SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
X
1934 - FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-13905
COMPX INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 57-0981653
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16825 NORTHCHASE DRIVE, SUITE 1200, HOUSTON, TX
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 423-3304
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Class A common stock New York Stock Exchange
($.01 par value per share)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
X
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. .
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
AS OF FEBRUARY 26, 1999, 6,144,880 SHARES OF CLASS A COMMON STOCK WERE
OUTSTANDING. THE AGGREGATE MARKET VALUE OF THE 5.8 MILLION SHARES OF VOTING
STOCK HELD BY NONAFFILIATES OF VALHI, INC. AS OF SUCH DATE APPROXIMATED $101
MILLION.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED BY PART III IS INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE COMMISSION PURSUANT
TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER THE END OF THE FISCAL YEAR
COVERED BY THIS REPORT.
PART I
ITEM 1. BUSINESS
GENERAL
CompX International Inc. (NYSE: CIX) is a leading manufacturer of ergonomic
computer support systems, precision ball bearing slides and locking systems for
use in office furniture, computer-related applications and a variety of other
products. The Company's products are principally designed for use in medium- to
high-end applications, where product design, quality and durability are critical
to the Company's customers. The Company believes that it is among the world's
largest producers of ergonomic computer support systems for office furniture
manufacturers, among the world's largest producers of precision ball bearing
slides and among the largest North American producers of medium-security cabinet
locks. Following completion of the acquisition of Thomas Regout Holding NV in
January 1999, the Company believes it is the largest European producer of
precision slides for the office products industry. In 1998, CompX generated net
sales of $152.1 million, a 40% increase from 1997 (an increase of 12% excluding
the acquisition of two lock competitors during 1998). In 1998, ergonomic
computer support systems, precision ball bearing slides and locking systems
accounted for approximately 28%, 33% and 39% of net sales, respectively.
Valhi, Inc. and Valhi's wholly-owned subsidiary Valcor, Inc. own 64% of the
Company's outstanding common stock. Contran Corporation holds, directly or
through subsidiaries, approximately 92% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held either by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee, or by Mr. Simmons directly.
Mr. Simmons is Chairman of the Board and Chief Executive Officer of each of
Contran, Valhi and Valcor and may be deemed to control each of such companies
and CompX.
The Company was incorporated in Delaware in 1993. At that time, Valhi
formed National Cabinet Lock, Inc. and contributed the assets of its Cabinet
Lock Division and the stock of Waterloo Furniture Components Limited. In 1996,
the Company changed its name to CompX International Inc.
The statements in this Annual Report on Form 10-K relating to matters that
are not historical facts, including, but not limited to, statements found in
this Item 1 - "Business", Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risks," are "forward-looking statements"
based on management's belief and assumptions using currently available
information. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it cannot assure that these
expectations will prove to be correct. Such statements involve a number of
risks and uncertainties including, but are not limited to, future supply and
demand for the Company's products (including cyclicality thereof), general
global economic conditions, competitive products and substitute products,
customer and competitor strategies, the impact of pricing and production
decisions, potential difficulties in integrating completed acquisitions,
environmental matters, government regulations and possible changes therein,
possible disruptions of normal business activity from Year 2000 issues and other
risks and uncertainties as discussed herein in this Annual Report, including,
without limitation, the sections referenced above. Should one or more of these
risks materialize, or should the underlying assumptions prove incorrect, actual
results could differ materially from those forecasted or expected. The Company
assumes no duty to publicly update such statements.
INDUSTRY OVERVIEW
Historically, approximately 75% of the Company's products were sold to the
office furniture manufacturing industry. During the past year, the Company's
acquisition of certain competitors in the lock industry has expanded the
Company's product offering and reduced the emphasis on the office furniture
segment. Currently approximately 50% of the Company's products are sold to the
office furniture manufacturing industry while the remainder are sold for use in
other products, such as vending equipment, postal boxes, electromechanical
enclosures, transportation, computers, and other non-office furniture and
equipment. CompX's management believes that its emphasis on new product
development, sales of its ergonomic computer support systems as well as slide
and security products used in computer applications result in the Company
experiencing higher rates of growth than the office furniture industry as a
whole.
The Company believes that fundamental shifts in technology, health
considerations and work processes in the office workplace provide new growth
opportunities. Increased use of technology has caused businesses to redesign
their workspaces with greater emphasis on the space efficient integration of
computers and other office technologies into the office workplace as well as
protecting computer equipment from damage and theft. Additionally, increased
regulatory sensitivity to ergonomic concerns and heightened focus on the risks
of repetitive stress injury have also influenced redesign of the office
workplace. In 1996, California became the first state to adopt legislation
relating to ergonomics in the workplace. In Europe, organizations like the
International Organization for Standardization and the European Committee for
Standardization have proposed draft guidelines that specify ranges of adjustment
in height and angle of workstation tabletops and computer keyboard support
mechanisms aimed at reducing the likelihood of injury from repetitive stress
tasks. In the United States, the Occupational Safety & Health Administration has
recently issued a draft standard that addresses guidelines for ergonomic
standards in the workplace. This standard is a program-oriented standard that
will place responsibility on the employer to mitigate the risk of injury in
workplaces prone to cause repetitive stress injuries. It is currently proposed
that this proposal be adopted as an OSHA standard by the year 2000.
The influence of existing and proposed legislation concerning workplace
ergonomics continues to effect the demand for ergonomically designed office
furniture products, which allow workers to adjust and re-arrange the orientation
of office equipment and supplies for greater comfort, safety and productivity.
Businesses increasingly are seeking changes in work processes to achieve more
efficient workspace utilization, resulting in the creation of new office
furniture designs that embrace office sharing concepts such as office "hoteling"
and open office designs. The Company's products target manufacturers of new
furniture designed to address these industry dynamics as well as customers that
specialize in retrofitting existing office furniture.
PRODUCTS
CompX manufactures and sells components in three major product lines:
ergonomic computer support systems, precision ball bearing slides and locking
systems. The Company's ergonomic computer support systems and precision ball
bearing slides are sold under the Waterloo Furniture Components Limited and
Thomas Regout names and the Company's locking systems are sold under the
National Cabinet Lock, Fort Lock and Timberline Lock names. The Company believes
that its brand names are well recognized in the industry.
Ergonomic computer support systems. CompX is a leading manufacturer and
innovator in ergonomic computer support systems for office furniture. Unlike
products targeting the residential market, which is more price sensitive with
less emphasis on quality, the CompX line consists of more highly engineered
products designed to provide ergonomic benefits for business and other
sophisticated users.
The Company's ergonomic computer support systems include adjustable
computer keyboard support arms. These devices are designed to attach to office
desks in workplace and in home office environments where there exists a need to
permit computer users to adjust their computer keyboard to various heights and
positions to alleviate possible strains and stress which may result from
repetitive activities, such as typing. These products also maximize usable
workspace and permit the storage of the keyboard underneath the desk. CompX
introduced its first ergonomic keyboard arm in 1983 and the Leverlock adjustment
mechanism in 1989, which is designed to make the adjustment of the keyboard arm
easier for all (including impaired) users. In 1999 the Company introduced the
Lift-n-Lock mechanism that allows adjustment of the keyboard arm without the use
of levers or knobs.
Adjustable computer table mechanisms address the need for flexibility and
adjustability in work surfaces. The Company's adjustable table mechanisms
provide adjustable workspace heights that permit users to stand or sit and that
can be easily adjusted for different user needs.
The prevalence of computers in the workplace has also created a need for
safe and convenient storage solutions for the central processor unit ("CPU")
case. In 1997, the Company introduced a CPU storage device that can be mounted
under a work surface or on the side of desk panels to store the CPU case off the
floor to minimize the adverse effects of dust and moisture or damage from
accidental impact. The unit operates on a slide mechanism that also pivots to
provide ease of access to peripheral connections while allowing convenient,
unobtrusive storage.
CompX also offers a number of complementary accessories to its main
products. These include ergonomic wrist rest aids, mouse pad supports and
computer monitor support arms, such as the Monitor Master for the adjustment of
heavy monitors to reduce eye strain.
Precision ball bearing slides. CompX manufactures a complete line of
precision ball bearing slides for use in office furniture, computers and other
applications. Precision ball bearing slides are manufactured to stringent
industry standards and are designed in conjunction with office furniture
original equipment manufacturers ("OEMs") to meet the needs of end users with
respect to weight support capabilities and ease of movement.
In addition to its basic product line, sales based on patented innovations
account for an increasing proportion of the Company's sales growth. In 1994,
CompX introduced the Butterfly Take Apart System, which is designed to easily
disengage drawers from filing cabinets. The following year, the Company began
selling its Integrated Slide Lock ("ISL"), with which a file cabinet
manufacturer can reduce the possibility of multiple drawers being opened by the
user at the same time, significantly reducing the risk of injury from a falling
cabinet while lowering the total cost of manufacturing the complete file
cabinet. The Company's patented concept affords OEM's cost savings advantages
in production, since the ISL is designed as an integral part of the drawer
slide, compared to custom fabricated add-on solutions previously utilized by
most manufacturers.
In recent years, applications other than office furniture have represented
a rapidly growing source of demand for the Company's precision ball bearing
slides. Opportunities in heavy-duty applications such as tool storage cabinets
and electromechanical applications have created new market opportunities. As a
result of the design efforts focused on these markets, CompX created the Ball
Lock to prevent heavily filled drawers, such as auto mechanic tool boxes, from
opening while cabinets are moved during routine use in the field. The Company's
products are used extensively in professional toolboxes and, increasingly, in
electromechanical imaging equipment to facilitate the movement of machine
components in the document reproduction process.
The Company's January 1999 acquisition of Thomas Regout expands the
Company's market presence in high precision, heavy duty ball bearing slide
applications. Thomas Regout's products in the U.S. and in Europe are utilized in
highly engineered applications such as computer network server cabinets where
convenient access for hardware upgrades and maintenance is required while
providing stability and protection to critical network system components.
Locking systems. The Company believes that it is among the largest North
American manufacturers of medium-security locking systems. The Company
manufactures lock mechanisms that generally fall into three categories: disc
tumbler locks, pin tumbler locks and KeSet high security locks.
Disc tumbler locks, also called wafer tumbler or plate tumbler, derive
their keying from a series of flat tumblers with a hole in the middle through
which the key passes to open the lock. This type of lock is normally limited to
two levels of keying, a passkey and one master key. A disc tumbler lock
provides moderate security and is manufactured by all three of the Company's
facilities. Disc tumbler locks represent the lowest cost lock to produce,
resulting in lower selling prices to customers.
Pin tumbler locks are keyed with a series of small pins manufactured on in-
house automatic screw machines. A stack of pins is required for each cut in a
key. Due to the increased number of parts, this type of lock is more costly to
manufacture than disc tumbler locks, and offers increased variety in keying with
more than one level of master keying. Pin tumbler locks also provide
substantially more security and are commonly used in banking, vending, computers
and institutional furniture industries. Tubular key pin tumbler locks are
designed for significant special applications for major customers. These
proprietary products are redesigned frequently, which requires a substantial
ongoing engineering effort.
The Company's industrial customers include manufacturers of cabinet
enclosures, from office furniture to electrical circuit panels to vending
machines. CompX, like most cabinet lock companies, has a standardized product
line suitable for many customers. However, a substantial portion of the
Company's volume involves specialized adaptations to individual manufacturer's
enclosure specifications.
The Company's acquisition of Fort Lock in March 1998 expanded the Company's
offering of locking systems to include several new market segments. These
include locks for ignition systems and storage compartments for a major
motorcycle manufacturer, products to major OEM's including manufacturers of
aftermarket security devices for desktop and laptop computers. Electronic locks
utilized in safes in hotel rooms and sold in retail stores, as well as versions
for securing tool boxes, is also a growing product line added as a result of the
Fort Lock acquisition.
The Company's patented KeSet high security system, is another version of a
pin tumbler lock, with parts manufactured from hardened steel components to
prevent forced entry. A significant feature of the product line is the ability
to change the keying on a single lock 64 times without removing the lock from
its enclosure. This product is used primarily to protect money in applications
such as soft drink vending machines, gaming machines and parking meters where
higher levels of security are required.
Each of the industries served with cabinet locks has a distribution segment
for replacement needs or for supply to small shops whose volume is not
substantial enough to buy direct from a lock manufacturer. CompX has met this
need in part with its industry-unique STOCK LOCKS and ShipFast inventory
programs. Partially as a result of this program, the Company believes it holds
the largest cabinet lock market share in both locksmith and hardware component
distribution.
The Company's STOCK LOCKS and ShipFast distribution programs represent 20%
of its locking systems sales. This program is comprised of over 1,200 stock
keeping units (also referred to as SKUs) of standardized locking products. This
program plans, manufactures and packages locks to inventory with a variety of
keying and finishes for shipment to customers generally within 24 hours of
receipt of the customer order.
Sales under this program are made both to a North American distribution and
factory centers network as well as to large OEMs when special needs require
either smaller quantities or non-special products other than their normal volume
requirements. This network supplies the Company's products both to after-market
replacement markets and to cabinet shops who do not purchase direct from the
Company due to their smaller size.
The established distributor network for STOCK LOCKS and ShipFast has been
used to develop a standardized product line in other segments of the Company's
products. Currently both ergonomic computer support systems and, to a limited
extent, precision ball bearing slides, are enjoying growing marketing success
through these and new ergonomic distribution channels.
SALES, MARKETING AND DISTRIBUTION
CompX sells components to OEMs and to distributors through a specialized
sales force. The majority of the Company's sales are to OEMs, while the balance
represents standardized products sold through distribution channels.
Sales to large OEM customers are made through the efforts of factory-based
sales and marketing professionals and engineers working in concert with salaried
field salespeople and independent manufacturer's representatives. Manufacturers'
representatives are selected based on special skills in certain markets or with
current or potential customers. Cabinet locks are sold by a separate network of
Company-employed salespeople and manufacturers' representatives as well as
factory-based national account managers.
A significant portion of the Company's sales are made through hardware
component distributors. The Company also has a significant market share of
locking systems sales to the locksmith distribution channel. CompX supports its
distributor sales with a line of standardized products used by the largest
segments of the marketplace. These products are packaged and merchandised for
easy availability and handling by distributors and the end user. Based on the
Company's successful STOCK LOCKS inventory program, similar programs have been
implemented for distributor sales of ergonomic computer support systems and to
some extent precision ball bearing slides. Since their addition to the
Company's distributor product line in 1992, sales of these products to the
distributor market have grown to represent approximately 10% of combined
ergonomic computer support systems and precision ball bearing slide net sales.
To afford a competitive advantage to the Company as well as to customers,
ergonomic computer support system and precision ball bearing slides are
delivered primarily by means of a Company-owned tractor/trailer fleet. This
satellite-monitored fleet improves the timely and economic delivery of products
to customers. Another important economic advantage to the Company's customers
of an in-house trucking fleet is that it allows the shipment of many products in
returnable metal baskets (in lieu of corrugated paper cartons), which avoids
both the environmental and economic burden of disposal.
The Company does not believe it is dependent upon one or a few customers,
the loss of which would have a material adverse effect on its component products
operations. For the years ended December 31, 1996 and 1997, the ten largest
customers accounted for about one-third of sales, with the largest customer less
than 10% in each year with six of such customers in each year located in the
Unites States. In 1998, the Company's ten largest customers accounted for 40%
of sales and nine of such customers were located in the United States and one
customer, Hon Company, accounted for approximately 10% of sales.
ACQUISITION
In January 1999, the Company completed the acquisition of in excess of 99%
of the stock of Thomas Regout Holding NV, a producer of precision ball bearing
slides, for approximately $52.2 million cash. The transaction was financed
principally by available cash and $20 million of borrowings under the Company's
$100 million revolving bank credit facility (the "Revolving Senior Credit
Facility"). CompX acquired the remaining stock of Thomas Regout by the end of
February 1999.
For the fiscal year ended June 30, 1998, Thomas Regout reported sales of
approximately $59 million. Thomas Regout is the largest European producer of
precision slides for the office products industry and also a significant
producer in the United States. Thomas Regout's precision slide products
represent a complementary product offering to CompX's Waterloo slide product
line. Thomas Regout operates its larger plant in Maastricht, The Netherlands
and a second plant near Grand Rapids, Michigan, which in 1998 accounted for
about 29% of the sales of Thomas Regout.
RAW MATERIALS
Coiled steel is the major raw material used in the manufacture of precision
ball bearing slides and ergonomic computer support systems. Plastic resins for
injection molded plastics are also an integral material for ergonomic computer
support systems. Purchased components, including zinc castings, are the
principal raw materials used in the manufacture of medium-security cabinet
locks. These raw materials are purchased from several suppliers and readily
available from numerous sources.
The Company occasionally enters into raw material arrangements to mitigate
the short-term impact of future increases in raw material costs. While these
arrangements do not commit the Company to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows the Company to stabilize raw material
purchase prices provided the specified minimum monthly purchase quantities are
met. Materials purchased on the spot market are sometimes subject to
unanticipated and sudden price increases. Due to the competitive nature of the
markets served by the Company's products, it is often difficult to recover such
increases in raw material costs through increased product selling prices and
consequently overall operating margins can be affected by such raw material cost
pressures.
COMPETITION
The office furniture market is highly competitive. Suppliers to office
furniture OEMs compete on the basis of (i) product design, including ergonomic
and aesthetic factors, (ii) product quality and durability, (iii) price, (iv)
on-time delivery and (v) service and technical support. The Company focuses its
efforts on the middle- and high-end segments of the market, where product
design, quality, durability and service are placed at a premium.
The medium-security lock market is also highly competitive. This market is
highly fragmented with a number of small- to medium-sized manufacturers who
supply the market. Lock manufacturers compete on the basis of (i) product
design, (ii) custom engineering capability, (iii) price and (iv) order
fulfillment lead times.
The Company believes it derives a significant competitive advantage as a
result of its focus on (i) a collaborative approach to product design and
engineering, (ii) increased manufacturing and assembly automation and (iii)
implementation of distribution programs that reduce order fulfillment times.
The Company competes in the ergonomic computer support systems market with
one major producer and a number of small manufacturers that compete primarily on
the basis of product quality, features and price. The Company competes in the
precision ball bearing slide market with two large manufacturers and a number of
smaller manufacturers that compete primarily on the basis of product quality and
price. The Company's medium-security locks compete with a variety of relatively
small competitors, which makes significant price increases difficult.
Certain of the Company's competitors may have greater financial, marketing,
manufacturing and technical resources than those of the Company. Although the
Company believes that it has been able to compete successfully in its markets to
date, there can be no assurance that it will be able to continue to do so in the
future.
PATENTS AND TRADEMARKS
CompX holds a number of patents relating to its component products, certain
of which are believed to be important to CompX and its continuing business
activity. CompX's major trademarks, including National Cabinet Lock, Fort
Lock, Thomas Regout, STOCK LOCKS, ShipFast and Waterloo Furniture Components
Limited, are protected by registration in the United States and elsewhere with
respect to the products it manufactures and sells. The Company believes such
trademarks are well recognized in the component products industry.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the use, storage, handling, generation,
transportation, treatment, emission, discharge, disposal and remediation of, and
exposure to, hazardous and non-hazardous substances, materials and wastes
("Environmental Laws"). The Company's operations also are subject to federal,
state, local and foreign laws and regulations relating to worker health and
safety. The Company believes that it is in substantial compliance with all such
laws and regulations. The costs of maintaining compliance with such laws and
regulations have not significantly impacted the Company to date, and the Company
has no significant planned costs or expenses relating to such matters. There
can be no assurance, however, that compliance with future Environmental Laws or
with future laws and regulations governing worker health and safety will not
require the Company to incur significant additional expenditures, or that such
additional costs would not have a material adverse effect on the Company's
business, consolidated financial condition, results of operations or liquidity.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,550 employees,
including 690 in the United States 830 in Canada and 30 in France.
Approximately 85% of the Company's employees in Canada are represented by the
United Steel Workers of America labor union. The Company's collective
bargaining agreement with such union expires in January 2000. The Company
believes that its labor relations are satisfactory. Thomas Regout employs
approximately 420 persons in Europe and 130 persons in the United States.
Certain of the European employees are covered by a collective bargaining
agreement expiring in June 2000.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately
3,200 square feet of leased space at 16825 Northchase Drive, Houston, Texas
77060. The following table sets forth the location, size and general product
types produced for each of the Company's facilities. All of such facilities are
owned except for the French lock facility and the distribution center, which are
leased.
SIZE PRODUCTS
PRODUCED
FACILITY NAME LOCATION (square feet)
Manitou Kitchener, Ontario 280,000 Slides
Trillium Kitchener, Ontario 116,000 Ergonomic products
Thomas Regout Maastricht,
The Netherlands 270,000 Slides
Grand Rapids, MI 60,000 Slides
National Cabinet
Lock Mauldin, SC 159,200 Locks
Fort Lock River Grove, IL 100,000 Locks
Timberline Lake Bluff, IL 16,000 Locks
Fort Securite' Henriville, France 15,000 Locks
Distribution Chino, CA 6,000 Product distribution
Center
The Manitou and National Cabinet Lock facilities are ISO-9001 registered.
ISO-9001 registration of the Fort Lock and Trillium facilities is anticipated in
1999. The Company believes that all its facilities are well maintained and
satisfactory for their intended purposes. The Thomas Regout facilities were
acquired in January 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved, from time to time, in various environmental,
contractual, product liability, patent (or intellectual property) and other
claims and disputes incidental to its business. Currently, no environmental or
other material litigation is pending or, to the knowledge of the Company,
threatened. The Company currently believes that the disposition of all claims
and disputes, individually or in the aggregate, should not have a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange (symbol: CIX). As of February 26, 1999, there were approximately 30
holders of record of CompX Class A common stock. The following table sets forth
the high and low closing sales prices for CompX Class A common stock for 1998
(subsequent to the Company's March 1998 initial public offering), according to
the New York Stock Exchange Composite Tape, and dividends paid during such
periods. On February 26, 1999 the closing price of CompX common stock according
to the NYSE Composite Tape was $17 3/8.
DIVIDENDS
HIGH LOW PAID
Year ended December 31, 1998
First Quarter $24 3/16 $23 1/8 $ -
Second Quarter 27 1/2 19 5/8 -
Third Quarter 24 11/16 16 3/4 -
Fourth Quarter 26 1/2 16 3/16 -
The Company does not currently pay dividends. The declaration and payment
of future dividends and the amount thereof will be dependent upon the Company's
results of operations, financial condition, cash requirements for its
businesses, contractual requirements and restrictions (including those contained
in the Company's Revolving Senior Credit Facility) and other factors deemed
relevant by the Board of Directors.
Prior to the initial public offering of the Company's Class A common stock
in March 1998, the Company paid dividends to Valcor aggregating $6.1 million in
1997 and $1.8 million in February 1998. In addition, on December 12, 1997, the
Company paid a $50 million dividend to Valcor in the form of a note payable.
The Company utilized borrowings under the Revolving Senior Credit Facility to
repay the note payable to Valcor.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data as of December 31, 1994 through 1998, and for
each of the years in the five-year period ended December 31, 1998, have been
derived from audited Consolidated Financial Statements of the Company. The
following selected financial and other data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's operations are comprised of a 52 or 53 week fiscal year. Each
of the years 1994 through 1997 consisted of a 52 week year and 1998 was a 53
week year.
Years ended December 31,
1994 1995 1996 1997 1998
($ in millions, except per share data)
INCOME STATEMENT DATA
Net sales $70.0 $80.2 $88.7 $108.7 $152.1
Operating income 20.9 19.9 22.1 28.3 31.9
Income before income taxes 20.7 19.9 22.1 27.7 32.5
Income taxes 8.8 7.8 9.1 11.0 12.0
Minority interest in losses - - - - (.2)
Net income 11.9 12.1 13.0 16.7 $ 20.7
Cash dividends (1) $ 4.6 $ 6.0 $ 6.2 $ 6.1 $ 1.8
Basic earnings per share data $1.19 $1.21 $1.30 $ 1.67 $ 1.37
Weighted average common shares
outstanding 10.0 10.0 10.0 10.0 15.1
BALANCE SHEET DATA
(AT YEAR END):
Cash and other current assets $25.9 $27.7 $32.2 $ 45.4 $ 86.5
Total assets 37.8 44.4 48.5 63.8 152.4
Current liabilities 8.9 9.6 8.1 64.4 20.3
Long-term debt, including
current maturities .1 .1 .2 50.4 1.7
Stockholders' equity (deficit) 26.2 32.6 39.2 (1.2) 130.0
(1) In addition to the amounts shown above, in December 1997 the Company
paid a $50 million dividend to Valcor in the form of a demand note payable.
The note was repaid in February 1998 using borrowings under the Company's
Revolving Senior Credit Facility. See Note 10 to the Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company sells ergonomic computer support systems and precision ball
bearing slides which are manufactured in two facilities located in Kitchener,
Ontario, Canada and medium security locks which are manufactured at facilities
in Mauldin, South Carolina, River Grove, Illinois, Lake Bluff, Illinois and
Henriville, France. In January 1999, the Company acquired Thomas Regout Holding
NV, a producer of precision ball bearing slides with manufacturing facilities
located in The Netherlands and Michigan.
On March 3, 1998, the Company completed the acquisition of the Fort Lock
Corporation and related assets for an aggregate purchase price of approximately
$33 million (the "Fort Lock Acquisition"). Funding of the Fort Lock Acquisition
was provided by available cash on hand and borrowings under the Revolving Senior
Credit Facility, which borrowings were repaid with a portion of the net proceeds
of the Company's initial public offering. In November 1998, the Company
acquired Timberline Lock, Ltd., a manufacturer of locks for wood furniture
applications, for approximately $8 million in cash funded by available cash on
hand.
Assuming the Fort Lock Acquisition occurred January 1, 1997, the Company's
unaudited pro forma net sales would have been $137.9 million and $156.7 million
for the years ended December 31, 1997 and 1998, respectively, and pro forma
operating income would have been $31.6 million and $32.4 million, respectively
($35.7 million in the 1998 period excluding the stock award charge described
below). The pro forma financial information is not necessarily indicative of
actual results had the transactions occurred at the beginning of the periods,
nor do they purport to represent results of future operations of the merged
companies. The pro forma effect of the Timberline Lock acquisition is not
material.
The Company's profitability primarily depends on its ability to utilize its
production capacity effectively, which is affected by, among other things, the
demand for its products, and its ability to control its manufacturing costs,
primarily comprised of raw materials such as zinc, copper, coiled steel and
plastic resins and of labor costs. Raw material costs represent approximately
45% of the Company's total cost of sales. Steel prices increased approximately
4% per pound in the second half of 1997, resulting in an overall increase in raw
material costs of approximately 2% in 1997 compared to 1996. Beginning in
August 1998, steel prices declined approximately 5%, resulting in an overall
decrease in raw material costs of approximately 2% in 1998 compared to 1997.
The Company occasionally enters into raw material supply arrangements to
mitigate the short-term impact of future increases in raw material costs. While
these arrangements do not commit the Company to a minimum volume of purchases,
they generally provide for stated unit prices based upon achievement of
specified volume purchase levels. This allows the Company to stabilize raw
material purchase prices provided the specified minimum monthly purchase
quantities are met. The Company currently anticipates entering into such
arrangements for zinc, coiled steel and plastic resins in 1999 and does not
anticipate significant changes in the cost of these materials from their current
levels. Materials purchased on the spot market are sometimes subject to
unanticipated and sudden price increases. Due to the competitive nature of the
markets served by the Company's products, it is often difficult to recover such
increases in raw material costs through increased product selling prices and
consequently overall operating margins can be affected by such raw material cost
pressures.
Labor costs represent approximately 14% of the Company's total cost of
sales. The Company's U.S. employees are not represented by bargaining units and
wage increases historically have been in line with overall inflation indices.
Approximately 85% of the Company's Canadian employees are covered by a three
year collective bargaining agreement that expires in January 2000 and provides
for annual wage increases of 2 - 3%. Wage increases for these employees
historically have been in line with overall inflation indices.
Selling, general and administrative costs consist primarily of salaries,
commissions and advertising expenses directly related to product sales and in
1996 and 1997 have been consistent as a percentage of net sales. In connection
with the Company's initial public offering in March 1998, five of the Company's
officers and directors were awarded 164,880 shares of Class A Common Stock. The
Company recognized a $3.3 million pre-tax charge, included in selling, general
and administrative expenses, equal to the aggregate value of the Class A shares
awarded based on the initial public offering price.
About two-thirds of the Company's net sales in 1998 were generated by its
Canadian operations. About 60% of these Canadian-produced sales are denominated
in U.S. dollars while substantially all of the related costs are incurred in
Canadian dollars. Consequently, relative changes in the U.S. dollar/Canadian
dollar exchange rate affect operating results. Since U.S. dollar/Canadian dollar
exchange rates did not fluctuate significantly from 1993 through 1997, the
impact on operating income of fluctuations in the value of the U.S. dollar
relative to the Canadian dollar during this period was not material. During
1998, fluctuations in the value of the U.S. dollar relative to the Canadian
dollar increased operating income (excluding the effect of the stock award
charge) by 3% and reduced net sales by approximately 1%.
Prior to March 1998, the Company was included in the consolidated U.S.
federal income tax return of Contran, and a tax sharing agreement provided for
allocation of tax liabilities and benefits to the Company, in general, as though
it filed a separate U.S. federal income tax return. The principal reasons for
the difference between the U.S. federal statutory income tax rate and the
Company's effective income tax rates are explained in Note 8 to the Consolidated
Financial Statements. Upon completion of the initial public offering in March
1998, the Company became a separate U.S. federal income tax payer and ceased to
be included in the consolidated U.S. federal income tax return of Contran.
Recently, some of the Company's customers, principally in the office
furniture industry, have publicly announced softening market demand and a
slowdown in order volumes for their products beginning in late 1998 and
continuing into 1999. While the Company has experienced some softening of
demand, primarily in its precision ball bearing slide product line and, to a
lesser degree, in its ergonomics product line, such softening of demand has been
offset in part by increased demand for its security products. Overall, and
primarily as a result of the January 1999 acquisition of Thomas Regout, the
Company expects its sales and operating income will be higher in 1999 compared
to 1998.
RESULTS OF OPERATIONS
The table set forth below summarizes the Company's operating expenses as a
percentage of net sales:
Years ended December 31,
1996 1997 1998
Net sales 100% 100% 100%
Cost of sales 66 65 67
Gross profit 34 35 33
Selling, general and administrative 10 10 13
Other income, net (1) (1) (1)
Operating income 25% 26% 21%
Year ended December 31, 1998 compared to year ended December 31, 1997
Net sales. Net sales increased $43.4 million, or 40% for the year ended
December 31, 1998 compared to December 31, 1997, primarily due to increased
volumes in all product lines and the inclusion of the results of Fort Lock
beginning March 3, 1998. Combined net sales from the Company's ergonomic
computer support systems and precision ball bearing slide products increased
$11.6 million, or 14%, based on higher unit volumes and relatively stable
prices. Locking system sales increased $31.8 million, or 113%, primarily due to
sales attributable to Fort Lock.
Operating income. Operating income increased $6.9 million for the year
ended December 31, 1998 compared to December 31, 1997 (excluding the $3.3
million stock award charge discussed above), or 24%, due primarily to the
increased volumes in all product lines. Reduction in gross profit margins in
1998 resulted principally from goodwill amortization associated with the Fort
Lock Acquisition. Beginning in August 1998, steel prices declined approximately
5%, resulting in an overall decrease in raw material costs of approximately 2%
in 1998 compared to 1997.
Year ended December 31, 1997 compared to year ended December 31, 1996
Net sales. Net sales increased $20.0 million, or 22%, to $108.7 million for
the year ended December 31, 1997 from $88.7 million for the year ended December
31, 1996. The increase was primarily due to increased volume in ergonomic
computer support systems, precision ball bearing slides and medium-security
cabinet locks. Combined net sales from the Company's ergonomic computer support
systems and precision ball bearing slide products increased $15.8 million, or
25%, based on higher unit volumes and relatively stable prices. Medium-security
cabinet lock sales increased $3.6 million, or 15% based primarily on higher unit
volumes and to a lesser degree on certain price increases instituted at the
beginning of 1997.
Operating income. Operating income increased $6.2 million, or 28%, to $28.3
million for the year ended December 31, 1997 from $22.1 million for the year
ended December 31, 1996, due primarily to increases in sales volumes. Operating
income margin improvement in 1997 was primarily influenced by the elimination of
certain unprofitable or low-margin product lines acquired in 1995 and increased
sales of higher margin ergonomic computer support systems and precision ball
bearing slides. These improvements were partially offset by higher raw material
prices, primarily steel. Beginning in August 1997 steel prices have increased
approximately 4% per pound, resulting in an overall increase in raw material
cost of approximately 2% in 1997 compared to 1996.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, certain of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in normal business activities.
CompX has recently installed information systems upgrades for both its U.S.
and Canadian facilities which contained, among many other features, software
compatibility with the Year 2000 Issue. CompX does not currently anticipate
spending significant additional funds to address software compatibility with the
Year 2000 Issue with respect to its own internal systems.
As part of its Year 2000 compliance plan, CompX is seeking confirmation
from its major software and hardware vendors and primary suppliers that they are
developing and implementing plans to become, or that they have become, Year 2000
compliant. Confirmations received by CompX to-date indicate that they generally
are in the process of becoming Year 2000 compliant by December 31, 1999. The
major software vendors used by CompX have already delivered Year 2000 compliant
software. CompX plans to seek confirmation from its major customers to ensure
they are Year 2000 compliant or are developing and implementing plans to become
Year 2000 compliant. Notwithstanding these efforts, CompX's ability to affect
the Year 2000 preparedness of such vendors, suppliers and customers is limited.
CompX is developing a contingency plan to deal with potential Year 2000
Issues related to business interruption that may occur on January 1, 2000 or
thereafter. CompX's plan is expected to be completed in the second quarter of
1999.
Although CompX expects its systems to be Year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the Year 2000
compliance programs of its vendors, suppliers, and customers. CompX also cannot
predict whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that might result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, CompX cannot predict the impact on its consolidated financial
condition or results of operations resulting from noncompliant Year 2000 systems
that CompX directly or indirectly relies upon. Should CompX's Year 2000
compliance plan not be successful or be delayed beyond January 2000, or should
one or more suppliers, vendors or customers fail to adequately address their
Year 2000 Issues, the consequences to CompX could be far reaching and material,
including an inability to produce products at its manufacturing facilities,
which could lead to an indeterminate amount of lost revenue. Although not
anticipated, the most reasonable likely worst-case scenario of failure by CompX
or its key suppliers or customers to become Year 2000 compliant would be a
short-term slowdown or cessation of manufacturing operations at one or more of
our facilities and a short-term inability on the part of CompX to process orders
and billings in a timely manner, and to deliver product to customers.
Thomas Regout's Year 2000 preparedness is substantially similar to CompX's
other operations.
IMPACT OF ACCOUNTING STANDARDS NOT YET ADOPTED
See Note 1 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities and non-cash stock award charges,
for 1996, 1997 and 1998, are generally similar to the trends in the Company's
earnings. Such cash flows provided by operating activities totaled
$15.1 million, $19.1 million and $27.4 million for the years ended December 31,
1996, 1997 and 1998, respectively, compared to net income of $13.0 million,
$16.7 million and $20.7 million, respectively. Depreciation and amortization
increased in 1998 in part due to the Fort Lock Acquisition discussed above.
Changes in assets and liabilities result primarily from the timing of
production, sales and purchases. Such changes in assets and liabilities
generally tend to even out over time and result in trends in cash flows from
operating activities generally reflecting earnings trends.
Investing activities. Net cash used by investing activities totaled $2.0
million, $5.5 million and $54.2 million for the years ended December 31, 1996,
1997 and 1998, respectively. Cash used by investing activities in 1998 includes
an aggregate of $41.6 million for the Fort Lock and Timberline acquisitions.
Other cash flows from investing activities in each of the past three years
related principally to capital expenditures. Capital expenditures in the past
three years emphasized manufacturing equipment which utilizes new technologies
and increases automation of the manufacturing process to provide for increased
productivity and efficiency. The increase in capital expenditures in 1997 and
1998 relates primarily to the additions of a third plating line at the Company's
Kitchener facility, facility expansions in Mauldin and Kitchener, the
acquisition of an adjoining manufacturing building at Fort Lock and the addition
of automation equipment at all facilities.
Capital expenditures for 1999 are estimated at approximately $17 million,
the majority of which relate to projects that emphasize improved production
efficiency and increase production capacity and development of E-Commerce
capabilities. Firm purchase commitments for capital projects not commenced at
December 31, 1998 were not material. As discussed above, the Company acquired
Thomas Regout in early 1999 for an aggregate of $52.2 million cash. Funds for
this acquisition were provided by available cash on hand and $20 million of
borrowings under the Company's Revolving Senior Credit Facility.
Financing activities. Net cash provided (used) by financing activities
totaled ($6.3) million, ($5.9) million and $58.7 million for the years ended
December 31, 1996, 1997 and 1998, respectively. Net cash provided in 1998
includes $110.4 million of net proceeds from the Company's March 1998 initial
public offering and the repayment of $50 million of indebtedness owed to Valcor.
The Company paid dividends to its parent company aggregating $6.2 million in
1996, $6.1 million in 1997 and $1.8 million in 1998. In addition, on December
12, 1997, the Company paid a $50 million dividend to Valcor in the form of a
note payable. The Company utilized borrowings under the Revolving Senior Credit
Facility to repay the note payable to Valcor. See Notes 9 and 10 to the
Consolidated Financial Statements.
At December 31, 1998, the Company had $100 million of borrowing
availability under its Revolving Senior Credit Facility. The Company borrowed
$20 million under this facility in January 1999 to fund a portion of the Thomas
Regout acquisition.
Other
At December 31, 1998, approximately 74% of the Company's consolidated cash
and equivalents were invested in A1 or P1 - grade commercial paper issued by
various third parties having a maturity of three months or less.
Management believes that cash generated from operations and borrowing
availability under the Revolving Senior Credit Facility, together with cash on
hand, will be sufficient to meet the Company's liquidity needs for working
capital, capital expenditures and debt service.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements in light of its capital resources
and estimated future operating cash flows. As a result of this process, the
Company may in the future seek to raise additional capital, refinance or
restructure indebtedness, issue additional securities or take a combination of
such steps or other steps to manage its liquidity and capital resources. In the
normal course of business, the Company may review opportunities for
acquisitions, joint ventures or other business combinations in the component
products industry. In the event of any such transaction, the Company may
consider using available cash, issuing additional equity securities or
increasing the indebtedness of the Company or its subsidiaries.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates.
The Company has historically had a very low level of indebtedness and
invests excess funds in instruments having a very short maturity. Consequently,
the Company's exposure to market risk from changes in interest rates has been
nominal. However, it is possible that in the future the Company might increase
its level of indebtedness and enter into interest rate swaps or other types of
contracts in order to manage a portion of its interest rate market risk
associated with any variable-rate borrowings.
In the past, the Company has periodically entered into currency forward
contracts to manage a very nominal portion of foreign exchange rate market risk
associated with receivables denominated in a currency other than the holder's
functional currency. Otherwise, the Company does not generally enter into
forward or option contracts to manage such market risks, nor does the Company
enter into any such contract or other type of derivative instrument for trading
purposes. Solely in connection with the January 1999 acquisition of Thomas
Regout, on December 30, 1998 the Company entered into a short-term currency
forward contract to purchase NLG 75.0 million for $40.1 million which contract
was executed on January 19, 1999. See Note 2 to the Consolidated Financial
Statements. Other than such forward contract, the Company was not a party to
any type of forward or option contract at December 31, 1998.
The Company is exposed to market risk arising from changes in foreign
currency exchange rates as a result of manufacturing and selling its products
worldwide. Earnings are primarily affected by fluctuations in the value of the
U.S. dollar relative to the Canadian Dollar and, beginning in January 1999, the
Dutch Guilder.
Beginning January 1, 1999, eleven of the fifteen members of the European
Union ("EU"), including the Netherlands and France, adopted a new European
currency unit (the "euro") as their common legal currency. Following the
introduction of the euro, the participating countries' national currencies
remain legal tender as denominations of the euro from January 1, 1999 through
January 1, 2002, and the exchange rates between the euro and such national
currency units are fixed.
The functional currencies of the Company's French lock operations and the
recently-acquired Thomas Regout operations in Maastricht, The Netherlands, will
convert to the euro from their respective national currencies over a two-year
period beginning in 1999. The euro conversion may impact the Company's
operations including, among other things, changes in product pricing decisions
necessitated by cross-border price transparencies. Such changes in product
pricing decisions could impact both selling prices and purchasing costs and,
consequently, favorably or unfavorably impact results of operations.
In 1998 the Company assessed and evaluated the impact of the euro
conversion on its business and made the necessary system conversions.
Modifications of information systems to handle euro-denominated transactions
have been implemented and were not extensive. Thomas Regout's information
systems have also been modified to handle euro-denominated transactions.
Because of the inherent uncertainty of the ultimate effect of the euro
conversion, the Company cannot accurately predict the impact of the euro
conversion on its results of operations, financial condition or liquidity.
At December 31, 1998, the Company had approximately $1.3 million of
indebtedness denominated in French-francs bearing interest at fixed interest
rates between 6% and 7%. The potential increase in interest expense in 1999
related to such indebtedness resulting from a hypothetical 10% adverse change in
exchange rates would not be material.
The above discussion includes forward-looking statements of market risk
which assume hypothetical changes in market prices. Actual future market
conditions will likely differ materially from such assumptions. Accordingly,
such forward-looking statements should not be considered to be projections by
the Company of future events or losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
CompX's definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report (the "CompX Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
CompX Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
CompX Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
CompX Proxy Statement. See Note 10 to the Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d)Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules listed on the
accompanying Index of Financial Statements and Schedules (see page F)
are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31,
1998.
October 15, 1998 - Reported Items 5 and 7.
October 16, 1998 - Reported Items 5 and 7.
November 19, 1998 - Reported Items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit
Index. CompX will furnish a copy of any of the exhibits listed
below upon payment of $4.00 per exhibit to cover the costs to
CompX of furnishing the exhibits. Instruments defining the
rights of holders of long-term debt issues which do not exceed
10% of consolidated total assets will be furnished to the
Commission upon request.
Item No. Exhibit Item
3.1 Restated Certificate of Incorporation of Registrant -
incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-1 (File No.
333-42643).
3.2 Bylaws of Registrant - incorporated by reference to
Exhibit 3.2 of the Registrant's Registration Statement on
Form S-1 (File No. 333-42643).
10.1 Intercorporate Services Agreement between the Registrant
and Valhi, Inc. effective as of January 1, 1998.
10.2 Intercorporate Services Agreement between the Registrant
and NL Industries, Inc. effective as of January 1, 1998.
10.3* CompX International Inc. 1997 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.2 of the
Registrant's Registration Statement on Form S-1 (File No.
333-42643).
10.4* CompX International Inc. Variable Compensation Plan
effective as of January 1, 1999.
Item No. Exhibit Item
10.5 Agreement between Haworth, Inc. and Waterloo Furniture
Components, Ltd. and Waterloo Furniture Components, Inc.
effective October 1, 1992 - incorporated by reference to
Exhibit 10.3 of the Registrant's Registration Statement on
Form S-1 (File No. 333-42643).
10.6 Tax Sharing Agreement among the Registrant, Valcor, Inc.
and Valhi, Inc. dated as of January 2, 1998 - incorporated
by reference to Exhibit 10.4 of the Registrant's
Registration Statement on Form S-1 (File No. 333-42643).
10.7 $100,000,000 Credit Agreement between the Registrant,
Bankers Trust Company, as Agent and various lending
institutions dated February 26, 1998 - incorporated by
reference to Exhibit 10.5 of the Registrant's
Registration Statement on Form S-1 (File No. 333-42643).
10.8 Stock Purchase Agreement between CompX International Inc.
and Shareholders of Fort Lock Corporation dated February
3, 1998 - incorporated by reference to Exhibit 10.7 of the
Registrant's Registration Statement on Form S-1 (File No.
333-42643).
10.9 Offer and Acquisition Agreement dated December 18, 1998
between CompX International Inc. and Thomas Regout Holding
N.V. - incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K (File No. 1-13905)
dated January 29, 1999.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricwaterhouseCoopers LLP
27.1 Financial Data Schedule for the year ended December 31,
1998.
99.1 Annual Report of the National Cabinet Lock, Inc.
Contributory Retirement Plan (Form 11-K) to be filed under
Form 10-K/A to this Annual Report on Form 10-K within 180
days after December 31, 1998.
*Management contract, compensatory plan or agreement
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.
COMPX INTERNATIONAL INC.
By: /s/ Joseph S. Compofelice
Joseph S. Compofelice
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Joseph S. Chairman of the Board, March 22, 1999
President and Chief
Compofelice
Executive Officer
Joseph S. Compofelice (Principal
Executive Officer)
/s/ John A. Miller Vice President March 22, 1999
and Chief Financial
John A. Miller
Officer and Treasurer
(Principal Financial
Officer)
/s/ David A. Bowers Vice President and March 22, 1999
Director
David A. Bowers
/s/ Todd W. Strange Vice President and March 22, 1999
Controller (Principal
Accounting Officer)
Todd W. Strange
/s/ Glenn R. Simmons Director March 22, 1999
Glenn R. Simmons
/s/ Robert W. Singer Director March 22, 1999
Robert W. Singer
/s/ Edward J. Hardin Director March 22, 1999
Edward J. Hardin
/s/ Paul M. Bass Director March 22, 1999
Paul M. Bass
/s/ Ann Manix Director March 22, 1999
Ann Manix
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(A) AND 14(D)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS PAGE
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 1997 and 1998 F-2
Consolidated Statements of Income -
Years ended December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Comprehensive Income -
Years ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996, 1997 and 1998 F-8
Notes to Consolidated Financial Statements F-9
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule II - Valuation and qualifying accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of CompX International Inc.:
In our opinion, the accompanying consolidated balance sheets of CompX
International Inc. and Subsidiaries, and the related consolidated statements of
income, comprehensive income, cash flows and stockholders' equity, present
fairly, in all material respects, the consolidated financial position of CompX
International Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 the consolidated financial 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 our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
February 19, 1999
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1997 1998
Current assets:
Cash and cash equivalents $19,187 $ 47,363
Accounts receivable, less allowance for
doubtful accounts of $311 and $310 14,573 18,976
Receivable from affiliates - 573
Refundable income taxes - 524
Inventories 11,073 16,952
Prepaid expenses 161 1,381
Deferred income taxes 438 688
Total current assets 45,432 86,457
Other assets:
Goodwill - 22,317
Other intangible assets 66 2,938
Deferred income taxes 133 -
Other - 400
Total other assets 199 25,655
Property and equipment:
Land 383 1,219
Buildings 8,194 13,678
Equipment 24,343 39,216
Construction in progress 707 3,533
33,627 57,646
Less accumulated depreciation 15,464 17,376
Net property and equipment 18,163 40,270
$63,794 $152,382
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1997 1998
Current liabilities:
Demand note payable to Valcor $50,000 $ -
Current maturities of long-term debt 113 609
Accounts payable and accrued liabilities 11,427 17,243
Other payable to affiliates 331 -
Income taxes 2,559 2,415
Total current liabilities 64,430 20,267
Noncurrent liabilities:
Long-term debt 262 1,082
Deferred income taxes 115 983
Other 150 -
Total noncurrent liabilities 527 2,065
Minority interest - 4
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 1,000 shares
authorized, none issued - -
Class A common stock, $.01 par value;
20,000,000 shares authorized; nil and 6,144,880
shares issued and outstanding - 61
Class B common stock, $.01 par value;
10,000,000 shares authorized, issued and outstandin 100 100
Additional paid-in capital 4,412 118,027
Retained earnings (deficit) (4,596) 14,270
Accumulated other comprehensive income-
currency translation
(1,079) (2,412)
Total stockholders' equity (deficit) (1,163) 130,046
$63,794 $152,382
Commitments and contingencies (Notes 2 and 11)
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1997 1998
Net sales $88,744 $108,652 $152,093
Costs and expenses:
Cost of sales 58,295 70,638 102,004
Selling, general and administrative 9,094 10,546 19,706
Other income, net (759) (872) (1,546)
General corporate expense (income), net 12 472 (1,700)
Interest expense 18 199 1,094
66,660 80,983 119,558
Income before income taxes and
minority interest 22,084 27,669 32,535
Provision for income taxes 9,055 11,019 12,034
Minority interest - - (165)
Net income $13,029 $ 16,650 $ 20,666
Basic and diluted earnings per common share $ 1.30 $ 1.67 $ 1.37
Shares used in the calculation of earnings
per share amounts:
Basic earnings per share 10,000 10,000 15,052
Dilutive impact of stock options - - 32
Diluted earnings per share 10,000 10,000 15,084
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
1996 1997 1998
Net income $13,029 $16,650 $20,666
Other comprehensive income -
Currency translation adjustment:
Pre-tax amount (234) (1,472) (2,001)
Less income tax benefit (82) (515) (668)
Total other comprehensive incom (152) (957) (1,333)
Comprehensive income $12,877 $15,693 $19,333
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
1996 1997 1998
Cash flows from operating activities:
Net income $13,029 $16,650 $ 20,666
Depreciation and amortization 2,483 2,811 4,538
Deferred income taxes (625) (651) (830)
Noncash stock award of Management Shares - - 3,298
Minority interest - - (165)
Other, net 206 338 (85)
Change in assets and liabilities:
Accounts receivable (1,093) (3,117) (1,319)
Inventories (1,662) (194) (375)
Accounts payable and accrued liabilities (1,277) 4,531 1,486
Accounts with affiliates (59) 710 (904)
Income taxes (221) 1,502 (687)
Other, net (306) 372 (1,357)
Net cash provided by operating 10,475 22,952 24,266
activities
Cash flows from investing activities:
Capital expenditures (2,287) (5,536) (12,928)
Purchase of business units - - (41,646)
Other, net 263 15 398
Net cash used by investing activities (2,024) (5,521) (54,176)
Cash flows from financing activities:
Long-term debt:
Additions - 369 75,475
Principal payments (74) (156) (75,157)
Deferred financing costs paid - - (200)
Repayment of demand note to Valcor - - (50,000)
Issuance of common stock - - 110,378
Dividends (6,247) (6,098) (1,800)
Net cash provided (used) by financing
activities
(6,321) (5,885) 58,696
Net increase $ 2,130 $11,546 $ 28,786
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
1996 1997 1998
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing
activities $ 2,130 $11,546 $28,786
Business units acquired - - 387
Currency translation (128) (909) (997)
Balance at beginning of year 6,548 8,550 19,187
Balance at end of year $ 8,550 $19,187 $47,363
Supplemental disclosures:
Cash paid for:
Interest $ 18 $ 35 $ 1,244
Income taxes 9,974 9,617 14,449
Dividend in the form of a demand note $ - $50,000 $ -
payable
Net assets consolidated - business
units acquired:
Cash and cash equivalents $ - $ - $ 387
Goodwill - - 23,145
Other intangible assets - - 3,057
Other non-cash assets - - 21,653
Liabilities - - (6,596)
Cash paid $ - $ - $41,646
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
ADDITIONAL
COMMON STOCK PAID-IN
CAPITAL
CLASS A CLASS B
Balance at December 31, 1995 $ - $100 $ 4,412
Net income - - -
Other comprehensive income - - -
Cash dividends - - -
Balance at December 31, 1996 - 100 4,412
Net income - - -
Other comprehensive income - - -
Dividends:
Cash - - -
Noncash - - -
Balance at December 31, 1997 - 100 4,412
Net income - - -
Other comprehensive income - - -
Cash dividends - - -
Issuance of common stock:
Initial public offering 60 - 110,318
Management shares 1 - 3,297
Balance at December 31, 1998 $ 61 $100 $118,027
ACCUMULATED OTHER
COMPREHENSIVE
INCOME - TOTAL
RETAINED CURRENCY STOCKHOLDER'S
EARNINGS TRANSLATION EQUITY
(DEFICIT) (DEFICIT)
Balance at December 31, 1995 $ 28,070 $ 30 $ 32,612
Net income 13,029 - 13,029
Other comprehensive income - (152) (152)
Cash dividends (6,247) - (6,247)
Balance at December 31, 1996 34,852 (122) 39,242
Net income 16,650 - 16,650
Other comprehensive income - (957) (957)
Dividends:
Cash (6,098) - (6,098)
Noncash (50,000) - (50,000)
Balance at December 31, 1997 (4,596) (1,079) (1,163)
Net income 20,666 - 20,666
Other comprehensive income - (1,333) (1,333)
Cash dividends (1,800) - (1,800)
Issuance of common stock:
Initial public offering - - 110,378
Management shares -
Balance at December 31, 1998 $ 14,270 $(2,412) $130,046
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization. CompX International Inc. (NYSE: CIX) is 64% owned by Valhi,
Inc. (NYSE: VHI) and Valhi's wholly-owned subsidiary Valcor, Inc. Prior to the
Company's March 1998 initial public offering, the Company was a wholly-owned
subsidiary of Valcor. The Company manufactures and sells component products
(ergonomic computer support systems, precision ball bearing slides and locking
systems), primarily in North America. Contran Corporation holds, directly or
through subsidiaries, approximately 92% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held either by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee, or by Mr. Simmons directly. Mr.
Simmons, the Chairman of the Board of each of Contran, Valhi and Valcor, may be
deemed to control each of such companies and the Company.
Management estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of CompX International Inc. and its majority-
owned subsidiaries. All material intercompany accounts and balances have been
eliminated. Certain prior year amounts have been reclassified to conform to the
current year presentation.
Fiscal year. The Company's operations are reported on a 52 or 53-week
fiscal year. The years ended December 31, 1996 and 1997 each consisted of 52
weeks, and the year ended December 31, 1998 consisted of 53 weeks.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is deemed to be other than the U.S. dollar are
translated at year-end rates of exchange and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Currency transaction gains and losses are recognized in
income currently. The net foreign currency transaction gain, included in other
income, net, was $136,000 in 1996, $303,000 in 1997 and $512,000 in 1998.
Cash and cash equivalents. Cash equivalents consist principally of bank
time deposits and government and commercial notes with original maturities of
three months or less.
Net sales. Sales are recorded when products are shipped.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market. Inventories are based on average cost or the first-in, first-out
method.
Property, equipment and depreciation. Property and equipment, including
purchased computer software for internal use, are stated at cost. Maintenance,
repairs and minor renewals are expensed; major improvements are capitalized.
Depreciation is computed principally by the straight-line method over the
estimated useful lives of 15 to 40 years for buildings and three to 10 years for
equipment.
Intangible assets and amortization. Goodwill, representing the excess of
cost over fair value of individual net assets acquired in business combinations
accounted for by the purchase method, is amortized by the straight-line method
over 20 years and is stated net of accumulated amortization of $.8 million at
December 31, 1998. The Company's criteria for evaluating the recoverability of
goodwill includes consideration of the estimated fair value of the businesses
acquired.
Other intangible assets, consisting primarily of the estimated fair value of
certain patents acquired, are being amortized by the straight-line method over
the lives of such patents (approximately 14.25 years remaining at December 31,
1998) and are stated net of accumulated amortization of $.2 million at December
31, 1998.
Income taxes. Prior to March 1998, the Company was a member of Contran's
consolidated United States federal income tax group (the "Contran Tax Group").
The policy for intercompany allocation of federal income taxes provides that
subsidiaries included in the Contran Tax Group compute the provision for federal
income taxes on a separate company basis. Subsidiaries of Contran make payments
to, or receive payments from, Contran in the amount they would have paid to or
received from the Internal Revenue Service had they not been members of the
Contran Tax Group. The separate company provisions and payments are computed
using the tax elections made by Contran. Subsequent to the Company's initial
public offering of shares of its Class A common stock in March 1998, the Company
became a separate U.S. federal income taxpayer and is no longer a member of the
Contran Tax Group.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
undistributed earnings of foreign subsidiaries which are not deemed to be
permanently reinvested. Earnings of foreign subsidiaries deemed to be
permanently reinvested aggregate $16 million at December 31, 1998.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. All outstanding stock options were included
in the calculation of diluted earnings per share in 1998.
Stock options. The Company accounts for stock-based employee compensation
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and its various interpretations. Under APBO No. 25,
no compensation cost is generally recognized for fixed stock options in which
the exercise price is not less than the market price on the grant date.
Compensation cost recognized by the Company in accordance with APBO No. 25 has
not been significant in any of the past three years.
New accounting principle not yet adopted. The Company will adopt Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, no later than the first quarter of 2000.
Under SFAS No. 133, all derivatives will be recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair
value of derivatives will depend upon the intended use of the derivative. The
Company is currently studying this new accounting rule, and the impact of
adopting SFAS No. 133, if any, has not yet been determined but will be dependent
upon the extent to which the Company is a party to derivative contracts or
hedging activities covered by SFAS No. 133 at the time of adoption.
Other. Advertising costs, expensed as incurred, were $410,000 in 1996,
$555,000 in 1997 and $423,000 in 1998. Research and development costs, expensed
as incurred, were $460,000 in 1996, $468,000 in 1997 and $643,000 in 1998.
NOTE 2 - BUSINESS UNITS ACQUIRED:
In 1998, the Company acquired two U.S. lock competitors for an aggregate
cash purchase price of approximately $41.6 million. Funding for the
acquisitions was provided by cash on hand and $25 million of borrowings under
the Company's $100 million revolving credit facility discussed in Note 6. The
Company accounted for the acquisitions by the purchase method of accounting and,
accordingly, the results of operations and cash flows of the businesses acquired
are included in the Company's consolidated financial statements subsequent to
the respective dates of acquisition. The purchase price has been allocated to
the individual assets acquired and liabilities assumed based upon preliminary
estimated fair values. The actual allocation of the purchase price may be
different from the preliminary allocation due to adjustments in the purchase
price and refinements in estimates of the fair values of the net assets
acquired.
Assuming the Fort Lock Acquisition occurred as of January 1, 1997, the
Company's unaudited pro forma net sales would have been $137.9 million and
$156.7 million, net income would have been $18.6 million and $21.3 million and
diluted earnings per common share would have been $1.15 and $1.31 on weighted
average diluted shares of 16.2 million for the years ended December 31, 1997 and
1998, respectively. The unaudited pro forma financial information is not
necessarily indicative of actual results had the transactions occurred at the
beginning of these periods, nor does it purport to represent results of future
operations of the combined companies.
In January 1999, the Company acquired a precision ball bearing slide
competitor based in The Netherlands for aggregate cash consideration of NLG 98
million ($52.2 million), using funds on hand and $20 million of borrowing under
the Company's revolving credit facility. This acquisition will also be
accounted for by the purchase method, and accordingly the results of operations
and cash flows of the acquired business will be included in the Company's
consolidated financial statements effective January 1, 1999. These operations
generated sales of approximately $59 million during its latest fiscal year. In
connection with this acquisition, the Company entered into a short-term currency
forward contract on December 30, 1998 to purchase NLG 75.0 million for $40.1
million, which contract was executed on January 19, 1999. The estimated fair
value of such forward contract at December 31, 1998 is insignificant.
NOTE 3 - BUSINESS AND GEOGRAPHIC SEGMENTS:
The Company operates in one business segment - the manufacture and sale of
component products (ergonomic computer support systems, precision ball bearing
slides and locking systems) for furniture and other markets. The Company
evaluates segment performance based on segment operating income, which is
defined as income before income taxes and interest expense, exclusive of certain
non-recurring items (such as gains or losses on disposition of business units)
and certain general corporate income and expense items (including interest and
dividend income) which are not attributable to the operations of the reportable
operating segment. The accounting policies of the reportable operating segment
are the same as those described in Note 1. Interest income included in the
calculation of segment operating income aggregated $.4 million in 1996, $.5
million in 1997 and $.6 million in 1998. Capital expenditures include additions
to property and equipment but exclude amounts attributable to business units
acquired in business combinations accounted for by the purchase method. See
Note 2.
Segment assets are comprised of all assets attributable to the reportable
operating segment. Corporate assets are not attributable to the operating
segment and consist of cash and cash equivalents. For geographic information,
net sales are attributed to the place of manufacture (point-of-origin) and the
location of the customer (point-of-destination); property and equipment are
attributed to their physical location. At December 31, 1998, the net assets of
non-U.S. subsidiaries (principally Canada) included in consolidated net assets
approximated $37.6 million.
YEARS ENDED DECEMBER 31,
1996 1997 1998
(IN THOUSANDS)
Net sales:
Point of origin:
Canada $65,758 $ 80,632 $ 92,272
United States 22,986 28,020 58,018
Other - - 1,803
$88,744 $108,652 $152,093
Point of destination:
United States $58,155 $ 70,354 $105,189
Canada 27,763 33,974 40,284
Other 2,826 4,324 6,620
$88,744 $108,652 $152,093
Operating income $22,114 $ 28,340 $ 31,929
General corporate income (expense), net (12) (472) 1,700
Interest expense (18) (199) (1,094)
Income before income taxes $22,084 $ 27,699 $ 32,535
DECEMBER 31,
1996 1997 1998
(IN THOUSANDS)
Total assets:
Operating segment $48,450 $63,794 $121,645
Corporate - - 30,737
$48,450 $63,794 $152,382
Net property and equipment:
Canada $10,681 $12,567 $ 18,307
United States 5,478 5,596 20,607
Other - - 1,356
$16,159 $18,163 $ 40,270
NOTE 4 - INVENTORIES:
DECEMBER 31,
1997 1998
(IN THOUSANDS)
Raw materials $ 2,057 $ 6,520
Work in process 5,193 5,748
Finished products 3,775 4,634
Supplies 48 50
$11,073 $16,952
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
DECEMBER 31,
1997 1998
(IN THOUSANDS)
Accounts payable $ 5,497 $ 8,589
Accrued liabilities:
Employee benefits 3,490 4,498
Insurance 633 842
Royalties 447 504
Other 1,360 2,810
$11,427 $17,243
NOTE 6 - INDEBTEDNESS:
At December 31, 1998, long-term debt consists of (i) French-franc
denominated bank debt ($1.3 million) bearing interest at fixed interest rates
between 6% and 7% and due through 2003 and (ii) capital lease obligations ($.4
million) due through 2002. The fair value of such bank debt is deemed to
approximate its net book value.
In February, 1998, the Company entered into a new $100 million unsecured
revolving credit facility. Borrowings are available for the Company's general
corporate purposes, including potential acquisitions. In February 1998, the
Company utilized borrowings under the facility to repay fully the Valcor Note
discussed in Note 10. Borrowings under the facility (nil outstanding at
December 31, 1998) were repaid with a portion of the net proceeds of the
Company's initial public offering discussed in Note 9. The facility matures in
2003. Borrowings of up to $100 million are available, subject to limitation
with respect to compliance with certain coverage ratios and covenants. At
December 31, 1998, $100 million was available for borrowing under this facility.
The facility has no required principal amortization payments prior to maturity
absent noncompliance with certain covenants and conditions of the agreement.
Amounts drawn under the facility will bear interest at the Eurodollar Rate plus
between 17.5 and 90.0 basis points depending on certain coverage ratios for the
most recent four quarter period. The facility contains certain covenants and
restrictions customary in lending transactions of this type, including
restrictions on the payment of dividends and requirements to maintain specified
levels of consolidated net worth (as defined). At December 31, 1998, no amounts
are available for dividends.
Aggregate maturities of long-term debt at December 31, 1998 are shown in the
table below.
Years ending December 31, AMOUNT
(IN THOUSANDS)
1999 $ 609
2000 703
2001 194
2002 143
2003 42
$1,691
NOTE 7 - EMPLOYEE BENEFIT PLANS:
Substantially all of the Company's employees are eligible to participate in
Company-sponsored contributory savings plans with partial matching Company
contributions. In addition, certain U.S. employees participate in a Company-
sponsored noncontributory defined contribution plan with Company contributions
based on a profit sharing formula. Company contributions to these plans
aggregated $842,000 in 1996, $1,051,000 in 1997 and $1,074,000 in 1998.
NOTE 8 - INCOME TAXES:
The components of pre-tax income and the provision for income taxes, the
difference between the provision for income taxes and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% and the
comprehensive provision for income taxes are presented below.
YEARS ENDED DECEMBER 31,
1996 1997 1998
(IN THOUSANDS)
Components of pre-tax income:
United States $ 5,667 $ 7,136 $ 6,835
Non-U.S. 16,417 20,533 25,700
$22,084 $27,669 $32,535
Provision for income taxes:
Currently payable:
U.S. federal and state $ 1,936 $ 2,747 $ 3,351
Foreign 7,744 8,923 9,513
9,680 11,670 12,864
Deferred taxes:
U.S. (872) (85) (714)
Foreign 247 (566) (116)
(625) (651) (830)
$ 9,055 $11,019 $12,034
Expected tax expense, at the U.S.
federal $ 7,729 $ 9,684 $11,387
statutory income tax rate of 35%
Non-U.S. tax rates 128 550 134
Incremental U.S. tax on earnings of
Canadian subsidiary 1,050 631 -
No tax benefit for goodwill amortizatio - - 290
State income taxes and other, net 148 154 223
$ 9,055 $11,019 $12,034
Comprehensive provision (benefit) for
income
taxes allocable to:
Pre-tax income $ 9,055 $11,019 $12,034
Other comprehensive income -
currency translation (82) (515) (668)
$ 8,973 $10,504 $11,366
The components of net deferred tax assets (liabilities) are summarized
below.
DECEMBER 31,
1997 1998
(IN THOUSANDS)
Tax effect of temporary differences relating to:
Inventories $ 198 $ 299
Property and equipment (717) (3,023)
Accrued liabilities and other deductible differences 447 1,160
Investment in Canadian subsidiary not a member of th
consolidated tax group
627 1,298
Other taxable differences (99) (29)
$ 456 $ (295)
Net current deferred tax assets $ 438 $ 688
Net noncurrent deferred tax assets 133 -
Net noncurrent deferred tax liabilities (115) (983)
$ 456 $ (295)
NOTE 9 - STOCKHOLDERS' EQUITY:
Recapitalization. In February 1998, the Company amended and restated its
certificate of incorporation. As amended, the authorized capital stock of the
Company consists of shares of Class A Common Stock (20,000,000 shares
authorized) and Class B Common Stock (10,000,000 shares authorized), each par
value $.01 per share, and 1,000 shares of preferred stock, par value $.01 per
share. Upon the effectiveness of the amendment and restatement of the
certificate of incorporation, the 1,000 shares of the Company's common stock, $1
par value, previously outstanding and all held by Valcor, Inc., were
reclassified into 10,000,000 shares of the Company's Class B Common Stock.
The shares of Class A Common Stock and Class B Common Stock are identical in
all respects, except for certain voting rights and certain conversion rights in
respect of the shares of the Class B Common Stock. Holders of Class A Common
Stock are entitled to one vote per share. Holders of Class B Common Stock are
entitled to one vote per share in all matters except for election of directors
where such holders are entitled to ten votes per share. Holders of all classes
of common stock entitled to vote will vote together as a single class on all
matters presented to the stockholders for their vote or approval, except as
otherwise required by applicable law. Each share of Class A Common Stock and
Class B Common Stock have an equal and ratable right to receive dividends to be
paid from the Company's assets when, and if declared by the Board of Directors.
In the event of the dissolution, liquidation or winding up of the Company, the
holders of Class A Common Stock and Class B Common Stock will be entitled to
share equally and ratably in the assets available for distribution after
payments are made to the Company's creditors and to the holders of any preferred
stock of the Company that may be outstanding at the time. Shares of the Class A
Common Stock have no conversion rights. Under certain conditions, shares of
Class B Common Stock will convert, on a share-for-share basis, into shares of
Class A Common Stock.
Public offering. In March 1998, the Company completed an initial public
offering of 5,980,000 shares of the Company's Class A Common Stock at an
offering price to the public of $20.00 per share. The net proceeds to the
Company were approximately $110.4 million. A majority of the net proceeds to
the Company from the offering were used to repay borrowings under the Company's
revolving credit facility discussed in Note 6.
Stock award grants. In March 1998, the Company granted 164,880 shares of
Class A Common Stock to certain key individuals of the Company (the "Management
Shares") for their services in connection with the initial public offering. The
Company valued such Class A shares awarded at the initial public offering price
of $20 per share, and the aggregate value of the Class A shares awarded was
approximately $3.3 million. The Company recognized a charge, at the time of the
completion of the public offering, equal to the aggregate value of the Class A
shares awarded.
Incentive compensation plan. The CompX International Inc. 1997 Incentive
Compensation Plan provides for the award or grant of stock options, stock
appreciation rights, performance grants and other awards to employees and other
individuals providing services to the Company. Up to 1.5 million shares of
Class A Common Stock may be issued pursuant to the plan. Stock options are
granted at prices not less than the market price of the Company's stock on the
date of grant, and generally vest over five years and expire ten years from the
date of grant.
The following table sets forth changes in outstanding options during 1998.
The options granted in 1998 were issued concurrent with completion of the
initial public offering discussed above at an exercise price equal to the $20
per share initial public offering price.
AMOUNT
EXERCISE PAYABLE
PRICE PER UPON
SHARES SHARE EXERCISE
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Outstanding at December 31, 1997 - $ - $ -
Granted 440 20.00 8,800
Canceled (21) 20.00 (410)
Outstanding at December 31, 1998 419 $20.00 $8,390
Outstanding options at December 31, 1998 represent approximately 7% of the
Company's outstanding Class A common shares at that date and expire in 2008. At
December 31, 1998, no options were exercisable, options to purchase 84,000
shares are scheduled to become exercisable in 1999 and an aggregate of 916,000
shares were available for future grants.
Other. The following pro forma information, required by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," is based on an estimation of the fair value of CompX options
issued in 1998. The weighted average fair value of CompX options granted during
1998 was $12.83 per share. The fair values of such options were calculated
using the Black-Scholes stock option valuation model with the following
weighted-average assumptions: stock price volatility of 43%, risk-free rate of
return of 5.9%, dividend yields of nil and an expected term of 10 years. The
Black-Scholes model was not developed for use in valuing employee stock options,
but was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition, it
requires the use of subjective assumptions including expectations of future
dividends and stock price volatility. Such assumptions are only used for making
the required fair value estimate and should not be considered as indicators of
future dividend policy or stock price appreciation. Because changes in the
subjective assumptions can materially affect the fair value estimate, and
because employee stock options have characteristics significantly different from
those of traded options, the use of the Black-Scholes option-pricing model may
not provide a reliable estimate of the fair value of employee stock options.
Had the Company elected to account for its stock-based employee
compensation for all awards granted in 1998 in accordance with the fair value-
based accounting method of SFAS No. 123, the Company's reported net income would
have decreased by $.7 million in 1998, or $.05 per basic share. For purposes of
this pro forma disclosure, the estimated fair value of options is amortized to
expense over the options' vesting period. Such pro forma impact on net income
and basic earnings per share is not necessarily indicative of future effects on
net income or earnings per share.
NOTE 10 - RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons. See
Note 1. Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (a) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (b) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran and related entities consider, review and evaluate, such transactions.
Depending upon the business, tax and other objectives then relevant, it is
possible that the Company might be a party to one or more such transactions in
the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
In December 1997, the Company paid a $50 million dividend to Valcor in the
form of a $50 million demand note payable (the "Valcor Note"). The Valcor Note
was unsecured and bore interest at a fixed rate of 6%. Interest expense related
to the Valcor Note was $164,000 in 1997 and $460,000 in 1998. The Valcor Note
was repaid in February 1998 using proceeds from the Company's new revolving
credit facility discussed in Note 6.
Receivables from and payables to affiliates are summarized below.
DECEMBER 31,
1997 1998
(IN THOUSANDS)
Receivable from affiliates - income taxes $ - $ 573
Payable to affiliates:
Valcor Note $50,000 $ -
Income taxes and other 331 -
$50,331 $ -
Under the terms of Intercorporate Service Agreements with Valhi, Valhi
performs certain management, financial and administrative services for the
Company on a fee basis. Such fees are based upon estimates of time devoted to
the affairs of the Company by individual Valhi employees and the compensation of
such persons. Fees pursuant to these agreements were $300,000 in 1996, $260,000
in 1997 and $310,000 in 1998. Certain of the Company's insurance coverages are
arranged for and brokered by EWI Re, Inc. Parties related to Contran own 90% of
the outstanding common stock of EWI, and a son-in-law of Harold C. Simmons
manages the operations of EWI. The Company generally does not compensate EWI
directly for insurance, but understands that consistent with insurance industry
practice, EWI receives a commission for its services from the insurance
underwriters. Net charges from related parties for services provided in the
ordinary course of business, principally charges for insuring property and other
risks, aggregated $149,000 in 1996, $208,000 in 1997 and $391,000 in 1998. These
fees and charges are principally pass-through in nature and, in the Company's
opinion, are reasonable and not materially different from those that would have
been incurred on a stand-alone basis.
Certain employees of the Company have been awarded shares of restricted
Valhi common stock and/or granted options to purchase Valhi common stock under
the terms of Valhi's stock option plans. Prior to March 1998, the Company paid
Valhi the aggregate difference between the option price and the market value of
Valhi's common stock on the exercise date of such options. For financial
reporting purposes, the Company accounted for the related expense (credit) of
$9,000 in 1996, $472,000 in 1997 and $(274,000) in 1998 in a manner similar to
accounting for stock appreciation rights. Effective March 1998, the Company no
longer pays Valhi upon the exercise of such options. Restricted stock which was
granted was forfeitable unless certain periods of employment were completed.
The Company paid Valhi the market value of the restricted shares on the dates
the restrictions expired, and accrued the related expense over the restriction
period. Expense related to restricted stock was $3,000 in 1996. All
outstanding restricted stock vested in 1996.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
Legal proceedings. The Company is involved, from time to time, in various
environmental, contractual, product liability, patent (or intellectual property)
and other claims and disputes incidental to its business. Currently no
environmental or other material litigation is pending or, to the knowledge of
the Company, threatened. The Company currently believes that the disposition of
all claims and disputes, individually or in the aggregate, should not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or liquidity.
Income taxes. The Company is undergoing examinations of certain of its
income tax returns, and tax authorities have or may propose tax deficiencies.
The Company believes that it has adequately provided accruals for additional
income taxes and related interest expense which may ultimately result from such
examinations and believes that the ultimate disposition of all such examinations
should not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
While the Company was a member of the Contran Tax Group, the Company and
Valcor were parties to a tax sharing agreement which provided for the allocation
of tax liabilities and tax payments as described in Note 1. The Company was
jointly and severally liable for the federal income tax of Contran and the other
companies included in the Contran Tax Group for all periods in which the Company
was included in Contran Tax Group. Valcor and Valhi have agreed, however, to
indemnify the Company for any liability for income taxes of the Contran Tax
Group in excess of the Company's tax liability computed in accordance with the
tax sharing agreement.
Concentration of credit risk. The Company's products are sold primarily to
original equipment manufacturers in the U.S. and Canada. The ten largest
customers accounted for approximately 40% of sales in 1998 with nine of such
customers located in the United States and one customer, Hon Company, accounted
for approximately 10% of sales (1997 and 1996 - approximately one-third of sales
with six located in the United States).
At December 31, 1998, approximately 74% of the Company's cash and cash
equivalents was invested in A1 or P1-grade commercial paper issued by various
third parties having a maturity of three months or less (1997 - 70%).
Other. Royalty expense was $601,000 in 1996, $849,000 in 1997 and
$1,105,000 in 1998. Royalties relate principally to certain Canadian-produced
products sold in the United States and are based upon volume.
Rent expense, principally for equipment, was $387,000 in 1996 and $425,000
in 1997 and $496,000 in 1998. At December 31, 1998, future minimum rentals
under noncancellable operating leases are approximately $338,000 in 1999,
$291,000 in 2000, $228,000 in 2001, $99,000 in 2002 and $12,000 in 2003.
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
QUARTER ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
(IN MILLIONS, EXCEPT PER SHARE AMOUNT)
1997:
Net sales $25.8 $27.4 $27.0 $28.4
Operating income 6.3 6.9 6.9 8.2
Net income 3.7 4.2 4.1 4.7
Basic and diluted earnings per
share $ .37 $ .42 $ .41 $ .47
1998:
Net sales $32.1 $39.7 $38.7 $41.6
Operating income 4.3 9.1 8.7 9.8
Net income 2.2 6.1 6.0 6.5
Basic and diluted earnings per $ .18 $ .38 $ .37 $ .40
share
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of CompX International Inc.:
Our report on the consolidated financial statements of CompX International
Inc. and Subsidiaries as of December 31, 1997 and 1998 and for each of the three
years in the period ended December 31, 1998, which report is included in this
Annual Report on Form 10-K, also included an audit of the financial statement
schedules of CompX International Inc. and Subsidiaries listed in the index on
page F of this Annual Report on Form 10-K. In our opinion, based upon our
audits, these financial statement schedules present fairly, in all material
respects, the information required to be included therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 19, 1999
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts $138 $184 $(199)
Amortization of other intangible assets $ 26 $ 18 $ (17)
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $167 $193 $ (58)
Amortization of other intangible assets $ 27 $ 12 $ -
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts $311 $109 $(210)
Amortization of goodwill $ - $828 $ -
Amortization of other intangible assets $ 39 $182 $ -
RECOVERIES BALANCE
AND CURRENCY AT END
DESCRIPTION TRANSLATION OTHER(A) OF YEAR
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts $ 44 $ - $167
Amortization of other intangible assets $ - $ - $ 27
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts $ 9 $ - $311
Amortization of other intangible assets $ - $ - $ 39
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts $(10) $110 $310
Amortization of goodwill $ - $ - $828
Amortization of other intangible assets $ (5) $ - $216
(a) 1998 - Business units acquired.