completed and approved for sale.
Current liabilities declined 12% or $344,397 as the remaining
payments were made during FY 1998 for the liability associated with the
termination of the Company's sales agreement with its manufacturer's
representatives.
The current ratio of 3.2:1 at the 1998 fiscal year end increased
in comparison to the 2.9:1 ratio at the 1997 fiscal year end principally
due to the decline in current liabilities.
Cash provided by operating activities in the amount of $1,493,822
in fiscal year 1998 resulted principally from net income of $932,186
plus the non-cash charges for depreciation and amortization of
$1,091,634 offset by an increase in working capital of $843,803.
12
Funds were used for capital expenditures in the amount of
$2,014,132 principally for production and computer equipment. The
Company expects to spend approximately the same amount for capital
expenditures in FY 1999. During the year, the Company sold $1,586,735 of
U.S. Treasury Bills to meet working capital and capital expenditure
requirements.
.
The Company's $1,000,000 short-term line of credit was not
utilized during the fiscal year 1998 and had no balance outstanding at
October 31, 1998. The preferred stock dividend was declared and paid in
January 1998.
The Company's cash flow, financial position, and credit facilities
should provide an adequate base for working capital and production
investment requirements resulting from projected production rates by
North American automotive manufacturers, additional market penetration,
and potential new products near term, including air conditioning
outlets.
Impact of Year 2000
The management of the Company has considered the impact of the
changeover before, during and after midnight, December 31, 1999, to
January 1, 2000, on the handling of data and information, any related
software, and functions of operations. Inadequate handling of the
changeover could have a significant impact on the Company as follows:
a) business systems - internal computer information system,
CAD/CAM engineering design systems, payroll and personnel systems, and
electronic data interchange (EDI) systems;
b) manufacturing, warehouse and support equipment;
c) technical infrastructure, e.g. network, computer server,
personal computers, and telephone systems;
d) production, service, and other suppliers;
e) environmental support systems, e.g. security and maintenance
systems;
f) dedicated research and development systems.
The changeover will have no direct impact on the Company's
products themselves.
The Company's management has addressed each one of the above
issues where the impact applies and has in general either updated the
system, acquired a new system, tested the system and found compliance,
or been assured by the equipment or software manufacturer that the
related items were in compliance. A timetable was established in 1997,
and all the necessary steps have been taken and completed with respect
to the Company's internal systems. The Company's suppliers have been
surveyed to assess the status of their systems, focusing on
13
those with the largest potential impact on the Company. Questionable
areas with respect to the Company's customers and suppliers continue to
be addressed.
Aside from the acquisition of new systems which were considered to
be necessary and timely for the future successful functioning of the
business, the costs of the steps taken were not material to the
Company's profitability or financial condition.
The most reasonable likely worst cases if the changeover were not
handled properly by the Company's systems or its suppliers would be loss
of power and/or communications for a temporary period which would impact
production. Since the Company provides its products to and communicates
daily with the auto companies' assembly plants or their other suppliers,
this loss could be a serious problem. The Company plans to build
inventory to meet this short-term contingency and consider alternative
means of communications. Any significant loss of revenue would be
directly related to lost production by the North American auto
companies, which is not considered probable and cannot be estimated at
this time.
Forward-Looking Statements
This report contains certain forward-looking statements subject to
risks and uncertainties which could cause actual results to differ
materially from those anticipated. Readers are cautioned not to place
undue reliance on those forward-looking statements which speak only as
of the date of this report.
14
Schedule A: Relationship to Net Sales
Percent Change of Dollars
Period-to-Period
Percentage of Net Sales Increase or (Decrease)
FY 1998 FY 1997 FY 1996 1997-1998 1996-1997
------- ------- ------- --------- ---------
Net sales 100.0 100.0 100.0 11.9 3.9
Direct labor, material and other product-related costs 76.5 69.3 66.2 23.6 8.7
Selling, general and administrative expenses 12.8 16.4 20.1 (13.0) (15.1)
Research and development costs 4.1 5.3 6.5 (13.8) (14.5)
----- ---- ----
Operating income 6.6 8.9 7.2 (17.6) 27.8
Interest income 0.3 0.6 0.5 (39.1) 31.5
Other income (expense) net 0.3 -- -- -- --
----- ---- ----
Net income before taxes 7.2 9.5 7.7 (16.2) 29.4
===== ==== ====
15
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Accountants...............................................................17
Financial Statements:
Consolidated Statements of Income.........................................................18
Consolidated Balance Sheets...............................................................19
Consolidated Statements of Changes in Stockholders' Equity................................20
Consolidated Statements of Cash Flows.....................................................21
Notes to Consolidated Financial Statements................................................22
16
REPORT OF INDEPENDENT ACCOUNTANTS
December 16, 1998
To the Board of Directors and Stockholders
Bowles Fluidics Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows present fairly, in all material respects, the financial position of
Bowles Fluidics Corporation as of October 31, 1998, and October 25, 1997, and
the results of its operations and its cash flows for each of the three fiscal
years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
17
BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended
October 31, October 25, October 26,
1998 1997 1996
Product sales $ 18,385,924 $ 18,110,514 $ 17,292,030
Technical services sales 2,698,880 732,159 836,244
----------- ------------ ------------
Net sales 21,084,804 18,842,673 18,128,274
Cost of sales 16,145,848 13,065,374 11,996,305
---------- ---------- ----------
Gross profit 4,938,956 5,777,299 6,131,969
Selling, general and
administrative expenses 2,691,141 3,094,769 3,643,128
Research and development
costs 866,390 1,005,183 1,175,890
----------- ---------- ----------
Operating income 1,381,425 1,677,347 1,312,951
Interest income 71,530 117,541 89,401
Other income (expense), net 55,184 4,555 (11,417)
---------- ------------ ------------
Income before taxes 1,508,139 1,799,443 1,390,935
Provision for income taxes 575,953 657,420 506,629
----------- ----------- -----------
Net income 932,186 1,142,023 884,306
Preferred stock dividends
accrued (74,646) (74,646) (74,645)
---------- ------------ -----------
Income applicable to common
shareholders $ 857,540 $ 1,067,377 $ 809,661
=========== ========= ===========
Basic earnings per share $ .07 $ .08 $ .06
============= ============= ===============
Diluted earnings per share $ .06 $ .07 $ .05
============= ============== ===============
The accompanying notes are an integral part of these financial statements.
18
BOWLES FLUIDICS CORPORATION
CONSOLIDATED BALANCE SHEETS
October 31, October 25,
1998 1997
---- ----
ASSETS
Current
Cash and cash equivalents $ 1,734,261 $ 755,525
Investments available for sale -- 1,563,121
Accounts receivable 3,233,775 3,112,063
Income taxes receivable 194,213 --
Inventories 2,263,144 2,130,615
Other current assets 399,781 634,037
----------- -----------
Total current assets 7,825,174 8,195,361
---------- ----------
Property and equipment, net 4,408,404 3,494,335
Other assets 121,743 95,005
----------- ------------
Total assets $ 12,355,321 $ 11,784,701
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable - trade $ 1,109,902 $ 1,122,437
Accrued expenses 1,326,107 1,609,807
Income taxes payable -- 48,162
------------ -----------
Total current liabilities 2,436,009 2,780,406
Other liabilities 541,093 492,866
----------- -----------
Total liabilities 2,977,102 3,273,272
---------- ----------
Commitments and contingencies
Stockholders' equity
8% Convertible preferred stock 933,080 933,080
Common stock 1,268,501 1,264,001
Additional paid-in capital 2,732,833 2,728,083
Retained earnings 4,443,805 3,586,265
---------- ----------
Total stockholders' equity 9,378,219 8,511,429
---------- ----------
Total liabilities and stockholders' equity $ 12,355,321 $ 11,784,701
========== ==========
The accompanying notes are an integral part of these financial statements.
19
BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Additional
Shares Shares Paid-in Retained
Total (000's) Amount (000's) Amount Capital Earnings
----------- ------- ------ ------- ------------ ------------- ----------
Balance October 28, 1995 $ 6,629,891 933 $ 933,080 12,610 $ 1,261,001 $ 2,726,583 $ 1,709,227
Preferred stock dividends (74,645) (74,645)
Net income 884,306 884,306
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance October 26, 1996 7,439,552 933 933,080 12,610 1,261,001 2,726,583 2,518,888
Stock options exercised 4,500 30 3,000 1,500
Preferred stock dividends (74,646) (74,646)
Net income 1,142,023 1,142,023
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance October 25, 1997 8,511,429 933 933,080 12,640 1,264,001 2,728,083 3,586,265
Stock options exercised 9,250 45 4,500 4,750
Preferred stock dividends (74,646) (74,646)
Net income 932,186 932,186
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance October 31, 1998 $ 9,378,219 933 $ 933,080 12,685 $ 1,268,501 $ 2,732,833 $ 4,443,805
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
20
BOWLES FLUIDICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
October 31, October 25, October 26,
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 932,186 $ 1,142,023 $ 884,306
Adjustments to reconcile net income
provided by operating activities:
Depreciation and amortization 1,091,634 960,346 750,449
Deferred income taxes 332,759 (5,900) (241,315)
(Gain)/Loss on disposal of assets 4,660 21,089 3,088
Accretion of interest on investments (23,614) (45,269) (31,659)
---------- ---------- ----------
2,337,625 2,072,289 1,364,869
--------- --------- ---------
Change in operating accounts:
Accounts receivable (121,712) (336,405) (14,264)
Inventories (132,529) (144,550) (86,719)
Other assets (26,447) (74,958) (122,381)
Accounts payable (12,535) 17,926 109,090
Accrued expenses (283,700) (189,549) 537,235
Income taxes (242,375) 8,162 (71,441)
Other liabilities (24,505) 156,433 428,049
---------- --------- ----------
(843,803) (562,941) 779,569
--------- --------- ----------
Net cash provided by operating activities: 1,493,822 1,509,348 2,144,438
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,014,132) (1,027,780) (1,321,331)
Purchase of investments -- (1,540,015) (566,664)
Patents and trademarks (32,347) (4,433) --
Proceeds from sale of equipment 10,054 1,441 --
Proceeds from sale of investments 1,586,735 600,000 700,000
--------- ---------- ----------
Net cash used in investing activities (449,690) (1,970,787) (1,187,995)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payment of debt -- -- (271,669)
Preferred stock dividends (74,646) (74,646) (74,645)
Proceeds from issuance of common stock 9,250 4,500 --
----------- ----------- ----------
Net cash used by financing activities (65,396) (70,146) (346,314)
----------- ---------- ----------
Net increase(decrease) in cash and cash
equivalents 978,736 (531,585) 610,129
CASH AND CASH EQUIVALENTS:
- Beginning of period 755,525 1,287,110 676,981
---------- --------- ----------
- End of period $ 1,734,261 $ 755,525 $ 1,287,110
========= ========== =========
The accompanying notes are an integral part of these financial statements.
21
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL. The Company and its wholly owned subsidiary, Fluid Effects
Corporation, operate on a 52/53-week fiscal year which ends on the last
Saturday of October. The fiscal year 1998 has 53 weeks and fiscal years
1997 and 1996 have 52 weeks. Assets and liabilities, and revenues and
expenses, are recognized on the accrual basis of accounting. Fluid Effects
Corporation was merged into the Company as of April 6, 1998.
CASH EQUIVALENTS. Cash equivalents are highly liquid investments with
original maturities of 90 days or less.
INVESTMENTS. Investments, which are available for sale, consist of U.S.
Treasury Bills with original maturities over 90 days, but not greater than
365 days, and are carried at cost plus accrued interest, which approximates
market.
INVENTORY PRICING. Inventories are carried at the lower of cost (first-in,
first-out) or market.
PROPERTY, EQUIPMENT AND DEPRECIATION. The cost of property and equipment is
depreciated over the estimated useful life of the related assets.
Depreciation is computed on the straight-line method for all assets based
on the following estimated lives:
Years
-----
Production machinery and equipment 3-10
Office furniture and equipment 5-7
Laboratory and machine shop equipment 3-10
Leasehold improvements lease term
Depreciation expense for the fiscal years ended 1998, 1997, and 1996 was
$1,085,349, $939,678, and $711,282 respectively.
PATENTS. Costs associated with obtaining United States patents are
capitalized and amortized using the straight-line method over the life of
the patent beginning with the date of issue or date of filing the
application. The Company initially charges all costs associated with the
acquisition of U.S. and foreign patents to expense, then capitalizes those
costs related to U.S. patents upon issuance of those patents.
Management reviews all of the patent costs and writes off any patents
which are considered to be of no foreseeable economic benefit to the
Company. The Company recognizes income from patent licenses in accordance
with the respective payment terms of each license agreement.
22
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. (continued)
INCOME TAXES. The Company uses the asset and liability method for
accounting for income taxes. Under this method, deferred income taxes are
recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences
between the financial statements carrying amounts and the tax bases of
existing assets and liabilities.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS. Certain 1996 and 1997 amounts have been reclassified to
conform to the 1998 presentation.
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of
accounts receivable and cash investments. The Company's customer base
includes the significant U.S. automotive manufacturers and a large number
of automotive parts suppliers. The Company does not require collateral for
its trade accounts receivable. However, the Company's credit evaluation
process and reasonably short collection terms help to mitigate any
concentration of credit risk. The Company also has cash investment policies
that limit the amount of credit exposure to any one financial institution
and require placement of investments in financial institutions evaluated as
highly creditworthy.
2. INVENTORIES
Inventories are comprised of:
1998 1997
-------------- -------------
Raw material $ 720,084 $ 620,567
Work and tooling in progress 791,805 1,016,845
Finished goods 751,255 493,203
---------- ----------
Total $2,263,144 $2,130,615
========== ==========
Tooling in progress includes costs accumulated under short-term contracts
to produce tooling for certain of the Company's customers of $598,193 and
$865,700 in 1998 and 1997 respectively.
23
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.PROPERTY AND EQUIPMENT, NET
Property and Equipment, net, is comprised of:
1998 1997
-------------- --------
Production machinery and equipment $6,328,351 $4,946,390
Office furniture and equipment 2,502,438 2,321,844
Laboratory and machine shop equipment 1,586,801 1,428,516
Leasehold improvements 894,816 812,120
-------------- ----------
Total property and equipment 11,312,406 9,508,870
Less accumulated depreciation (6,904,002) (6,014,535)
--------- ---------
Property and equipment, net $4,408,404 $3,494,335
========= =========
4. LINE OF CREDIT
In May 1996, the Company entered into a fourth amended and restated
agreement with Mercantile-Safe Deposit & Trust Company to reaffirm and
extend its $1,000,000 line of credit until May 8, 1997, on an unsecured
basis. At the Company's request and the Bank's discretion the line of
credit was extended until May 8, 1999, and may be reaffirmed each year
thereafter. The interest rate is Mercantile's prime rate, floating, which
was 8% as of October 31, 1998. In addition, a 3/8% annual fee is assessed
on the unused portion of this credit facility. Advances on the line of
credit are limited to 85% of eligible accounts receivable and 40% of
finished goods inventory. No amount was outstanding on this credit line at
October 31, 1998, or October 25, 1997.
In addition to the maintenance of certain financial ratios, the
covenants of the fourth amended loan agreement require the Company's
tangible net worth to be not less than $2,000,000 as of the close of each
fiscal year.
5. DEBT
No debt was outstanding as of October 31, 1998, and October 25, 1997. In
February 1996 the unpaid balance of the then outstanding loan from
Mercantile-Safe Deposit & Trust Company was paid in total.
24
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6.STOCKHOLDERS' EQUITY
The 8% convertible preferred stock of the Company at October 31, 1998,
and October 25, 1997, consists of 3,000,000 authorized shares, par value
$1.00 per share, with 933,080 shares issued and outstanding on both dates.
The common stock of the Company at October 31, 1998, and October 25,
1997, consists of 17,000,000 authorized shares, par value $.10 per share.
On October 31, 1998, the shares issued and outstanding were 12,685,011,
whereas on October 25, 1997, they were 12,640,011.
The Company's preferred stock provides for an annual dividend of $.08
per share from the net earnings of the Company and is cumulative only for
those years in which the Company has earnings, and $1.00 per share in
liquidation before any distribution can be made to holders of common stock.
If any dividends payable on the preferred stock with respect to any fiscal
year of the Company are not paid for any reason, the rights of the holders
of the preferred stock to receive payment of such dividends shall not lapse
or terminate; but unpaid dividends shall accumulate and shall be paid
without interest to the holders of the preferred stock when and as
authorized by the Board of Directors before any dividends shall be paid on
any other class of stock.
The Company's preferred stock may at the option of the holder, at any
time dividends are current, be converted into common stock of the Company
at the conversion rate of four shares of common for each share of
preferred. Additionally, the preferred stock is redeemable at par in whole
or in part at the option of the Board of Directors at any time the
dividends are current after a period of 10 years subsequent to issue. At
October 31, 1998, 683,080 shares have been outstanding for more than 10
years and dividends are current, and thus can be redeemed. The common stock
has one (1) vote per share and the preferred stock has four (4) votes per
share.
RESERVED SHARES. As of and for the three fiscal years in the period ended
October 31, 1998, there were 300,000 shares of common stock reserved for
issuance in connection with the Company's stock option plans. None of the
authorized shares of common stock are reserved for conversion of preferred
stock. Under the laws of the State of Maryland, the authorization of the
preferred stock in itself provides the authorization of common stock
necessary for conversion.
QUASI-REORGANIZATION. Effective October 29, 1994, the Board of Directors
approved a quasi-reorganization which had the impact of eliminating the
retained earnings deficit as an adjustment to additional paid-in capital.
25
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES
The Company and its subsidiary file a consolidated federal income tax
return and separate state income tax returns. The provision for income
taxes consisted of the following:
1998 1997 1996
---------------- ------------- --------
Federal:
Current $195,218 $620,131 $678,938
Deferred 292,675 (6,100) (222,600)
-------- --------- -------
487,893 614,031 456,338
------- ------- -------
State:
Current 47,976 43,189 68,791
Deferred 40,084 200 (18,500)
-------- ---------- -------
88,060 43,389 50,291
-------- -------- --------
$575,953 $657,420 $506,629
======= ======= =======
The components of the deferred tax asset and liability for 1998 and 1997 were as follows:
1998 1997
---- ----
Deferred tax assets:
Accrued vacation and retirement programs $ 43,818 $ 83,600
Non-deductible reserves 261,882 490,600
------- -------
Total deferred tax assets 305,700 574,200
------- -------
Deferred tax liabilities:
Property and equipment (368,000) (303,700)
------- -------
Total deferred tax liabilities (368,000) (303,700)
------- -------
Net deferred tax asset (liability) $ (62,300) $ 270,500
======= =======
Reconciliation of the provisions for income taxes at the U.S. federal statutory rate to the effective tax
expense were as follows:
1998 1997 1996
------------ ------------ -------
U.S. statutory income tax $512,767 $611,811 $472,918
State taxes, net of federal
income tax benefit 58,736 28,637 33,711
Other, net 4,450 16,972 --
--------- -------- ------
$575,953 $657,420 $506,629
======= ======= =======
Cash paid for income taxes was $489,000, $584,000, and $877,000 for
1998, 1997, and 1996 respectively.
26
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EARNINGS PER SHARE
Effective October 26, 1997, the Company adopted Statement of Financial
Accounting Standard No. 128 "Earnings per Share" ("SFAS 128"). SFAS 128
replaced the presentation of primary earnings per share (EPS) and fully
diluted EPS with a presentation of basic EPS and diluted EPS. All earnings
per share amounts presented in the financial statements here have been
restated in accordance with SFAS 128.
Basic earnings per share is determined based on the weighted average
number of common shares outstanding during the periods. Diluted earnings
per share is determined based on the weighted average number of common
shares outstanding and potential dilution of securities that could share in
earnings.
The following table sets forth the computation of basic and diluted
earnings per share:
For the Years Ended
-------------------------------------------------------
October 31, October 25, October 26,
1998 1997 1996
---------------- ---------------- ----------------
Numerator:
Numerator for basic earnings per share:
Income applicable to common
shareholders $ 857,540 $ 1,067,377 $ 809,661
Effect of dilutive securities:
Preferred Stock Dividends 74,646 74,646 74,646
------------ ------------ ------------
Numerator for diluted earnings per share
Income applicable to common shareholders after
assumed conversion $ 932,186 $ 1,142,023 $ 884,306
---------- ---------- ----------
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding
during the period 12,660,294 12,633,764 12,610,011
Effect of dilutive securities:
Employee Stock Options 32,160 48,607 91,887
Assumed Conversion of Preferred Stock 3,732,320 3,732,320 3,732,320
----------- ----------- -----------
Denominator for diluted earnings per
share 16,424,774 16,414,691 16,434,218
---------- ---------- ----------
Earnings per Share:
Basic $ .07 $ .08 $ .06
=== === ===
Diluted $ .06 $ .07 $ .05
=== === ===
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under non-cancelable operating
leases which expire in 2004 for Columbia, Maryland, and in 2000 for
Southfield, Michigan. As of October 31, 1998, minimum annual aggregate
rentals are as follows:
27
Year Ended Amount
---------- ------
1999 $ 594,929
2000 572,831
2001 561,646
2002 561,646
2003 561,646
thereafter 257,421
Total minimum future rental payments $3,110,119
Rent expense under all leases for 1998, 1997, and 1996 was $666,908,
$644,008, and $626,565 respectively.
Management is unaware of any pending legal proceedings which would
have a material adverse effect on the financial statements of the
Company.
10. EMPLOYEE BENEFIT PLANS
On November 1, 1990, the Company adopted a defined contribution (401k)
plan covering substantially all of its employees. Contributions and costs
were determined by matching 50% of employee contributions up to 4% of
each covered employee's earnings. As of April 1, 1994, the Company
increased its matching contribution to 50% of the employee contributions
up to 6% of each covered employee's earnings. The Company's contributions
to the plan were $169,685, $151,314, and $119,640 in 1998, 1997, and 1996
respectively.
The Company has agreed to retirement programs for certain former
officers providing for the payment of certain retirement benefits. The
unfunded present value, at a discount rate of 7.5%, of these benefits
accumulated as of October 31, 1998, amounts to approximately $323,000, of
which $264,000 is included in other liabilities. Expenses related to
these programs were $41,090 in 1998, $46,476 in 1997, and $44,000 in
1996.
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTIONS
In May 1992, the Company adopted its key employee incentive stock
option plan. Activity in the Company's incentive stock option plan was as
follows:
1998 1997 1996
--------- --------- ------
Options outstanding, beginning of year 70,000 180,000 180,000
Options granted - - -
28
Options exercised (45,000) (30,000) -
Options expired (25,000) (80,000) -
----------- ----------- -----------
Options outstanding, end of year - 70,000 180,000
=========== =========== ===========
Options activities are at exercise prices ranging from $.15 to $.65
per share.
Statement of Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (FAS 123) became effective for the Company in 1997. As
allowed by FAS 123, the Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25), in accounting for its stock option plans. FAS 123
requires the Company to present pro forma information as if the Company
had accounted for stock options granted since December 15, 1995, under
the fair value method of FAS 123. No pro forma information has been
presented by the Company as no stock options have been issued since
December 15, 1995, the effective date of FAS 123.
12. TERMINATION OF SALES AGREEMENT
During the fiscal year 1996, the Company accrued $760,000 ($465,400
net of income taxes) for the termination in May 1997 of the sales
agreement with its manufacturer's representatives. The payments commenced
in May 1997 and were completed at May 14, 1998.
13. MAJOR CUSTOMERS
Over 90% of the Company's production of nozzles is incorporated in
vehicles produced by General Motors, Ford, and Chrysler, each of whom
typically represents over 10% of the Company's sales volume. The Company
is, therefore, substantially dependent upon the North American production
requirements of these three automotive companies. In addition, the
Company's customers required that a QS-9000-compliant quality system be
developed and registered by an independent organization. In September
1996, the Company was assessed by Underwriters Laboratories Inc.,
received QS-9000 certification with ISO 9001 addendum as of December 20,
1996, and has maintained that certification since then.
BOWLES FLUIDICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. (Continued)
Three customers each had sales exceeding 10% of the Company revenues:
1998 1997 1996
---- ---- ----
Customer A $3,727,630 $3,819,124 $3,845,926
Customer B 2,977,928 3,506,208 2,378,921
Customer C 2,411,813 2,367,381 2,511,570
14. NEW ACCOUNTING PRONOUNCEMENTS
29
The Financial Accounting Standards Board has issued the following
Statements of Financial Standards ("FAS") which are not yet effective for
the Company:
o FAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATIVE
INFORMATION
This statement becomes effective for fiscal years beginning after
December 15, 1997, and changes the way public companies report
information about segments of their business in their financial
statements and requires them to report selected segment information in
their quarterly reports to stockholders. The Company intends to adopt
the disclosure requirement by this statement for the year ending
October 30, 1999.
o FAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
This statement becomes effective for fiscal years beginning after June
15, 1999. This standard establishes accounting and reporting standards
for derivative instruments and hedging activities. The Company does
not believe this new standard will have any impact on the Company upon
adoption.
15. PROPOSED REVERSE STOCK SPLIT
On December 8, 1998, the Board of Directors of the Company adopted a
resolution authorizing the submission to the vote of the stockholders of
the Company of a proposed amendment to the Articles of Incorporation of
the Company under which all outstanding shares of common stock will be
subject to a reverse stock split at the ratio of 1000 shares of common
stock before the reverse split to 1 share of common stock after the
reverse split. The Board of Directors also adopted a resolution
authorizing the redemption of all fractional shares of common stock
resulting from the reverse stock split at the rate of $1,250 per post
reverse split share. This proposed amendment to the Articles of
Incorporation is pending subject to stockholder approval.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
Information is included in the Proxy Statement for the Annual Meeting of
Stockholders scheduled for April 7, 1999.
Executive Officers of the Registrant
Name, Age and Position: Business Experience During Past Five Years:
William Ewing III Chairman of the Board since July 1996. Responsible for the formation of
Chairman of the Board overall corporate policy and planning. Member of Board of Directors
of Directors since 1985. Previously Vice President and Treasurer of Reeves
Age 52 Industries, Inc., 1995-1997, and Managing Director of Chemical Bank,
1992-1994.
Ronald D. Stouffer President since March 1994. Responsible for execution of the Company's
President policies and for the Company's operations. Executive Vice President
Chief Executive Officer responsible for engineering and manufacturing from 1982 to 1994. Member
Age 67 of Board of Directors since 1978. Joined the Company in 1967.
Eric W. Koehler Appointed Executive Vice President and member of Board of Directors
Executive Vice President December 17, 1997, in charge of marketing, sales, and engineering
Age 36 functions. Previously Vice President, Marketing, since March 1994,
responsible for marketing and sales functions. Director of Marketing,
1990-1994. Joined the Company in 1989.
Melvyn J. L. Clough Vice President, Operations, since joining the Company in November 1995.
Vice President, Responsible for manufacturing operations including industrial engineering
Operations and tooling. Previously Engineering Manager for A. Raymond, Inc.,
Age 51 1992-1995.
Richard W. Hess Vice President, Automotive Products Engineering, since April 1998.
Vice President, Responsible for the Company's engineering of automotive products.
Engineering Previously Vice President, Engineering, since joining the Company in 1992.
Age 55
31
Executive Officers of the Registrant (continued)
Name, Age and Position: Business Experience During Past Five Years:
----------------------- -------------------------------------------
Eleanor M. Kupris Vice President, Administration, since 1982. Corporate Secretary since
Secretary and Vice Presi- March 1992. Responsible for purchasing and personnel. Joined the
dent, Administration Company in 1966.
Age 57
David A. Quinn Vice President, Finance, and Treasurer since joining the Company in
Vice President, October 1993. Responsible for treasury, accounting and financial
Finance, and Treasurer planning functions. Previously CFO for Bruning Paint Company, 1991-1993.
Age 62
Dharapuram N. Srinath Vice President, Advanced Engineering, since April 1998. Responsible for
Vice President, the development of new products, other than automotive, and research and
Advanced Engineering development. Previously Vice President, Quality Assurance, from March
Age 47 1995, and Director of Quality Assurance and Product Reliability,
1992-1995. Joined the Company in 1978.
Arlene M. Hardy Corporate Controller since 1990. Responsible for accounting functions.
Corporate Controller Joined the Company in 1986.
Age 51
The names, ages and positions of all of the executive officers of the
Company are listed above, along with their business experience during the
past five years. Officers are appointed annually by the Board of Directors
at its meeting immediately following the Annual Meeting of Stockholders.
There are no family relationships among any of the officers of the Company,
nor any arrangements or understanding between any such officers and another
person pursuant to which they were elected as officers.
Item 11. EXECUTIVE COMPENSATION
Information is included in the Proxy Statement for the Annual Meeting of
Stockholders scheduled for April 7, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information is included in the Proxy Statement for the Annual Meeting of
Stockholders scheduled for April 7, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is included in the Proxy Statement for the Annual Meeting of
Stockholders scheduled for April 7, 1999.
32
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 Financial Statements
Included in Part II of this report:
Report of Independent Accountants
Consolidated Statements of Income for the three years
ended October 31, 1998, October 25, 1997, and October
26, 1996
Consolidated Balance Sheets at October 31, 1998, and
October 25, 1997
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended October 31, 1998,
October 25, 1997, and October 26, 1996
Consolidated Statements of Cash Flows for the three
years ended October 31, 1998, October 25, 1997, and
October 26, 1996
Notes to Consolidated Financial Statements
(a) 2 Financial Statements Schedules
Schedules are omitted because of the absence of conditions
under which they are required or because the required
information is given in the financial statements or notes
thereto.
(b) Reports on Form 8-K
A Form 8-K was filed on October 6, 1998, during the fourth
quarter of the Company's fiscal year indicating the unanimous
election at an informal meeting of the Board of Directors on July
14, 1998, and confirmed at a meeting of the Board on September 22,
1998, of Frederic Ewing II, James Parkinson, and Neil T. Ruddock to
the Board of Directors to serve until the next Annual Meeting of
Stockholders.
33
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.
BOWLES FLUIDICS CORPORATION
BY:
Chairman of
the Board and
- ------------------------------- Director ----------------------------------
William Ewing III Date
President and
- ------------------------------- Director ----------------------------------
Ronald D. Stouffer Date
Executive
Vice President and
- ------------------------------- Director ----------------------------------
Eric W. Koehler Date
Vice President
- ------------------------------- Finance ----------------------------------
David A. Quinn Date
- ------------------------------- Corporate Controller ----------------------------------
Arlene M. Hardy Date
- ------------------------------- Director ----------------------------------
David C. Dressler Date
- ------------------------------- Director ----------------------------------
Frederic Ewing II Date
- ------------------------------- Director ----------------------------------
Jim Parkinson Date
- ------------------------------- Director ----------------------------------
Neil T. Ruddock Date
34
[ARTICLE] 5
[RESTATED]
[CIK] 0000013585
[NAME] BOWLES FLUIDICS CORPORATION
[MULTIPLIER] 1
[FISCAL-YEAR-END] Oct-31-1998
[PERIOD-END] Oct-31-1998
[PERIOD-TYPE] 12-mos
[CASH] 1,734,261
[SECURITIES] 0
[RECEIVABLES] 3,427,988
[ALLOWANCES] 0
[INVENTORY] 2,263,144
[CURRENT-ASSETS] 7,825,174
[PP&E] 11,312,406
[DEPRECIATION] 6,904,002
[TOTAL-ASSETS] 12,355,321
[CURRENT-LIABILITIES] 2,436,009
[BONDS] 0
[COMMON] 1,268,501
[PREFERRED-MANDATORY] 0
[PREFERRED] 933,080
[OTHER-SE] 7,176,638
[TOTAL-LIABILITY-AND-EQUITY] 12,355,321
[SALES] 21,084,804
[TOTAL-REVENUES] 21,084,804
[CGS] 16,145,848
[TOTAL-COSTS] 19,703,379
[OTHER-EXPENSES] (126,714)
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 1,508,139
[INCOME-TAX] 575,953
[INCOME-CONTINUING] 932,186
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 932,186
[EPS-PRIMARY] 0.07 <F1>
[EPS-DILUTED] 0.06
[FN]
<F1> EPS-BASIC
</FN>
Exhibit 6
PRO FORMA DATA DISCLOSING THE EFFECT OF THE REVERSE STOCK SPLIT AND BUYBACK
OF FRACTIONAL SHARES ON THE COMPANY'S BALANCE SHEET
AS OF THE MOST RECENT FISCAL YEAR END
BOWLES FLUIDICS CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
October 31, 1998
-------------------------------------------------
Reverse Split
& Buyback
Reported Adjustments Pro Forma
-------------------------------------------------
ASSETS
Current
Cash and cash equivalents $1,734,261 ($212,656) $1,521,605
Accounts receivable 3,233,775 3,233,775
Income taxes receivable 194,213 194,213
Inventories 2,263,144 2,263,144
Other current assets 399,781 399,781
-------------------------------------------------
Total current assets 7,825,174 (212,656) 7,612,518
-------------------------------------------------
Property and equipment, net 4,408,404 4,408,404
Other assets 121,743 121,743
-------------------------------------------------
Total assets $12,355,321 ($212,656) $12,142,665
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable - trade $1,109,902 $1,109,902
Accrued expenses 1,326,107 1,326,107
---------------- ----------------
Total current liabilities 2,436,009 2,436,009
Other liabilities 541,093 541,093
---------------- ----------------
Total liabilities 2,977,102 2,977,102
---------------- ----------------
Commitments and contingencies
Stockholders' equity
8% Convertible preferred stock 933,080 933,080
Common stock 1,268,501 ($17,012) 1,251,489
Additional paid-in capital 2,732,833 (36,651) 2,696,182
Retained earnings 4,443,805 (158,992) 4,284,813
-------------------------------------------------
Total stockholders' equity 9,378,219 (212,656) 9,165,563
-------------------------------------------------
Exhibit 6 - 1
Total liabilities and stockholders' equity $12,355,321 ($212,656) $12,142,665
=================================================
Common stock book value $8,445,139 ($212,656) $8,232,483
Number of common shares outstanding 12,685,011 (12,672,496) 12,515
Per share $0.67 $657.81
Exhibit 6 - 2
BOWLES FLUIDICS CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
REVERSE SPLIT AND BUYBACK ADJUSTMENTS
1. Balance Sheet: October 31, 1998
The pro forma balance sheet reflects the reduction in cash and cash
equivalents and the decrease in stockholders' equity of $212,656 resulting
from the buyback of estimated fractional common shares (170,125 shares)
after the 1-for-1,000 reverse common stock split at $1,250 per share, as
if the buyback occurred at October 31, 1998.
The retained earnings adjustment of $158,992 reflects the total adjustment
of stockholders' equity of $212,656 net of the par value of the related
common stock and a pro rata portion of the additional paid-in capital. The
reduction of retained earnings represents the net payout of historical
earnings based on the fair market value of the fractional shares acquired.
The pro forma book value per share reflects the lower common stock book
value and the lower number of common shares outstanding after the split
and buyback.
Exhibit 6 - 3
Exhibit 7
PRO FORMA DATA DISCLOSING THE EFFECT OF THE REVERSE STOCK SPLIT AND BUYBACK OF
FRACTIONAL SHARES ON THE COMPANY'S CONSOLIDATED STATEMENT OF INCOME,
EARNINGS PER SHARE AMOUNTS, AND RATIO OF EARNINGS TO FIXED CHARGES
FOR THE MOST RECENT FISCAL YEAR END
BOWLES FLUIDICS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended October 31, 1998
--------------------------------------------------------
Reverse Split
& Buyback
Reported Adjustments Pro Forma
--------------------------------------------------------
Product sales $18,385,924 $18,385,924
Technical services sales 2,698,880 2,698,880
------------------- ---------------------
Net sales 21,084,804 21,084,804
Cost of sales 16,145,848 16,145,848
------------------- ---------------------
Gross profit 4,938,956 4,938,956
Selling, general and
administrative expenses 2,691,141 2,691,141
Research and development
costs 866,390 866,390
------------------- ---------------------
Operating income 1,381,425 1,381,425
Interest income 71,530 ($10,845) 60,685
Other income (expense), net 55,184 55,184
--------------------------------------------------------
Income before income taxes 1,508,139 (10,845) 1,497,294
Provision for income taxes 575,953 (4,142) 571,811
--------------------------------------------------------
Net income 932,186 (6,703) 925,483
Preferred stock dividends
accrued (74,646) 0 (74,646)
--------------------------------------------------------
Income applicable to common
shareholders $857,540 ($6,703) $850,837
========================================================
Basic earnings per share:
Income applicable to common
shareholders $857,540 ($6,703) $850,837
--------------------------------------------------------
Weighted average of common
shares outstanding 12,660,294 (12,647,804) 12,490
Basic earnings per share $0.07 $68.12
=================== =====================
Diluted earnings per share:
Net income $932,186 ($6,703) $925,483
--------------------------------------------------------
Weighted average of common
shares outstanding 12,660,294 (12,647,804) 12,490
Add: Assumed conversion of
preferred stock 3,732,320 (3,728,588) 3,732
Assumed exercise of
stock options 32,160 (32,128) 32
--------------------------------------------------------
Number of common shares
outstanding adjusted 16,424,774 (16,408,520) 16,254
--------------------------------------------------------
Diluted earnings per share $0.06 $56.94
=================== =====================
Ratio of earnings to fixed charges N/a N/a
BOWLES FLUIDICS CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
REVERSE SPLIT AND BUYBACK ADJUSTMENTS
1. Income Statement: Year Ended October 31, 1998
The pro forma income statement reflects the reduction in interest income,
net of income taxes, to give effect to the $212,656 reduction of cash and
cash equivalents to acquire the estimated fractional common shares
outstanding (170,125 shares) after the 1-for-1000 reverse common stock
split at $1,250 per share, as if the reverse split and buyback occurred at
October 31, 1998.
The pro forma basic and diluted earnings per share reflect the lower net
income and the lower number of common shares outstanding after the reverse
stock split and buyback of fractional common shares at $1,250 per share.
Exhibit 7 - 1
Exhibit 8
Bowles Fluidics Corporation
PROXY STATEMENT
PROPOSED AMENDMENT TO COMPANY'S ARTICLES OF INCORPORATION,
REVERSE STOCK SPLIT AND PURCHASE OF ANY RESULTING FRACTIONAL SHARES
A special meeting of the stockholders of Bowles Fluidics Corporation (the
"Company") has been called by the Board, to occur at 10:00 a.m. on April 14,
1999, at the Company's executive offices located at 6625 Dobbin Road in
Columbia, Maryland, for the purpose of considering and voting upon a proposed
amendment to the Company's Articles of Incorporation (the "Proposed Amendment")
which would authorize a reverse split of Company's Common Stock, par value $0.10
per share (the "Common Stock") in the ratio of 1,000 shares of "Old Common
Stock" to 1 share of "New Common Stock"; that is, each 1,000 shares of Old
Common Stock would be converted to one share of New Common Stock. As used in
this Proxy Statement, the term "Old Common Stock" refers to the Common Stock
BEFORE the proposed reverse stock split and the term "New Common Stock" refers
to the Common Stock FOLLOWING the proposed reverse stock split. The par value of
the New Common Stock would be adjusted to $100 per share. Any fractional shares
of Common Stock resulting from the reverse stock split will be purchased from
the holders thereof at the rate of $1,250 per whole share of New Common Stock
(the "Purchase Price").
THE BOARD RECOMMENDS TO THE COMPANY'S STOCKHOLDERS APPROVAL OF THE PROPOSED
AMENDMENT.
The Proposed Amendment must be approved by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter. Holders of Common
Stock are entitled to cast one vote for each share of Common Stock. Holders of
the Company's Preferred Stock are entitled to cast four votes for each share of
Preferred Stock.
William Ewing, III, James T. Parkinson, III, and Frederic Ewing, II (the
"Affiliated Stockholders), each of whom is an officer or a Director of the
Company (or both) control in the aggregate sufficient votes to assure approval
of the Proposed Amendment. The Affiliated Stockholders have stated that they
intend to vote in favor of the Proposed Amendment authorizing the reverse stock
split. See "SPECIAL FACTORS - EFFECT UPON CERTAIN AFFILIATES OF THE COMPANY" and
"FAIRNESS OF THE TRANSACTION - NUMBER OF VOTES REQUIRED TO APPROVE PROPOSED
AMENDMENT; NO APPRAISAL RIGHTS; INTENT OF AFFILIATED STOCKHOLDERS TO VOTE IN
FAVOR OF PROPOSED AMENDMENT".
In determining the price to be paid for fractional shares of Common Stock
following the reverse stock split, the Board relied upon the recommendation of a
special committee of independent directors of the Board (the "Special
Committee") and the opinion of Ferris, Baker Watts, Incorporated as to the
fairness of the Purchase Price. This fairness opinion and the factors considered
by the Board are described in greater detail below under the heading "Fairness
of Transaction; Procedures".
The accompanying Proxy is solicited by the management of Company. Any
expense of this solicitation will be borne by the Company.
This Proxy Statement is furnished by mail to the stockholders by the
management of the Company on whose behalf this solicitation of proxies is being
made for use at the Special Meeting of Stockholders to be held on April 14,
1999, at the Company's executive offices. This Proxy Statement and the Proxy are
being mailed on or about March 15, 1999, to all of the Company's stockholders
of record at the close of business on March 8, 1999 (the "Record Date").
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OF ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROXY STATEMENT AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT IMPLY
THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
This Proxy Statement is dated March 15, 1999
TABLE OF CONTENTS
SUMMARY........................................................................................................1
PROPOSED AMENDMENT TO COMPANY'S ARTICLES OF INCORPORATION,.....................................................1
AVAILABLE INFORMATION..........................................................................................2
ADDITIONAL INFORMATION.........................................................................................2
SPECIAL FACTORS...................................................................................................3
PURPOSE OFREVERSE STOCK SPLIT; EFFECT UPON THE COMPANY.........................................................3
ALTERNATE METHODS OF ACHIEVING PURPOSE.........................................................................3
EFFECT UPON CERTAIN AFFILIATES OF THE COMPANY..................................................................4
EFFECT UPON UNAFFILIATED SHAREHOLDERS..........................................................................5
FEDERAL INCOME TAX TREATMENT OF PURCHASE OF FRACTIONAL SHARES..................................................6
FAIRNESS OF THE TRANSACTION; PROCEDURES...........................................................................7
SPECIAL COMMITTEE..............................................................................................7
AFFILIATED STOCKHOLDERS........................................................................................8
OTHER FACTORS CONSIDERED BY THE BOARD..........................................................................8
NUMBER OF VOTES REQUIRED TO APPROVE PROPOSED AMENDMENT; NO APPRAISAL RIGHTS; INTENT OF AFFILIATED STOCKHOLDERS
TO VOTE IN FAVOR OF PROPOSED AMENDMENT........................................................................10
NO FIRM OFFERS TO MERGE OR ACQUIRE COMPANY....................................................................10
FAIRNESS OPINION..............................................................................................10
VALUATION METHODOLOGIES.......................................................................................12
THE COMPANY......................................................................................................14
PAYMENT OF PURCHASE PRICE; EFFECT ON COMPANY..................................................................15
CERTAIN OWNERSHIP INTERESTS IN SECURITIES OF THE COMPANY......................................................15
CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECTTO THE COMPANY'S SECURITIES.............................17
THE COMPANY'S COMMON STOCK.......................................................................................18
TERMS OF THE PROPOSED REVERSE STOCK SPLIT.....................................................................18
SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION............................................................19
COSTS AND EXPENSES OF TRANSACTION.............................................................................19
PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE TRANSACTION........................19
PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED TO PROMOTE REVERSE STOCK SPLIT..............................19
EXCHANGE OF STOCK CERTIFICATES; PAYMENT OF PURCHASE PRICE FOR FRACTIONAL SHARES...............................20
FINANCIAL INFORMATION.........................................................................................20
OTHER BUSINESS...................................................................................................21
SUMMARY
PROPOSED AMENDMENT TO COMPANY'S ARTICLES OF INCORPORATION,
REVERSE STOCK SPLIT AND PURCHASE OF ANY RESULTING FRACTIONAL SHARES
A special meeting of the stockholders of the Company has been called by the
Board, to occur at 10:00 a.m. on April 14, 1999, at the Company's offices
located at 6625 Dobbin Road in Columbia, Maryland, for the purpose of
considering and voting upon a proposed amendment to the Company's Articles of
Incorporation (the "Proposed Amendment") which would authorize a reverse split
of Company's Common Stock, par value $0.10 per share (the "Common Stock") in the
ratio of 1,000 shares of "Old Common Stock" to 1 share of "New Common Stock";
that is, each 1,000 shares of Old Common Stock would be converted to one share
of New Common Stock. As used in this Proxy Statement, the term "Old Common
Stock" refers to the Common Stock BEFORE the proposed reverse stock split and
the term "New Common Stock" refers to the Common Stock FOLLOWING the proposed
reverse stock split. The par value of the New Common Stock would be adjusted to
$100 per share.
The Board recommends to the Company's stockholders approval of the Proposed
Amendment.
Any fractional shares of Common Stock resulting from the reverse stock
split will be purchased from the holders thereof at the rate of $1,250 per whole
share of New Common Stock.
In determining the price to be paid for fractional shares of Common
Stock following the reverse stock split, the Board relied upon the
recommendation of a special committee of independent directors of the Board (the
"Special Committee") and the opinion of Ferris, Baker Watts, Incorporated as to
the fairness of the purchase price. This fairness opinion is discussed in
greater detail below under the heading "Fairness of Transaction; Procedures" and
a copy of the opinion is attached hereto as Exhibit 1.
THE PROPOSED REVERSE STOCK SPLIT DOES NOT INCLUDE THE COMPANY'S PREFERRED
STOCK. However, following the reverse stock split, the right to convert one
share of Preferred Stock into four shares of Common Stock will be adjusted to
take the reverse stock split into account such that each share of Preferred
Stock may be converted into 1/250th share of New Common Stock; similarly,
holders of Preferred Stock will have 1/250th vote for each share of Preferred
Stock.
The Proxy is revocable upon your written notice to the Secretary of the
Company at any time prior to the exercise of the authority granted thereby, and
it shall be suspended if you are present at the meeting and elect to vote in
person.
On the Record Date for voting at the meeting, the Company had outstanding
12,685,011 shares of Common Stock, par value $0.10, and 933,080 shares of voting
8% Convertible Preferred Stock, par value $1.00. Each share of Preferred Stock
is convertible into four shares of Common Stock at any time by the Preferred
Stockholder and at the option of the Company ten years after the date of
original issue if the dividends are current. The Company also had outstanding on
the Record Date no incentive stock options. The Company has never paid a
dividend on the Common Stock. The Company paid a dividend of $0.08 per share on
the Preferred Stock under its indenture for fiscal years 1986, 1987, 1988, 1989,
and 1992. A Preferred Stock dividend related to the Company's earnings for
fiscal years 1989 and 1992, aggregating $94,640, was paid on March 19, 1993, and
dividends related to earnings in 1993, 1994, 1995, 1996 and 1997 in the amounts
of $74,646 were paid to the holders of Preferred Stock on December 15 in each of
1993, 1994, and 1995, January 24, 1997, January 15, 1998, and January 15, 1999.
The holders of Common Stock of record at the close of business on the
Record Date fixed by the Board of Directors of the Company (the "Board")
pursuant to the By-Laws will be entitled to one vote per share, for a total of
12,685,011 votes, and the holders of the Preferred Stock of record on the same
day will be entitled to four votes per share, or 3,732,320 votes, for an
aggregate of
1
16,417,331 votes on all business of the meeting, including adoption of the
proposed amendment to the Company's Articles of Incorporation. The presence in
person or by proxy of the stockholders entitled to cast a majority of all of the
votes entitled to be cast at the meeting shall constitute a quorum for the
transaction of business at the meeting. The adoption of the Proposed Amendment
requires a two-thirds vote of all votes entitled to be cast. Any failure to cast
a vote or abstention will be counted as a negative vote.
William Ewing, III, James T. Parkinson, III, and Frederic Ewing, II (the
"Affiliated Stockholders), each of whom is an officer or a Director of the
Company (or both) control in the aggregate sufficient votes to assure approval
of the Proposed Amendment. The Affiliated Stockholders have stated that they
intend to vote in favor of the Proposed Amendment authorizing the reverse stock
split. Accordingly, it is expected that the Proposed Amendment will receive the
necessary approval from stockholders entitled to vote on the question.
The transaction is NOT structured so that approval of at least a majority
of unaffiliated stockholders is required. Section 3-602 of the Corporations and
Associations Article of the Annotated Code of Maryland requires that certain
transactions involving reclassification of securities (including reverse stock
splits) must be approved by two-thirds of the votes entitled to be cast by
unaffiliated stockholders. The Company is exempt from such provisions of law
because it had an existing interested stockholder on July 1, 1983, and the
Company has not elected to be subject to the requirements of said Section 3-602.
The Company has not voluntarily structured the transaction to require the
approval of at least a majority of unaffiliated stockholders because it is not
required by law to do so and believes that the Purchase Price is fair to
unaffiliated stockholders.
ALL STOCKHOLDERS SHOULD CAREFULLY READ THE ENTIRE PROXY STATEMENT FOR A
MORE COMPLETE DESCRIPTION OF THE PROPOSED AMENDMENT, THE REVERSE STOCK SPLIT,
THE PURCHASE OF FRACTIONAL SHARES OF COMMON STOCK RESULTING FROM THE REVERSE
STOCK SPLIT AND EFFECTS OF SUCH PURCHASE. THIS PROXY STATEMENT ALSO CONTAINS A
DESCRIPTION OF THE FAIRNESS OPINION OF FERRIS, BAKER WATTS, INCORPORATED AND A
COPY OF SUCH OPINION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files, reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. Copies of such reports and other information
may be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, DC 20549, on payment of prescribed charges. In
addition, such reports, proxy statements and other information may be
electronically accessed at the Commission's site on the World Wide Web located
at http://www.sec.gov.
ADDITIONAL INFORMATION
The Company and the Affiliated Stockholders have prepared and filed with
the Securities and Exchange Commission SEC Schedule 13E-3 in connection with the
proposed reverse stock split, which sets forth certain information about the
Company and the proposed reverse stock split. A copy of Schedule 13E-3 and other
periodic reports filed with the SEC are available from: Eleanor M. Kupris,
Secretary of the Company or may be obtained through the Securities and Exchange
Commission's website at www.sec.gov. Additional questions regarding the proposed
amendment to the Company's Articles of Incorporation which would authorize the
reverse stock split and purchase of fractional shares following the reverse
stock split may be directed to Counsel to the
2
Company, Ronald S. Schimel, Esquire, Miles & Stockbridge P.C., 9881 Broken Land
Parkway, Columbia, MD 21044, telephone: 410-381-6000.
SPECIAL FACTORS
PURPOSE OF REVERSE STOCK SPLIT; EFFECT UPON THE COMPANY.
The purpose of the reverse stock split and purchase of the resulting
fractional shares is to reduce the number of record stockholders to fewer than
300, thereby allowing the Company to suspend its obligation to file periodic
reports under Section 15(d) of the Securities and Exchange Act of 1934, such as
SEC Forms 10-K, 10-Q and 8-K. The Board believes that such action is in the best
interests of the Company because such reports allow the Company's limited number
of customers and competitors who are concentrated in a single industry to obtain
information concerning the Company's profit margins, patent positions and
operations which, in the Company's opinion, has or may have an adverse effect on
the Company's performance. In addition, the out-of-pocket and internal costs to
the Company associated with the preparation and filing of these periodic
reports, when compared to the limited number of stockholders is, in the
Company's opinion, unwarranted.
The Company incurs costs related to its status as a public reporting
corporation under the federal securities laws, including indirect costs as a
result of, among other things, the Company personnel, including management,
expending time to prepare and review various filings, furnish information to
stockholders, and attending to other related stockholders matters. Termination
of the Company's obligation to file periodic reports will eliminate the costs
and expenses of such federal securities filings and reduce the amount of time
and attention devoted by management to such reports and activities. The Company
estimates that, upon termination of its obligation to file periodic reports with
the Securities and Exchange Commission, it will achieve savings of approximately
$65,000 to $75,000 annually.
The Company determined to achieve its purpose through a reverse stock split
because it believes that this structure is the simplest and most economical
means of reducing the number of holders of the Company's Common Stock below 300,
thereby achieving its goal of terminating its obligation to file periodic
reports with the Securities and Exchange Commission. In addition, the Company
believes that the reverse stock split and purchase of fractional shares of the
New Common Stock will provide an easy and cost effective way for shareholders
holding less than one share of New Common Stock (1,000 shares of Old Common
Stock) to dispose of such shares at a fair price and without incurring brokerage
commissions and other transaction costs. The Company believes that implementing
the reverse stock split at this time so that it can terminate its obligation to
file periodic reports with the Securities and Exchange Commission will improve
its future performance.
Upon consummation of the reverse stock split, the Company anticipates that
the number of record stockholders of the Company will be reduced from
approximately 430 (as of October 15, 1998) to less than 200 and the Company will
achieve the purposes of the reverse stock split described above.
ALTERNATE METHODS OF ACHIEVING PURPOSE.
The Company considered two alternate means to accomplish its objective of
suspending its obligation to file such periodic reports.
TENDER OFFER. The Board considered making a tender offer for shares of
Common Stock in order to reduce the number of record holders of Common
Stock below 300. This alternative was viewed as undependable, however,
because it was not certain that the Company would sufficiently reduce the
number of its record stockholders to achieve its objective of less than 300
shareholders. The costs which might be incurred in connection with such a
tender offer also
3
appeared to be considerably higher than the costs expected to be incurred
in connection with the reverse stock split.
MERGER. The Board also considered the possibility of a "cash out"
merger. However, the anticipated costs of such a merger (including cost of
obtaining the requisite shareholder approvals and purchase of Common Stock)
were also expected to be higher than the costs expected to be incurred in
connection with the reverse stock split.
EFFECT UPON CERTAIN AFFILIATES OF THE COMPANY.
Set forth in the following table are the number of shares of Common Stock
currently owned or controlled by certain officers or directors of the Company
(the "Affiliated Stockholders"), the percentage of total shares outstanding, the
number of shares expected to be owned, and the percentage of total shares
expected to be outstanding following the proposed reverse stock split.
- ---------------------------------- ---------------------------------- ----------------------------------
SHARES CURRENTLY OWNED SHARES OWNED POST SPLIT
- ---------------------------------- ---------------------------------- ----------------------------------
NAME AND TITLE NUMBER % OF TOTAL NUMBER % OF TOTAL
SHARES SHARES
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
William Ewing, III, Chairman of 437,329 (1) 3.4 436 (1) 3.5
the Board of Directors, 8,697,829 (2) 68.6 8,680 (2) 69.4
Controlling Person
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
James T, Parkinson, III, 1,176,849 (3) 9.3 1,175 (3) 9.4
Director, Controlling Person
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
Frederic Ewing, II, Director, 390,827 (4) 3.1 390 (4) 3.1
Controlling Person 344,540 (5) 2.7 344 (5) 2.7
- ---------------------------------- ---------------- ----------------- ---------------- -----------------
Notes:
1. For own account, including 53,320 shares held by Mr. Ewing's
children for which he holds a power of attorney.
2. Owned by trusts of which Mr. Ewing is a trustee or owned by other
individuals for which he holds their powers of attorney,
excluding, however, shares owned by Frederic Ewing, II, which are
included under his name.
3. As trustee of trusts established under the will of Arthur Choate.
Mr. Parkinson disclaims any beneficial ownership of such shares.
4. For own account. Mr. William Ewing holds powers of attorney with
respect to these shares.
5. As trustee for two trusts.
Set forth in the following table are the net book value and net earnings
per share attributable to the Affiliated Stockholders, in terms of both dollar
amounts and percentages, before and after the proposed stock split.
4
- ----------------------------- -------------------- --------------------- -------------------- --------------------
BOOK VALUE BOOK VALUE BASIC EARNINGS BASIC EARNINGS
PRE-SPLIT (1) POST-SPLIT (1) PRE-SPLIT (2) POST-SPLIT (2)
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
NAME AND TITLE AMOUNT % OF AMOUNT % OF AMOUNT % OF AMOUNT % OF
TOTAL TOTAL TOTAL TOTAL
AMOUNT AMOUNT AMOUNT AMOUNT
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
William Ewing, III, $ 291,155 3.4 $ 286,805 3.5 $ 29,622 3.5 $ 29,700 3.5
Chairman of the Board of
Directors, Controlling 5,790,643 68.6 5,709,791 69.4 589,144 68.7 591,282 69.5
Person
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
James T, Parkinson, III, 783,496 9.3 772,927 9.4 79,713 9.3 80,041 9.4
Director, Controlling Person
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
Frederic Ewing, II, 260,196 3.1 256,546 3.1 26,473 3.1 26,567 3.1
Director, Controlling Person
229,380 2.7 226,287 2.7 23,337 2.7 23,434 2.8
- ----------------------------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
Notes:
1. This amount represents the numbers of shares owned multiplied by the
book value per share as of October 31, 1998, the end of the most recent
fiscal year of the Company. Such amounts represent only the
stockholder's pro rata interest in the Company's book value and are not
payable to the stockholders of the Company in the ordinary course of
business.
2. This amount represents the numbers of shares owned multiplied by the
basic earnings per share of the Company for the fiscal year ended
October 31, 1998. Such amounts represent only the stockholder's pro rata
interest (if any) in the Company's net earnings and are not payable to
the stockholders of the Company in the ordinary course of business,
other than as dividends. The Company has never paid any dividend on its
Common Stock.
The Affiliated Stockholders are expected to continue in their present
positions in the Company following the reverse stock split. None of these
persons will receive any consideration in connection with the reverse stock
split other than amounts received as a result of the purchase by the Company of
fractional shares of New Common Stock.
EFFECT UPON UNAFFILIATED SHAREHOLDERS.
Upon consummation of the reverse stock split and termination of the
Company's obligation to file periodic reports under the federal securities laws,
information now available to stockholders in the annual, quarterly and other
reports required to be filed by the Company with the Securities and Exchange
Commission would not be available to the Company's stockholders as a matter of
right. Under Maryland law, the Company is required to prepare annually and
submit to the annual meeting of stockholders a full and complete statement of
affairs of the Company, including a balance sheet and a financial statement of
operations for the preceding fiscal year. Such statement is also required by law
to be available to all stockholders of the Company for inspection and copying.
All owners of fractional shares of New Common Stock following the reverse
stock split will receive cash in lieu of such fractional shares at the rate of
$1,250 for each whole share of New Common Stock, pro rated as to the fractional
share held by each such owner. The Company believes that the purchase price
represents a premium above the average price per share of the
5
Company's Common Stock which could be received if such shares were sold on the
open market. Further, stockholders receiving cash in lieu of fractional shares
of New Common Stock will not have to pay any brokerage fees or commissions in
connection with such transaction.
Stockholders owning only fractional shares of New Common Stock following
the reverse stock split will receive cash in lieu of such fractional shares,
will cease to have any ownership interest in the Company, and will cease to
participate in future earnings and growth, if any, of the Company.
The Company believes that stockholders of the Company holding fractional
shares of New Common Stock are not entitled to appraisal rights under Maryland
law. However, in redeeming fractional shares, Maryland law provides that a
corporation may purchase fractional shares of its stock for "fair value".
Maryland courts have suggested that under certain circumstances shareholders are
not exclusively limited to the statutory appraisal rights granted stockholders
under Maryland law and that equitable remedies may be available to stockholders
in cases involving no legitimate business purpose, ULTRA VIRES actions, failure
to follow applicable procedures, fraud or extreme violation of fiduciary duties.
FEDERAL INCOME TAX TREATMENT OF PURCHASE OF FRACTIONAL SHARES.
Upon consummation of the reverse stock split, each 1,000 shares of Old
Common Stock issued and outstanding immediately prior to the effective time of
such split will be converted into one share of New Common Stock and all
resulting fractional shares of New Common Stock will be purchased by the Company
at the price of $1,250 per share. The following description of the federal
income tax consequences of the reverse stock split is included solely for the
general information of the holders of the Company's Common Stock. The federal
income tax consequences for any particular stockholder may be affected by
matters not discussed herein, and each stockholder should consult his or her
personal tax advisor in determining the federal, state and local income tax
consequences of the reverse stock split and purchase of fractional shares.
There will be no direct tax consequences for those stockholders receiving
New Common Stock upon the consummation of the reverse stock split, except for
reallocation to the stockholders' per share basis.
The purchase of fractional shares of New Common Stock by the Company will
be a taxable transaction for federal income tax purposes. Each holder of
fractional shares of New Common Stock purchased by the Company subsequent to the
reverse stock split will recognize gain or loss upon the purchase of that
stockholder's fractional share of New Common Stock equal to the difference, if
any, between (i) the amount of the cash payment received for any fractional
shares of New Common Stock and (ii) that stockholder's tax basis in such
fractional share of New Common Stock so long as the New Common Stock was held as
a capital asset of the stockholder. Any subsequent gain or loss resulting from
the disposition of New Common Stock should be treated as a capital gain or loss
transaction. As indicated previously, holders of New Common Stock are urged to
consult their personal tax advisors as to the tax consequences of the reverse
stock split and purchase of fractional shares under federal, state, local and
any other applicable laws.
The cash payments due to the holders of fractional shares of New Common
Stock (other than certain exempt entities and persons) will be subject to a
backup withholding tax at the rate of 31% under federal income tax law unless
certain requirements are met. Generally, the Company or its paying agent will be
required to deduct and withhold the tax on cash payments due at the effective
time of the purchase of fractional shares of New Common Stock subsequent to the
reverse stock split if (i) a stockholder fails to furnish a taxpayer
identification number ("TIN", the TIN of an individual stockholder is his or her
Social Security number) to the Company or its paying agent or fails to certify
under penalty of perjury that such TIN is correct; (ii) the Internal Revenue
Service ("IRS") notifies the Company or its paying agent that the TIN
furnished by the stockholder is incorrect; (iii) the IRS notifies the paying
agent that the stockholder has failed to report interest,
6
dividends, or original issue discount in the past; or (iv) there has been a
failure by the stockholder to certify under penalty of perjury that such
stockholder is not subject to the backup withholding tax. Any amounts withheld
by the Company or its paying agent in collecting the backup withholding tax
will reduce the federal income tax liability of the stockholders from whom such
tax was withheld.
FAIRNESS OF THE TRANSACTION; PROCEDURES
The Company and the Board of Directors believe that the proposed reverse
stock split and subsequent purchase of fractional shares is substantively and
procedurally fair to unaffiliated stockholders of the Company. The Board by
unanimous vote on December 8, 1998, adopted a resolution declaring the terms and
conditions of the reverse stock split and purchase of fractional shares
advisable and directing that the Proposed Amendment be submitted to shareholders
of the Company for consideration. The Board unanimously approved the Proposed
Amendment as advisable, which vote included all of the Directors who were not
employees of the Company.
SPECIAL COMMITTEE.
The Board on March 12, 1998, established a Special Committee comprised of
Directors of the Company who are not controlling persons of the Company to act
solely on behalf of the unaffiliated stockholders of the Company for purposes of
reviewing the desirability of undertaking the "going private" transaction which
will result from the reverse stock split. The Special Committee consisted of the
following persons, none of whom controls the Company: David C. Dressler, John E.
Searle, Jr., and Neil Ruddock. For reasons unrelated to this transaction, Mr.
Searle resigned from the Board effective December 8, 1998, following the meeting
of the Board on that date. Mr. Ruddock joined the Special Committee on July 14,
1998, when he also joined the Board.
The Special Committee was charged with the responsibility of recommending
to the Board a fair price to pay for the fractional shares resulting from the
reverse stock split of the Common Stock. The Special Committee solicited
proposals from three investment bankers, interviewed two and unanimously agreed
to retain the services of Ferris, Baker Watts. The Special Committee recommended
that the Board retain the investment banking firm of Ferris, Baker Watts,
Incorporated ("Ferris, Baker Watts"), and by letter agreement dated June 23,
1998 such firm was retained, to act as its financial advisor and to render its
opinion to the Board as to the fairness of the fractional share purchase price,
from a financial point of view, to the shareholders of the Company following the
reverse stock split (herein referred to as the "Purchase Price").
The Special Committee met on four occasions with a representative of
Ferris, Baker Watts during which discussions occurred and information shared
concerning the methodology of companies having business and markets similar to
those of the Company and the application of such methodologies to the Company's
financial and market position and future prospects. Based upon these
deliberations, the Special Committee believes that the proposed reverse stock
split and subsequent purchase of fractional shares is substantively and
procedurally fair to unaffiliated stockholders of the Company and unanimously
recommended to the Board that the Purchase Price of $1,250 per share of New
Common Stock resulting from a reverse stock split would be a fair price to pay.
Ferris, Baker Watts concurred in this recommendation.
The decision to retain Ferris, Baker Watts to prepare a report concerning
the fairness of the Purchase Price was initially made by the Special Committee
and affirmed by the Board on June 23, 1998. The Board retained the services of
Ferris, Baker Watts to perform a valuation of the Company's Common Stock and to
provide its opinion as to the fairness of the Purchase Price, from a financial
point of view, to be paid to the shareholders of the Company following the
reverse stock split. The Special Committee requested Ferris,
7
Baker Watts to undertake the proposed valuation because of its familiarity with
companies such as the Company and its experience with companies having a market
capitalization below $100,000,000.
Ferris, Baker Watts is a Mid-Atlantic based investment bank whose corporate
finance activities are focused on small to middle market companies. Ferris,
Baker Watts provides a full range of investment banking services to its clients,
ranging from merger and acquisition services, public offerings, private
placements and advisory services.
Other than the engagement of Ferris, Baker Watts to provide the services
described above, no material relationships existed between Ferris, Baker Watts,
its affiliates and/or unaffiliated representative, and the Company or its
affiliates during the past two years. No such material relationships are
contemplated for the future. The fee for Ferris, Baker Watts' services is
$65,000.
Ferris, Baker Watts provided the Special Committee and the Board with a
range of values for the Common Stock and a recommendation to pay a price at the
top of the range or as a premium to the top end of the range. The Special
Committee unanimously recommended to the Board a price of $1,250 per share of
New Common Stock and the Board unanimously adopted such recommendation.
Ferris, Baker Watts delivered its written opinion on December 8, 1998, to
the Special Committee and the Board to the effect that, as of such date, the
Purchase Price of $1,250 per share of New Common Stock to be received by the
shareholders of the Company as a result of the reverse stock split and purchase
of resulting fractional shares was fair, from a financial point of view. No
restrictions were imposed by the Special Committee or the Board upon Ferris,
Baker Watts with respect to the investigations made or procedures followed by
Ferris, Baker Watts in rendering its opinions.
On February 26, 1999, Ferris, Baker Watts delivered to the Board of
Directors a supplemental written opinion confirming its opinion that, as of such
date, the Purchase Price to be received by the shareholders of the Company as a
result of the reverse stock split and purchase of resulting fractional shares
was fair, from a financial point of view. This supplemental opinion takes into
account events occurring after December 8, 1998, including the audited financial
statements of the Company for the fiscal year ended October 31, 1998.
The full text of Ferris, Baker Watts' fairness opinion, which is summarized
below, sets forth certain assumptions made, certain procedures followed, and
certain matters considered by Ferris, Baker Watts, and is attached hereto as
Exhibit 1, together with a copy of its supplemental opinion. Copies of the
reports provided by Ferris, Baker Watts to the Special Committee and the
Board of Directors of the Company at the time the Board determined to proceed
with the Proposed Amendment on December 8, 1998, are attached to the Company's
Schedule 13E-3 filed with the Securities and Exchange Commission.
AFFILIATED STOCKHOLDERS.
The Affiliated Stockholders believe that the proposed reverse stock split
and subsequent purchase of fractional shares are substantively and procedurally
fair to unaffiliated stockholders of the Company and concur in the
recommendation of the Board of Directors that stockholders of the Company
approve the proposed amendment to the Articles of Incorporation of the Company
to authorize the reverse stock split.
OTHER FACTORS CONSIDERED BY THE BOARD.
In reaching their determination that the proposed reverse stock split and
subsequent purchase of fractional shares are substantively and procedurally fair
to unaffiliated stockholders of the Company, the Special Committee and the Board
of Directors considered the following factors:
8
> The written opinion of Ferris, Baker Watts delivered to the
Special Committee and the Board of Directors on December 8, 1998,
to the effect that, based upon and subject to certain factors and
assumptions stated therein, as of such date, the Purchase Price to
be received by the shareholders of the Company as a result of the
reverse stock split and purchase of resulting fractional shares
was fair, from a financial point of view. The full text of Ferris,
Baker Watts' fairness opinion is attached hereto as Exhibit 1.
> The relationship of the Purchase Price to the current market
price of the Company's Common Stock, as of December 4, 1998,
which was at a bid price of $0.75 per share and an asked price of
$1.0625 per share.
> The relationship of the Purchase Price to the historical market
prices of the Company's Common Stock, as described under Item 1(c)
of this Schedule, taking into account that at certain times during
the previous two full fiscal years of the Company the price of
the Company's Common Stock exceeded the Purchase Price.
> The book value of the Company's Common Stock, which was $0.60
per share as of October 25, 1997 (the end of the Company's 1997
fiscal year) and $0.66 per share as of July 25, 1998 (the end of
the third fiscal quarter of the Company's 1998 fiscal year).
> The relationship of the Purchase Price to the intrinsic
value of the Company based upon a discounted cash flow analysis
prepared by Ferris, Baker Watts in its reports to the Board of
Directors.
> The relationship of the Purchase Price to the value of the
Company based upon a comparison to the value of publicly traded
comparable companies as analyzed by Ferris, Baker Watts in its
reports to the Board of Directors.
> The advantages of and benefits to the Company of not being
required to file periodic reports with the Securities and Exchange
Commission pursuant to ss.15(d) of the Securities and Exchange Act
of 1934, the direct and indirect cost savings to be realized by
the Company from not having to file such periodic reports, and the
benefits to be derived by the remaining Company stockholders from
the transactions described in this Schedule.
> The Company's financial projections as analyzed by Ferris, Baker
Watts which, in the view of the Special Committee and the Board of
Directors, support their determination that the Purchase Price is
fair to unaffiliated stockholders,
> The purchase of fractional shares of New Common Stock at the
Purchase Price will enable owners of less than 1,000 shares of Old
Common Stock to sell such shares and receive a premium over the
highest price derived after applying the foregoing valuation
analysis for such shares, without paying brokerage fees and
commissions and other expenses of selling such shares.
The Board of Directors did not consider the liquidation value of the
Company in making its decision to recommend the reverse stock split, since the
value of the Company as a going concern far exceeded any liquidation value and
provided the best opportunity to maximize the Purchase Price.
In reaching its determination as to the fairness of the Purchase Price
and in view of the variety of factors considered in determining the fairness of
the Purchase Price, the Special Committee and the Board of Directors of the
Company did not assign any relative or specific weights to the various
factors considered by them.
9
In reaching their conclusion that the proposed reverse stock split and
subsequent purchase of fractional shares are substantively and procedurally fair
to unaffiliated stockholders of the Company, the Affiliated Stockholders adopted
the analysis of the factors described above by the Board of Directors, did not
assign any relative or specific weights to the foregoing factors, and did not
obtain any other analysis of the fairness of the transaction.
NUMBER OF VOTES REQUIRED TO APPROVE PROPOSED AMENDMENT; NO APPRAISAL RIGHTS;
INTENT OF AFFILIATED STOCKHOLDERS TO VOTE IN FAVOR OF PROPOSED AMENDMENT.
Any proposed amendment to the Articles of Incorporation of the Company must
be approved by the stockholders of the Company by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter. Holders of Common
Stock are entitled to cast one vote for each share of Common Stock. Holders of
the Company's Preferred Stock are entitled to cast four votes for each share of
Preferred Stock. Any failure to cast a vote or abstention will be counted as a
negative vote.
The transaction is NOT structured so that approval of at least a majority
of unaffiliated stockholders is required. Section 3-602 of the Corporations and
Associations Article of the Annotated Code of Maryland requires that certain
transactions involving reclassification of securities (including reverse stock
splits) must be approved by two-thirds of the votes entitled to be cast by
unaffiliated stockholders. The Company is exempt from such provisions of law
because it had an existing interested stockholder on July 1, 1983, and the
Company has not elected to be subject to the requirements of said Section 3-602.
The Company has not voluntarily structured the transaction to require the
approval of at least a majority of unaffiliated stockholders because it is not
required by law to do so and believes that the Purchase Price is fair to
unaffiliated stockholders.
The Affiliated Stockholders have stated that they intend to vote in
favor of the Proposed Amendment authorizing the reverse stock split. Such
persons control sufficient votes to assure approval of the proposed amendment.
Accordingly, it is expected that the Proposed Amendment will receive the
necessary approval from stockholders entitled to vote on the question.
NO FIRM OFFERS TO MERGE OR ACQUIRE COMPANY.
During the preceding 18 months, the Company has not received any firm
offers from any unaffiliated person for (a) the merger or consolidation of the
Company with or into any person, (b) the sale or other transfer of all or any
substantial part of the assets of the Company, or (c) securities of the Company
which would enable the holder thereof to exercise control of the Company.
There have been no contacts or negotiations which have been entered into or
which have occurred since the commencement of the Company's second full fiscal
year preceding the date of this Proxy Statement (i) between any affiliates
of the Company; or (ii) between the Company or any of its affiliates and any
person who is not affiliated with the Company and who would have a direct
interest in such matters.
FAIRNESS OPINION.
On December 8, 1998, Ferris, Baker Watts delivered an opinion (the
"Fairness Opinion") to the Board which concluded that based upon and subject to
the considerations set forth therein, as of such date the consideration to be
received by the shareholders of the Company as a result of the reverse stock
split and purchase of resulting fractional shares was fair, from a financial
point of view. The Fairness Opinion was based upon economic, market and other
conditions in effect as of its date. No limitations were imposed by the Board
upon Ferris, Baker Watts with respect to its investigation or procedures
followed in rendering the Fairness Opinion.
10
On February 26, 1999, Ferris, Baker Watts delivered to the Board of Directors a
supplemental written opinion confirming its Fairness Opinion and stating that,
as of such date, the Purchase Price to be received by the shareholders of the
Company as a result of the reverse stock split and purchase of resulting
fractional shares was fair, from a financial point of view. This supplemental
opinion takes into account events occurring after December 8, 1998, including
the audited financial statements of the Company for the fiscal year ended
October 31, 1998.
The Fairness Opinion, which sets forth assumptions made, material reviewed,
matters considered, and the limits of the review, is attached as Exhibit 1,
together with a copy of the supplemental opinion.
The following is a summary of the Fairness Opinion. Stockholders of the
Company are urged to read the Fairness Opinion in its entirety. Ferris, Baker
Watts has consented to the inclusion of its opinion in this Proxy Statement
provided to shareholders of the Company and has reviewed the following summary.
Certain projections provided to Ferris, Baker Watts and described below
constitute forward looking statements and involve numerous risks and
uncertainties. The Company's actual results may differ materially from the
results anticipated from the projections discussed herein as a result of various
factors, including, but not limited to, the effect of changing economic or
business conditions, competitive initiatives and pricing pressures, shifts in
market demand, the performance and needs of industries served by the Company,
actual future costs of operating expenses, increases in labor costs, and
management retention. There can be no assurance that the Company will achieve
the results anticipated from the projections discussed herein.
In connection with the Fairness Opinion, Ferris, Baker Watts reviewed,
among other things:
o the proposed reverse stock split;
o annual reports on form 10-K for the fiscal years 1993 through
1997;
o quarterly reports on form 10-Q for the first three quarters of
the fiscal years 1993 through 1998; and
o projected financial results for fiscal years 1998 through 2003
provided by management of the Company and approved by the
Board.
Ferris, Baker Watts also held discussions with management of the Company
regarding its past and current business operations, financial condition and
future prospects. Ferris, Baker Watts reviewed the reported price and trading
activity of the Company's Common Stock, compared certain financial and stock
market information concerning the Company with similar information for other
parts manufacturers supplying the automotive industry, the securities of which
are publicly traded, and performed other studies and analyses which Ferris,
Baker Watts deemed appropriate.
Ferris, Baker Watts assumed and relied upon the accuracy and completeness
of all financial and other information reviewed for the purposes of the Fairness
Opinion, whether publicly available or provided to Ferris, Baker Watts by the
Company and did not independently verify any such information or make an
independent evaluation or appraisal of the assets or liabilities of the Company.
The preparation of a fairness opinion involves determinations as to the
appropriate and relevant methods of financial analysis and, therefore, reference
should be made to the Fairness Opinion in its entirety and not to a summary
description. In performing its analysis, Ferris, Baker Watts made numerous
assumptions with respect to industry performance, business and economic
condition and
11
other matters, many of which are beyond the control of the Company. The analyses
performed by Ferris, Baker Watts are not necessarily indicative of future
results and do not purport to be appraisals or to reflect prices at which
businesses may actually be sold. The following paragraphs summarize all material
analyses performed by Ferris, Baker Watts.
VALUATION METHODOLOGIES.
Ferris, Baker Watts considered several methods to evaluate the value of the
Company, including: (i) the discounted future free cash flow of the Company, and
(ii) the earnings and book value to multiple comparisons to publicly traded
companies engaged in parts manufacturing supplying the automotive industry.
Ferris, Baker Watts also considered the market value of the Company's shares of
Common Stock as well as its trading history.
The discounted future free cash flow analysis ascribes value only to the
cash flows that can ultimately be taken out of the business. These free cash
flows are then discounted to the present at the firm's weighted average cost of
capital. The weighted average cost of capital can be described as the average
price a company must pay to attract both debt and equity to properly capitalize
its growth. These series of cash flows, when discounted to the present and after
subtracting claims by debt holders and others, represent the economic value of a
company to its shareholders. This method of valuation depends upon the accuracy
of the financial projections. Ferris, Baker Watts reviewed and analyzed 5 year
projections provided by the Company and approved by the Company's Board of
Directors. These projections showed the following: (i) revenues growing to $39.6
million by year 2003, representing a 13.9% compound average annual growth rate,
(ii) gross profit margins ranging between 22.4% and 26.6%, and (iii) operating
profit margins at 3.7% for fiscal year 1999, 8.2% for fiscal year 2000, and in
excess of 11% after fiscal year 2000. Ferris, Baker Watts assumed that such
projections were reasonably prepared by the management of the Company on bases
reflecting the best currently available estimates and judgments as to the
Company's expected future financial performance. The table below
summarizes the projections provided by the Company.
- ------------------------------------ ------------ --------------------------------------------------------
Data in thousands Expected Projected
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
INCOME STATEMENT 1998 1999 2000 2001 2002 2003
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Revenues $ 20,715 $ 21,345 $ 24,998 $ 30,505 $ 36,152 $ 39,648
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Gross profit 5,626 4,778 6,368 8,117 9,629 10,186
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Operating profit 2,021 796 2,056 3,366 4,309 4,496
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
After tax income 1,359 618 1,436 2,306 2,977 3,221
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
BALANCE SHEET - ASSETS
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Accounts receivable 3,314 3,415 4,000 4,881 5,784 6,344
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Inventory 2,635 2,835 3,124 3,774 4,440 5,018
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Total current assets 8,491 8,283 9,348 11,072 13,905 17,214
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Net property and equipment 4,313 5,103 5,883 7,119 7,940 8,245
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Total assets 12,904 13,486 15,331 18,291 21,945 25,559
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
BALANCE SHEET - LIABILITIES AND NET WORTH
- ------------------------------------------------- ---------- ----------- ---------- ---------- -----------
Accounts payable 1,346 1,409 1,675 2,074 2,494 2,775
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Accrued expenses 1,243 1,281 1,500 1,830 2,169 2,379
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Total current liabilities 2,638 2,712 3,226 3,986 4,768 5,266
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Net worth 9,802 10,345 11,706 13,936 16,838 19,984
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Total liabilities and net worth 12,904 13,486 15,331 18,291 21,945 25,559
- ------------------------------------ ------------ ---------- ----------- ---------- ---------- -----------
Applying the discounted future free cash flow analysis to these projections
yields a per share value on a pre-split basis of $1.04 (fully diluted). Thus,
the repurchase price
12
of $1.25 per share of Old Common Stock represents a premium of 20.2% over the
per share value determined from the discounted future free cash flow analysis on
a fully diluted basis.
Ferris, Baker Watts also considered the earnings and book multiple
comparisons of publicly traded comparable companies. Ferris, Baker Watts
selected 10 companies which design and manufacture parts for the automotive
industry having market capitalization below $250 million. The pertinent
performance measures are as follows:
o The Net Market Capital to Earnings Before Interest and Taxes (EBIT)
ratio measures the enterprise value to the net operating assets as a
multiple of the company's earnings before interest and taxes. By
focusing on EBIT instead of net income, it is possible to decrease
distortions among comparable companies that are due to different levels
of debt in capital structures, extraordinary items, varying tax rates,
and other line items that occur below the operating profit line. EBIT
is calculated to represent the pre-tax net income that would have
resulted had the company been financed on a total equity basis.
o The price to earnings ("P/E") ratio is a commonly utilized valuation
ratio. It is also known as the earnings multiple and provides investors
with an indication of how much they are paying for a company's earnings
power and the accounting income available to the common equity holder.
However, net income is often a poor approximation of actual cash flow
ultimately available to common shareholders for reinvestment or for the
payment of dividends. Accounting differences may make net income
numbers less comparable.
o The price to forward earnings ratio is similar to the P/E ratio
discussed above, the difference being that it is based upon
expectations for future earnings, not historical earnings.
o The Market Value to Revenues (Price/Revenue) ratio compares what the
market is actually willing to pay for the revenue stream of a company
relative to the actual revenue stream. This ratio is far less
consistent among comparable companies than ratios that measure value in
relation to some measure of earnings.
o The Market Value of Equity to Book Value of Equity (Price/Book) ratio
compares what the market is actually willing to pay for the assets of a
company to what the value of the company's securities would be worth
relative to the historical costs of its assets and earnings history.
This ratio tends to be far less consistent among comparable companies
than ratios that measure value in relation to some measure of earnings.
It is important to note that all of the companies selected for comparison
with the Company were larger in terms of total revenues and market
capitalization and the majority of the companies had substantially larger
average daily trading volumes when compared to the Company. Shares of the
Company's Common Stock are publicly traded but trade infrequently. Approximately
90% of the shares of the Company's Common Stock are controlled by two families
and employees of the Company. This narrow ownership of the Company's Common
Stock makes it difficult for a shareholder to realize liquidity for their
shares. Therefore, Ferris, Baker Watts applied a 15% discount to the implied
equity values derived from the comparable company analysis. The table below
summarizes the implied equity results from the comparable company analysis.
PER SHARE VALUE
---------------
METHOD (FULLY DILUTED)
------ ---------------
Net market Capital/EBIT 0.94
P/E 0.75
=== ====
13
Fwd P/E '98 0.85
Fwd P/E '99 (Estimated) 0.35
Market Value to Book Value 0.78
Market Value to Revenues 0.58
The repurchase price of $1.25 per share of Old Common Stock is at a premium
to all of the implied per share values derived from the comparable company
analysis.
Ferris, Baker Watts also examined the trading history of the Company. The
purchase price represented a 17.6% premium to the Ask price immediately prior to
the announcement of the transaction.
In determining whether the transaction was fair from a financial point of
view, Ferris, Baker Watts relied most heavily upon the discounted cash flow
method. The conclusion reached from the discounted cash flow method is supported
by the comparable company analysis.
From these analyses, Ferris, Baker Watts determined that (i) the
consideration to be received by the shareholders for the fractional shares of
New Common Stock was fair from a financial point of view, and (ii) the goal of
the reverse stock split could be accomplished at minimal cost and would not have
an adverse impact on the Company.
THE FAIRNESS OPINION RELATES ONLY TO WHETHER THE CONSIDERATION TO BE
RECEIVED BY THE HOLDERS OF FRACTIONAL SHARES OF NEW COMMON STOCK IS FAIR FROM A
FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER OF THE COMPANY AS TO HOW SUCH STOCKHOLDERS SHOULD VOTE WITH RESPECT
TO THE REVERSE STOCK SPLIT.
THE COMPANY
The Company, a Maryland corporation, is a designer, manufacturer and
supplier of windshield and rear window washer nozzles for passenger cars and
light trucks in North America. The Company also designs, manufactures and sells
defroster nozzles for a limited number of these same light vehicles. The address
of the Company is 6625 Dobbin Road, Columbia, Maryland 21045-4707.
The controlling stockholders, directors and executive officers of the
Company are identified on Exhibit 2 to this statement, together with certain
additional information bout such persons.
On December 8, 1998, the Board adopted a resolution authorizing the
submission to the vote of the stockholders of the Company of the Proposed
Amendment under which all outstanding shares of Old Common Stock will be subject
to a reverse stock split at the ratio of 1,000 shares of Old Common Stock to 1
share of New Common Stock. Copies of the Proposed Amendment and the resolutions
adopted by the Board are attached to this Proxy Statement as Exhibit 3.
The Company expects to submit the Proposed Amendment to the stockholders of
the Company at a special meeting expected to be held at 10:00 a.m. on April 14,
1999, at 6625 Dobbin Road, Columbia, Maryland.
14
PAYMENT OF PURCHASE PRICE; EFFECT ON COMPANY.
The Purchase Price of fractional shares of New Common Stock will be
paid from available funds of the Company, which is expected to result in a use
of cash in the expected amount of approximately $212,656 and a reduction in
shareholders' equity in the same amount.
The Company does not expect that any material change in the present
dividend rate or policy or indebtedness of the Company will occur as a result of
the reverse stock split. A change in the Company's capitalization will not occur
as a result of the change in par value of the New Common Stock.
CERTAIN OWNERSHIP INTERESTS IN SECURITIES OF THE COMPANY.
As of October 15, 1998, the record and beneficial ownership (except for
beneficial ownership disclaimed as set forth in applicable footnotes) of the
Company's Common Stock, the percentage of the total number of issued and
outstanding Common Stock, and the number of shares of Common Stock which such
person has a right to acquire, together with any pension plan, profit or similar
plan, and by each executive officer, director, and each controlling stockholder
are as follows:
15
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
NAME POSITION NO. COMMON PERCENTAGE NO. PERCENTAGE NO. SHARES PERCENTAGE
SHARES OF PREFERRED OF TOTAL (FULLY OF FULLY
TOTAL SHARES PREFERRED DILUTED DILUTED
COMMON SHARES BASIS) (6) SHARES
SHARES
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
William Ewing, III Chairman of the 437,329 (1) 3.4 808,872 86.7 12,370,646 75.4
Board of 8,697,829 (2) 68.6
Directors,
Controlling Person
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Ronald D. Stouffer President, Chief 129,431 1.0
Executive Officer,
Director
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Eric W. Koehler Executive Vice
President, Director
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
John E. Searle, Jr.(7) Director 20,000 .2
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
David C. Dressler Director 20,000 .2
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
James T. Parkinson, III Director, 1,176,849 (3) 9.3 28,509 3.1 1,290,885 7.9
Controlling Person
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Frederic Ewing, II Director, 390,827 (4) 3.1 86,304 9.2 535,155 3.3
Controlling Person 344,540 (5) 2.7
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
16
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Melvyn J. L. Clough Vice President,
Operations
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Richard W. Hess Vice President, 5,000 .04
Automotive
Products
Engineering
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Eleanor M. Kupris Secretary and Vice 38,040 .3
President,
Administration
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
David A. Quinn Vice President, 21,000 .2
Finance and
Treasurer
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Dharapuram N. Srinath Vice President, 6,500 .05
Advanced
Engineering
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Arlene M. Hardy Corporate
Controller
- --------------------------- -------------------- ---------------- ----------- ----------- ----------- ------------- -----------
Notes:
1. For own account, including 53,320 shares held by Mr. Ewing's
children for which he holds a power of attorney.
2. Owned by trusts of which Mr. Ewing is a trustee or owned by
other individuals for which he holds their powers of attorney,
excluding, however, shares owned by Frederic Ewing, II, which
are included under his name.
3. As trustee of trusts established under the will of Arthur
Choate.
4. For own account. Mr. William Ewing holds powers of attorney
with respect to these shares.
5. As trustee for two trusts.
6. Combined total of Common Stock and Preferred Stock after
conversion to Common Stock at a ratio of 1:4.
7. Resigned December 8, 1998.
No transactions in any shares of the Common Stock of the Company were
effected during the 60 days immediately preceding the date of this Schedule
13E-3 by the Company or by any of the persons named in paragraph (a) of this
Item.
CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE COMPANY'S
SECURITIES.
There are no contracts, arrangements, understandings or relationships
between the Company or the persons listed above and any other person in
connection with the proposed reverse stock split concerning the transfer or
voting of the Company's Common Stock or Preferred Stock, joint ventures, loan or
option arrangements, puts or calls, guaranties or the giving or withholding of
proxies, consents or other authorizations.
17
THE COMPANY'S COMMON STOCK
As of October 15, 1998, 12,685,011 shares of the Common Stock were
outstanding and held of record by approximately 430 persons. The Common Stock of
the Company is traded in the "over-the-counter" market and is quoted on the NASD
OTC Bulletin Board; symbol BOWE. The Company also has outstanding shares of
Preferred Stock, which are unregistered and are not publicly traded.
The high and low bid and asked prices of the Common Stock over the last two
fiscal years of the Company are listed below:
BID ASKED
----------------------------------- ------------------------------
FY High Low High Low
1998 1st Quarter 1 3/4 1 1/4 2 1/16 1 3/8
2nd Quarter 1 3/4 1 1/16 2 1/2 1 3/8
3rd Quarter 1 3/4 1 2 1 3/8
4th Quarter 1 1/32 23/32 1 1/2 1 1/8
1997 1st Quarter 1 3/8 13/16 1 5/8 1 1/4
2nd Quarter 1 3/8 5/8 1 9/16 3/4
3rd Quarter 13/16 7/16 7/8 9/16
4th Quarter 3 1/8 3/4 3 1/2 7/8
Note: The above quotes represent prices between dealers and do not include
retail mark-up, mark-down, or commissions. They do not represent actual
transactions.
The Company has never paid cash dividends on its Common Stock. Payment of
dividends on Common Stock is within the discretion of the Board and will depend,
among other factors, on earnings, capital requirements, and the operating
financial condition of the Company.
Neither the Company nor any of the Affiliated Stockholders has purchased
any of the Company's securities within the past two full fiscal years of the
Company.
TERMS OF THE PROPOSED REVERSE STOCK SPLIT.
The Company proposes, subject to stockholder approval, an amendment to the
Company's Articles of Incorporation which would decrease the number of shares of
Common Stock outstanding by means of a reverse stock split in the ratio of 1,000
shares of "Old Common Stock" to 1 share of "New Common Stock". As used herein,
the term "Old Common Stock" refers to the Common Stock BEFORE the proposed
reverse stock split and the term "New Common Stock" refers to the Common Stock
FOLLOWING the proposed reverse stock split. The par value of the New Common
Stock would be adjusted accordingly from $0.10 per share of Old Common Stock to
$100 per share of New Common Stock. If the proposed amendment to the Articles of
Incorporation is approved by the stockholders, as a result of the proposed
reverse stock split, the total authorized shares of Common Stock will be reduced
from 17,000,000 shares to 17,000 shares.
Following the reverse stock split, no fractional shares will be authorized
and any fractional shares will be purchased from holders thereof at the
Purchase Price of $1,250 per share of New Common Stock (I.E., post split). All
holders of Common Stock will be treated identically in connection with the
reverse stock split, in that all fractional shares of New Common Stock will be
purchased at the Purchase Price of $1,250 per share of New Common Stock.
Following the reverse stock split and purchase of resulting fractional
shares of New Common Stock, it is expected that the number of record
shareholders of the Company's Common Stock will be reduced from approximately
430 (as of October 15, 1998) to less than 200. The number of holders of the
Company's Preferred Stock will remain unchanged at approximately 18. As a result
of the reduction in number of shareholders below 300,
18
the Company intends to suspend its obligation to file periodic reports with the
Securities and Exchange Commission pursuant to section 15(d) of the Exchange Act
of 1934.
SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
The Company expects to spend its own funds to purchase fractional shares of
the New Common Stock following the reverse stock split. The Company anticipates
that as a result of the reverse stock split, there will be approximately
170.125 aggregate fractional shares of the New Common Stock to be purchased by
the Company. The expected aggregate purchase price of such shares is
approximately $212,656 (assuming 170.125 aggregate shares of New Common
Stock to be purchased), based upon the purchase price of $1,250 per share of New
Common Stock. Such price per share was determined based upon the report of
Ferris Baker Watts as to value of the Common Stock of the Company which report
is further described in this Proxy Statement.
COSTS AND EXPENSES OF TRANSACTION.
The following is a statement of all expenses incurred or estimated to be
incurred in connection with the going private transaction. The Company will be
responsible for paying any or all of such expenses.
Filing Fees $ 43
Legal Fees 125,000
Accounting Fees 2,000
Appraisal Fees 65,000
Administration of Share Buy Back 25,000
Printing Costs 2,000
-------
TOTAL $ 219,043
=======
All of the foregoing expenses and purchase price of fractional shares of
New Common Stock are expected to be paid from the available funds of the
Company.
PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE
TRANSACTION.
Based upon inquiry by the Company, no executive officer, director or
affiliate of the Company or any person enumerated in Exhibit 2 to this Proxy
Statement presently intends to tender or sell any of the Company's Common Stock
owned or held by such person, except with respect to fractional shares of New
Common Stock to be purchased by the Company following the reverse stock split.
Each of the persons enumerated in Exhibit 2 presently intends to vote all shares
of the Common Stock held by such person and with respect to which such person
holds proxies, in favor of the Proposed Amendment.
As described above, all of the persons enumerated in Exhibit 2 to this
Proxy Statement who are directors of the Company and all members of the Special
Committee voted in favor of the proposed amendment to the Company's Articles of
Incorporation. Based upon inquiry by the Company, except as stated in the
preceding sentence, none of the persons named in Exhibit 2 to this Proxy
Statement has made a recommendation in support of or opposed to the proposed
amendment to the Company's Articles of Incorporation.
PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED TO PROMOTE REVERSE STOCK
SPLIT.
No officer, employee, class of employees or corporate asset of the Company
(excluding corporate assets which are proposed to be used as consideration for
purchases of securities or payment of expenses as disclosed in this Proxy
Statement) has been or is proposed to be employed by the Company or any
affiliate in connection with the Proposed Amendment and reverse stock split
described in this Proxy Statement.
19
No person has been employed, retained or is to be compensated by the
Company, or by any person on behalf of the Company, to make solicitations or
recommendations in connection with the proposed amendment and reverse stock
split described in this Proxy Statement.
ANTICIPATED APPROVAL OF PROPOSED AMENDMENT. It is expected that the owners
of more than the necessary two-thirds of the shares of Common Stock and
Preferred Stock entitled to vote on the Proposed Amendment (including, without
limitation, all shares owned by the persons listed on Exhibit 2 and any shares
controlled by them) will vote in favor of such amendment, and, accordingly that
such amendment will receive the necessary approval from stockholders entitled to
vote on the question. Upon receipt of stockholder approval, the Company expects
to move quickly to implement the Proposed Amendment and the reverse stock split
authorized by such amendment.
EXCHANGE OF STOCK CERTIFICATES; PAYMENT OF PURCHASE PRICE FOR FRACTIONAL SHARES
Upon approval of the Proposed Amendment, each 1,000 share of Old Common
Stock will be converted into 1 share of New Common Stock. Fractional shares of
New Common Stock will not be issued as a result of the reverse stock split.
Holders of Old Common Stock otherwise entitled to a fractional share of New
Common Stock following the reverse stock split will be paid in cash in lieu of
such fractional shares at a Purchase Price equal to $1,250 per whole share of
New Common Stock. The reverse stock split will become effective upon the filing
of the Articles of Amendment to the Company's Articles of Incorporation with the
Maryland State Department of Assessments and Taxation. The filing of the
Articles of Amendment will occur as soon as practicable on or after the approval
of the proposed Amendment.
The conversion of shares of Old Common Stock into New Common Stock will
occur upon the filing of the Articles of Amendment to the Company's Articles of
Incorporation with the Maryland State Department of Assessments and Taxation. As
soon as practicable after such filing, each holder of Old Common Stock will
receive a letter of transmittal containing instructions for the surrender of
certificates representing shares of Old Common Stock in exchange for shares of
New Common Stock and cash (in the case of fractional shares of new Common Stock)
for which the shares represented by the certificates so surrendered are
exchangeable pursuant to the reverse stock split.
FOLLOWING THE REVERSE STOCK SPLIT, STOCKHOLDERS WILL RECEIVE, BY MAIL,
LETTERS OF TRANSMITTAL WITH WHICH STOCK CERTIFICATES FOR OLD COMMON STOCK SHOULD
BE RETURNED. STOCKHOLDERS SHOULD THEREFORE NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS. STOCKHOLDERS OF THE COMPANY SHOULD NOT FORWARD THEIR STOCK
CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
FINANCIAL INFORMATION
Audited financial statements of the Company for fiscal years 1997 and
1998 filed with the Company's most recent Annual Report under Sections 13 and
15(d) of the Securities Exchange Act of 1934 were filed with the Securities
and Exchange Commission on January 29, 1999, as a part of Form 10-K, SEC file
number 002-37706, and were amended on February 22, 1999, SEC file number
002-37706. Such audited financial statements appearing in Form 10-K, as
amended, are incorporated herein by reference. Form 10-K is available from the
Securities and Exchange Commission, on the Securities and Exchange Commission's
website, or from the Company. See "SUMMARY - AVAILABLE INFORMATION" and "SUMMARY
- - ADDITIONAL INFORMATION".
The ratio of earnings to fixed charges for the two most recent fiscal years
were not determined as there were no debt instruments or fixed charges for
either of these two years.
The book value per share as of the fiscal year ended October 31, 1998,
was $0.67.
20
Pro forma data disclosing the effect of the reverse stock split and buyback
of fractional shares on (1) the Company's balance sheet as of the most recent
fiscal year end is attached as Exhibit 4; and (2) the Company's statement of
income, earnings per share amounts, and ratio of earnings to fixed charges for
the most recent fiscal year end is attached as Exhibit 5.
The Company's book value per share as of the fiscal year ended October
31, 1998, taking into account the effect of the reverse stock split and buyback
of fractional shares , would be $657.81 per share of New Common Stock.
OTHER BUSINESS
Management does not intend to present any business for action at the
meeting other than as discussed herein and does not know of any other business
intended to be presented by others.
Eleanor M. Kupris, Secretary
March 15, 1999
Bowles Fluidics Corporation
6625 Dobbin Road
Columbia, Maryland 21405-4707
Telephone: 410-381-0400
EXHIBITS
1. Fairness Opinion of Ferris, Baker Watts, dated December 8, 1998, and
Supplemental Opinion dated February 26, 1999.
2. Identity and Background of Directors, Executive Officers and
Controlling Persons of the Company
3. Proposed Amendment to the Company's Articles of Incorporation and
Resolutions adopted by the Board of Directors on December 8, 1998.
4 Pro Forma Data Disclosing the Effect of the Reverse Stock Split and
Buyback of Fractional Shares on the Company's Balance Sheet as of the
Most Recent Fiscal Year End
5. Pro Forma Data Disclosing the Effect of the Reverse Stock Split and
Buyback of Fractional Shares on the Company's Statement of Income,
Earnings Per Share Amounts, and Ratio Of Earnings to Fixed Charges for
the Most Recent Fiscal Year End
21
EXHIBIT 1
FAIRNESS OPINION OF FERRIS, BAKER WATTS, DATED DECEMBER 8, 1998
AND SUPPLEMENTAL OPINION DATED FEBRUARY 26, 1999
December 8, 1998
The Board of Directors
Bowles Fluidics Corporation
6625 Dobbin Road
Columbia, MD 21045
Gentlemen:
Bowles Fluidics Corporation ("Bowles" or the "Company") has requested a
review of the proposed transaction (the "Transaction") involving the reverse
split of its common stock and the subsequent repurchase by the Company of
fractional shares created through the Transaction. Specifically, you have
requested a review of the financial consideration to be received by the
shareholders who will have their fractional shares repurchased in the
Transaction. We were retained by the Board of Directors and commenced our
investigation of the Transaction on June 23, 1998.
Pursuant to the Transaction, the Company will effect a one for 1,000
reverse split of its common stock. Shareholders holding fractional shares shall
have their shares repurchased by the Company for $1.25 per pre-split share.
In connection with the opinion, we have reviewed, among other things,
(i) the proposed Transaction, (ii) historical operating results of the Company,
(iii) internally prepared projections of the Company, and (iv) the historical
trading performance of the Company's stock. We have held discussions with the
members of the management of the Company regarding the past and current business
operations as well as the future prospects of the Company. We have reviewed
industry specific data regarding the valuation of publicly traded companies in
the automotive supplier market as well as other such information as we consider
appropriate.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of all financial and other information reviewed by us for
purposes of this opinion whether publicly available or provided to us by the
Company or representatives of the Company, and we have not assumed any
responsibility for independent verification of such information. We express no
opinion as to the allocation to be received by holders of interests who may
perfect dissenters' statutory fair appraisal remedies. Based upon the foregoing
and based upon other such matters that we consider relevant, it is our opinion
that the consideration to be received by the shareholders of the Company as a
result of the Transaction is fair from a financial point of view as of the date
hereof.
Our opinion is necessarily based upon economic, market and other
conditions as in effect on, and the information made available to us as of
December 8, 1998. Our opinion is directed to the Board of Directors of the
Company and does not constitute a recommendation to any
Exhibit 1 - 1
stockholder of the Company as to how the stockholder should vote at the
stockholder's meeting held in connection with the Transaction. It is understood
that subsequent developments may affect the conclusions reached in this opinion
and that we do not have any obligation to update, revise or reaffirm this
opinion.
Very truly yours,
Ferris, Baker Watts, Incorporated
Exhibit 1 - 2
February 26, 1999
The Board of Directors
Bowles Fluidics Corporation
6625 Dobbin Road
Columbia, MD 21045
Gentlemen:
Bowles Fluidics Corporation ("Bowles" or the "Company") has requested a
review of the proposed transaction (the "Transaction") involving the reverse
split of its common stock and the subsequent repurchase by the Company of
fractional shares created through the Transaction. Specifically, you have
requested a review of the financial consideration to be received by the
shareholders who will have their fractional shares repurchased in the
Transaction. We were retained by the Board of Directors and commenced our
investigation of the Transaction on June 23, 1998.
Pursuant to the Transaction, the Company will effect a one for 1,000
reverse split of its common stock. Shareholders holding fractional shares shall
have their shares repurchased by the Company for $1.25 per pre-split share.
In connection with the opinion, we have reviewed, among other things,
(i) the proposed Transaction, (ii) historical operating results of the Company,
including the Company's Form 10-K filed with the Securities and Exchange
Commission on February 22, 1999, (iii) internally prepared projections of the
Company, and (iv) the historical trading performance of the Company's stock. We
have held discussions with the members of the management of the Company
regarding the past and current business operations as well as the future
prospects of the Company. We have reviewed industry specific data regarding the
valuation of publicly traded companies in the automotive supplier market as well
as other such information as we consider appropriate.
In rendering our opinion, we have assumed and relied upon the accuracy
and completeness of all financial and other information reviewed by us for
purposes of this opinion whether publicly available or provided to us by the
Company or representatives of the Company, and we have not assumed any
responsibility for independent verification of such information. We express no
opinion as to the consideration which might be received by holders of fractional
shares of common stock pursuant to any fair appraisal remedies available under
applicable law. Based upon the foregoing and based upon other such matters that
we consider relevant, it is our
opinion that the consideration to be received by the shareholders of the Company
as a result of the Transaction is fair from a financial point of view as of the
date hereof.
Our opinion is necessarily based upon economic, market and other
conditions as in effect on, and the information made available to us as of
February 26, 1999. Our opinion is directed to the Board of Directors of the
Company and does not constitute a recommendation to any stockholder of the
Company as to how the stockholder should vote at the stockholder's meeting held
in connection with the Transaction. It is understood that subsequent
developments may affect the conclusions reached in this opinion and that we do
not have any obligation to update, revise or reaffirm this opinion.
Very truly yours,
Ferris, Baker Watts, Incorporated
Exhibit 1 - 3
EXHIBIT 2
IDENTITY AND BACKGROUND OF DIRECTORS, EXECUTIVE OFFICERS
AND CONTROLLING PERSONS OF THE COMPANY
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
NAME POSITION PRESENT OCCUPATION OCCUPATION OR EMPLOYMENT DURING
PAST FIVE YEARS
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
William Ewing, III Chairman of the Board of Chairman of the Board Vice President and Treasurer,
Directors, 1996 - present, Bowles Fluidics Corporation 1995-1997
Controlling Person 6625 Dobbin Road Reeves Industries, Inc.
Columbia, Maryland 21045-4707 101 Merritt
Director, 1985 - present P. O. Box 5063
Chairman of the Board Norwalk, CT
Vacuum Instruments Corp.
2099 9th Ave. Managing Director, 1992-1994
Ronkonoma, NY 11779 Chemical Bank
New York, New York
Chairman of the Board
Actronics Inc.
166 Bear Hill Road
Waltham, MA 02154
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Ronald D. Stouffer President, 1994 - present President and Chief Executive Executive Vice President, 1982 to
Chief Executive Officer, Officer 1994
1994 - present Bowles Fluidics Corporation Bowles Fluidics Corporation
Director, 1978 - present
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Eric W. Koehler Executive Vice President, Executive Vice President Vice President, Marketing, 1994 -
1997 - present Bowles Fluidics Corporation 1997
Director of Marketing, 1990-1994
Director, 1997 - present Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
John E. Searle, Jr.* Director Retired
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
David C. Dressler Director Retired
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Neil Ruddock Director, 1998 - present President, N. T. Ruddock Co.
President, National Metal
Abrasives Co.
26123 Broadway Ave.
Cleveland, Ohio 44146
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
James T. Parkinson, III Director, Controlling Self Employed; Investment
Person, 1998 - present Management
P. O. Box 2247
Middleburg, VA 20118
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Frederic Ewing, II Director, Controlling Person President
Vacuum Instrument Corp.
2099 9th Avenue
Ronkonoma, NY 11779
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Melvyn J. L. Clough** Vice President, Operations, Vice President, Operations Engineering Manager, 1992-1995
1995 - present Bowles Fluidics Corporation A. Raymond, Inc.
3091 Research Dr.
Rochester Hills, Michigan
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Richard W. Hess Vice President, Automotive Vice President, Automotive Vice President, Engineering, 1992
Products Engineering, 1998 Products Engineering, 1998 - - 1998,
- present present Bowles Fluidics Corporation
Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Exhibit 2 - 1
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
NAME POSITION PRESENT OCCUPATION OCCUPATION OR EMPLOYMENT DURING
PAST FIVE YEARS
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Eleanor M. Kupris Secretary and Vice Corporate Secretary, March 1992 -
President, Administration, present
1982 - present Vice President, Administration,
since 1982 - present
Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
David A. Quinn Vice President, Finance, Vice President, Finance and Chief Financial Officer, 1991-1993
and Treasurer, 1993 - Treasurer, 1993 - present Bruning Paint Company
present Bowles Fluidics Corporation 301 South Haven Street
Baltimore, MD 21224
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Dharapuram N. Srinath*** Vice President, Advanced Vice President, Advanced Vice President, Quality Assurance,
Engineering, 1998 - present Engineering, 1998 - present 1995 - 1998
Bowles Fluidics Corporation Director of Quality Assurance and
Product Reliability, 1992-1995
Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
Arlene M. Hardy Corporate Controller, 1990 Corporate Controller, 1990 -
- present present
Bowles Fluidics Corporation
- ----------------------------- ----------------------------- ----------------------------------- ------------------------------------
* Resigned December 8, 1998.
** Citizen of the United Kingdom.
*** Citizen of India.
Exhibit 2 - 2
EXHIBIT 3
PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION AND RESOLUTION ADOPTED BY THE BOARD OF
DIRECTORS ON DECEMBER 8, 1998
Article FOURTH of the Articles of Incorporation of the Corporation is hereby
amended by:
1. Cancelling the first two paragraphs thereof and inserting the following
in its place:
FOURTH: The total number of shares of all classes of stock the
Corporation has authority to issue is Three Million Seventeen Thousand
(3,017,000) shares divided into Three Million (3,000,000) shares of
cumulative, convertible Preferred Stock of a par value of One Dollar
($1.00) each and Seventeen Thousand (17,000) shares of Common Stock of
a par value of One Hundred Dollars ($100) each.
The Aggregate par value of all shares having par value of all classes
is Four Million Seven Hundred Thousand Dollars ($4,700,000).
2. Cancelling the paragraph immediately following the caption "Voting
Rights" and inserting the following in its place:
The Common Stock shall have one (1) vote per share and the Preferred
Stock shall have one-two hundred fiftieth (1/250) vote per share.
Except to the extent otherwise provided in the Articles of
Incorporation or provided by the laws of the State of Maryland, the
Common Stock and the Preferred Stock shall vote as a single class.
3. Cancelling the paragraph following the caption "Conversion" and
inserting the following in its place:
The cumulative Preferred Stock of the Corporation of One Dollar ($1.00)
par value, may at the option of the holder thereof, at any time
dividends are current be converted into Common Stock of the Corporation
of One Hundred Dollars ($100) par value upon the following terms:
(1) Any holder of any of the convertible Preferred
shares desiring to avail himself of the option for conversion
of his stock as herein provided, shall, deliver, duly endorsed
in blank, the certificate or certificates representing the
stock to be converted to the Secretary of the Corporation at
the Corporation Office and at the same time, notify the
Secretary in writing over his signature that he desires to
convert his stock into Common Stock of One Hundred Dollars
($100) par value pursuant to these provisions.
(2) Upon receipt by the Secretary of a certificate or
certificates representing shares of convertible Preferred
Stock and a notice that the holder thereof desired to convert
the same, the Corporation shall forthwith cause to be issued
to the holder of the
Exhibit 3 - 1
convertible Preferred shares surrendering the same, one-two hundred
fiftieth (1/250) share of Common Stock for each share of convertible
Preferred Stock surrendered, and shall deliver to such holder a
certificate in due form for such Common Stock.
Exhibit 3 - 2
EXHIBIT 4
PRO FORMA DATA DISCLOSING THE EFFECT OF THE REVERSE STOCK SPLIT AND BUYBACK
OF FRACTIONAL SHARES ON THE COMPANY'S BALANCE SHEET
AS OF THE MOST RECENT FISCAL YEAR END
BOWLES FLUIDICS CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
October 31, 1998
-------------------------------------------------
Reverse Split
& Buyback
Reported Adjustments Pro Forma
-------------------------------------------------
ASSETS
Current
Cash and cash equivalents $1,734,261 ($212,656) $1,521,605
Accounts receivable 3,233,775 3,233,775
Income taxes receivable 194,213 194,213
Inventories 2,263,144 2,263,144
Other current assets 399,781 399,781
-------------------------------------------------
Total current assets 7,825,174 (212,656) 7,612,518
-------------------------------------------------
Property and equipment, net 4,408,404 4,408,404
Other assets 121,743 121,743
-------------------------------------------------
Total assets $12,355,321 ($212,656) $12,142,665
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable - trade $1,109,902 $1,109,902
Accrued expenses 1,326,107 1,326,107
---------------- ----------------
Total current liabilities 2,436,009 2,436,009
Other liabilities 541,093 541,093
---------------- ----------------
Total liabilities 2,977,102 2,977,102
---------------- ----------------
Commitments and contingencies
Stockholders' equity
8% Convertible preferred stock 933,080 933,080
Common stock 1,268,501 ($17,012) 1,251,489
Additional paid-in capital 2,732,833 (36,651) 2,696,182
Retained earnings 4,443,805 (158,992) 4,284,813
-------------------------------------------------
Total stockholders' equity 9,378,219 (212,656) 9,165,563
-------------------------------------------------
Total liabilities and stockholders' equity $12,355,321 ($212,656) $12,142,665
=================================================
Common stock book value $8,445,139 ($212,656) $8,232,483
Number of common shares outstanding 12,685,011 (12,672,496) 12,515
Per share $0.67 $657.81
Exhibit 4 - 1
BOWLES FLUIDICS CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS
REVERSE SPLIT AND BUYBACK ADJUSTMENTS
1. Balance Sheet: October 31, 1998
The pro forma balance sheet reflects the reduction in cash and cash
equivalents and the decrease in stockholders' equity of $212,656
resulting from the buyback of estimated fractional common shares
(170,125 shares) after the 1-for-1,000 reverse common stock split at
$1,250 per share, as if the buyback occurred at October 31, 1998.
The retained earnings adjustment of $158,992 reflects the total adjustment
of stockholders' equity of $212,656 net of the par value of the related
common stock and a pro rata portion of the additional paid-in capital. The
reduction of retained earnings represents the net payout of historical
earnings based on the fair market value of the fractional shares acquired.
The pro forma book value per share reflects the lower common stock book
value and the lower number of common shares outstanding after the split
and buyback.
Exhibit 4 - 2
Exhibit 5
PRO FORMA DATA DISCLOSING THE EFFECT OF THE REVERSE STOCK SPLIT AND BUYBACK OF
FRACTIONAL SHARES ON THE COMPANY'S STATEMENT OF INCOME, EARNINGS PER SHARE
AMOUNTS, AND RATIO OF EARNINGS TO FIXED CHARGES FOR THE MOST RECENT FISCAL YEAR END
BOWLES FLUIDICS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended October 31, 1998
--------------------------------------------------------
Reverse Split
& Buyback
Reported Adjustments Pro Forma
--------------------------------------------------------
Product sales $18,385,924 $18,385,924
Technical services sales 2,698,880 2,698,880
------------------- ---------------------
Net sales 21,084,804 21,084,804
Cost of sales 16,145,848 16,145,848
------------------- ---------------------
Gross profit 4,938,956 4,938,956
Selling, general and
administrative expenses 2,691,141 2,691,141
Research and development
costs 866,390 866,390
------------------- ---------------------
Operating income 1,381,425 1,381,425
Interest income 71,530 ($10,845) 60,685
Other income (expense), net 55,184 55,184
--------------------------------------------------------
Income before income taxes 1,508,139 (10,845) 1,497,294
Provision for income taxes 575,953 (4,142) 571,811
--------------------------------------------------------
Net income 932,186 (6,703) 925,483
Preferred stock dividends
accrued (74,646) 0 (74,646)
--------------------------------------------------------
Income applicable to common
shareholders $857,540 ($6,703) $850,837
========================================================
Basic earnings per share:
Income applicable to common
shareholders $857,540 ($6,703) $850,837
--------------------------------------------------------
Weighted average of common
shares outstanding 12,660,294 (12,647,804) 12,490
Basic earnings per share $0.07 $68.12
=================== =====================
Diluted earnings per share:
Net income $932,186 ($6,703) $925,483
--------------------------------------------------------
Weighted average of common
shares outstanding 12,660,294 (12,647,804) 12,490
Add: Assumed conversion of
preferred stock 3,732,320 (3,728,588) 3,732
Assumed exercise of
stock options 32,160 (32,128) 32
--------------------------------------------------------
Number of common shares
outstanding adjusted 16,424,774 (16,408,520) 16,254
--------------------------------------------------------
Diluted earnings per share $0.06 $56.94
=================== =====================
Ratio of earnings to fixed charges N/a N/a
Exhibit 5 - 1
BOWLES FLUIDICS CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS
REVERSE SPLIT AND BUYBACK ADJUSTMENTS
1. Income Statement: Year Ended October 31, 1998
The pro forma income statement reflects the reduction in interest
income, net of income taxes, to give effect to the $212,656 reduction
of cash and cash equivalents to acquire the estimated fractional common
shares outstanding (170,125 shares) after the 1-for- 1000 reverse
common stock split at $1,250 per share, as if the reverse split and
buyback occurred at October 31, 1998.
The pro forma basic and diluted earnings per share reflect the lower net
income and the lower number of common shares outstanding after the reverse
stock split and buyback of fractional common shares at $1,250 per share.
Exhibit 5 - 2
BOWLES FLUIDICS CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 14, 1999
TO THE STOCKHOLDERS:
Notice is hereby given to the Stockholders that a Special Meeting of
Stockholders of BOWLES FLUIDICS CORPORATION (the "Company") will be held on
April 14, 1999, at 10:00 a.m., local time, at 6625 Dobbin Road, Columbia,
Maryland 21045.
The Special Meeting will be held for the purpose of:
(1) considering and voting upon a proposed amendment to the Articles
of Incorporation of the Company which would authorize a reverse
split of the Company's Common Stock, par value $0.10 per share
(the "Common Stock"), in the ratio of 1,000 shares to 1 share,
and
(2) transacting such other business as may properly be brought before
the meeting.
Upon adoption of the proposed amendment to the Company's Articles of
Incorporation, each 1,000 shares of Common Stock would be converted to one share
of Common Stock. Any fractional shares of Common Stock resulting from the
reverse stock split will be purchased from the holders thereof at the rate of
$1,250 per share (I.E., post reverse split).
The Proposed Amendment must be approved by the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter. William Ewing,
III, James T. Parkinson, III, and Frederic Ewing, II, each of whome is an
officer or a Director of the Company (or both) control in the aggregate
sufficient votes to assure approval of the Proposed Amendment and have stated
that they intend to vote in favor of the Proposed Amendment authorizing the
reverse stock split.
The record of Stockholders entitled to vote at said meeting was taken at
the close of business March 8, 1999.
Enclosed with this Notice is a Proxy Statement describing the proposed
amendment to the Articles of Incorporation, the Company's most recently filed
SEC Form 10-K and a Proxy.
Stockholders are requested to specify their choice, sign, date and return
the enclosed Proxy in the enclosed envelope, postage for which has been
provided. A prompt response will be appreciated.
BY THE ORDER OF THE BOARD OF
DIRECTORS
Eleanor M. Kupris, Secretary
Columbia, Maryland
March 15, 1999
PROXY
BOWLES FLUIDICS CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING, APRIL 14, 1999
The undersigned hereby appoints Eleanor M. Kupris and Howard L. Rose,
jointly and severally, Proxies, with full power of substitution, to vote as
designated below all shares of Common and/or Preferred Stock which the
undersigned is entitled to vote in connection with the amendment to the
Company's Articles of Incorporation proposed by the Board of Directors and on
all other matters which may come before the Special Meeting of Stockholders of
Bowles Fluidics Corporation to be held on April 14, 1999, or any adjournment
thereof. The meeting will begin at 10:00 a.m., local time, at the Company's
offices, 6625 Dobbin Road, Columbia, Maryland 21045.
1. Proposed amendment to Company's Articles of Incorporation authorizing
a 1,000 for 1 reverse stock split of the Company's common stock, par
value $0.10 per share.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED, BUT IF NOT
OTHERWISE MARKED, THEY WILL BE VOTED "FOR" THE ABOVE ITEMS.
Please sign exactly as your name or names appear below. When signing as
executor, administrator, attorney, trustee or guardian, please give your full
title as such. Corporations are requested to affix seals.
_____________________________________(SEAL)
Signature of Stockholder
_____________________________________
_____________________________________
Dated ___________________________, 1999
(Please sign, date and return this Proxy in the enclosed envelope.)