-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Erub2MdjAU9ZEkJPhzzn4KGwHFicxwk3JQUXVgTi9LCnoLuXiyJuZgpAmyK3yGuy V+NDhp0l2yXVtCAThrISoA== 0000889697-97-000282.txt : 19971230 0000889697-97-000282.hdr.sgml : 19971230 ACCESSION NUMBER: 0000889697-97-000282 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECOM GENERAL CORP CENTRAL INDEX KEY: 0000790375 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 870410875 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14299 FILM NUMBER: 97744814 BUSINESS ADDRESS: STREET 1: 46035 GRAND RIVER AVENUE CITY: NOVI STATE: MI ZIP: 48374 BUSINESS PHONE: 8103059410 MAIL ADDRESS: STREET 1: 46035 GRAND RIVER CITY: NOVI STATE: MI ZIP: 48374 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 Commission file number 0-14299 SECOM GENERAL CORPORATION (exact name of registrant as specified in its charter) DELAWARE 87-0410875 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 46035 GRAND RIVER AVENUE, NOVI, 48374 MICHIGAN (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (248) 305-9410 Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: None (Title of class and name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock, par value $.10 per share (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes_ X__ No____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in a definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] As of December 19, 1997, 5,340,400 shares of the Registrant's Common Stock were outstanding and the aggregate market value of such Common Stock held by non-affiliates (based on the closing price on that date as reported on the NASDAQ National Market System) was approximately $9,345,700. DOCUMENTS INCORPORATED BY REFERENCE
Part of 10-K into Document which it is incorporated - -------- ------------------------ Proxy Statement for Annual Part III Meeting to be held in March 1998
-2- TABLE OF CONTENTS PART I Page Item 1. Business 4 Item 2. Properties 9 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 PART III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 18 Item 13. Certain Relationships and Related Transactions 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 18 -3- PART I ITEM 1. BUSINESS GENERAL Secom General Corporation, a Delaware corporation (the "Company"), is a holding company with the following wholly owned operating subsidiaries: Metal Parts Forming Segment: * Uniflow Corporation ("Uniflow") acquired in 1991 Tooling Segment: * Form Flow, Inc. ("Form Flow") acquired in 1987 * L & H Die, Inc. ("L & H") acquired in 1987 * Micanol, Inc. ("Micanol") acquired in 1990 Production Machining Segment: * Milford Manufacturing Corporation ("Milford") acquired November 1996 The Company's corporate address is 46035 Grand River Drive, Novi, Michigan 48374; its telephone number is (248) 305-9410 and its facsimile number is (248) 347-2829. Except as otherwise indicated by the context, any reference to the "Company" shall mean the Company and its subsidiaries. The Company's fiscal year-end is September 30. FORWARD-LOOKING STATEMENTS Statements herein concerning expectations for the future constitute forward-looking statements within the meaning of the Securities Exchange Act of 1934 and are subject to a number of known and unknown risks, uncertainties and other factors which might cause actual results to differ materially from those expressed or implied by such forward-looking statements. Long term growth of the Company may be affected by changes in the automotive, trucking and construction industries, relations with various collective bargaining unit employees, general economic trends (including inflation and unemployment rates), interest rates, and the availability and cost of financing. -4- Long-term profitability will be dependent on management's ability to control its costs of operations for its respective areas of base sales, thereby providing adequate margins to maintain and expand its various businesses. Forward-looking statements herein include, but are not limited to, those concerning anticipated growth in sales and profitability, greater than expected declines in sales, inability to secure additional sources of working capital if and when needed, the ability to obtain price concessions if and when needed, and inability to manage growth. PRINCIPAL CUSTOMERS, BACKLOG AND SEASONALITY In 1997, VarityKelsey-Hayes ("VKH"), one of the Company's customers, accounted for 25% of the Company's consolidated revenues. The Company entered into a five-year supply agreement with VKH, concurrent with the execution of its agreement to acquire the Milford operation from VKH. Customer releases generally cover a period of three months or less. Because the Company receives successive customer releases of products which are subject to continual change in the short-term, management believes that its backlog is not a relevant indicator of the level of its present or future sales. Sales of the Company's parts, tooling and services are not considered seasonal. METAL PARTS FORMING SEGMENT GENERAL The Metal Parts Forming Segment is comprised of the Uniflow unit, which primarily manufactures automotive and truck parts from steel bar, coil and tubing using cold forging and forming machines and various types of secondary machining, such as CNC lathes, threadrolling and piercing equipment. SALES AND COMPETITION Uniflow's fiscal 1997 sales were comprised as follows: 27% wheel studs for heavy and light duty trucks (original equipment manufacturers or "OEM" and service part manufacturers or "aftermarket"); 23% transmission gear housings and component shaft parts; 22% automobile ball joint suspension housings (OEM and aftermarket); and 27% miscellaneous cold headed and cold forged parts (OEM). Competition within the cold forging and forming business varies with each product line and customer volume requirements. Generally, Uniflow specializes in smaller volumes, although it supplies higher volume OEM part requirements as well. Competitors are numerous in each segment and include companies such as Mascotech and Colfor. Uniflow's sales are concentrated with a few customers, as five customers comprised 57% of revenue for the fiscal year ended September 30, 1997. If Uniflow were to lose a significant customer, management believes that it could replace that business within an estimated timeframe of 6 to 18 months, although its gross profit margin could be adversely affected. Uniflow's sales backlog usually covers a period of approximately three months of work; actual sales vary with final release instructions from customers. -5- MANUFACTURING AND ENGINEERING Uniflow manufactures parts from steel bar, coil and tubing using cut-off machines, cold forging hydraulic presses, cold heading machines, CNC turning centers, threadrollers, broaching and piercing machines. Although part production can involve up to 14 different production steps, primary equipment consists of the cold forging presses and cold forming (header) machines, which form the parts into their general size and shape. After parts are forged or formed, they are routed to various secondary machining operations for finishing, such as CNC turning, threadrolling, piercing and drilling. External steps completed by outside processors typically include specialized machining, heat-treating, annealing and plating. Production order turnaround time can vary from 4 to 16 weeks, depending on engineering requirements, lead times from outside vendors and the production backlog. Uniflow's tooling department makes and repairs some of the perishable tooling used in production, while the Company's Tooling Segment also supplies Uniflow with some of its production tooling. The engineering staff offers tool design and production development services to customers for new or modified parts as well as continuing support for production operations. EMPLOYEES As of September 30, 1997, Uniflow employed a total of 189 full-time employees compared to 170 in the prior year, as follows: 173 direct and indirect labor (including factory floor supervision), 7 engineering, 2 sales, 4 office and 3 management. TOOLING SEGMENT GENERAL The Company's Tooling Segment ("Tooling Operation" or "Tooling Unit") is comprised of Form Flow, L & H and Micanol. In May 1995, the Company significantly reduced the size of one of its Tooling operation subsidiaries, Triple Technologies, Inc. ("Triple") by selling off certain equipment. Triple's remaining operations were transferred to the Company's Form Flow unit, although certain equipment was moved to the other subsidiaries. The continuing Triple business activity has been absorbed into Form Flow. The Tooling Operation manufactures close tolerance tooling for the hot and cold metal forming industry. Hot and cold metal forming companies typically make metal parts from steel coil that is automatically fed through various stations on a "header forming" machine. A header machine cuts steel coil and moves it through each die station progressively, using tool inserts to form the part. Tool life is dependent on the type of material used to make the part and the size and shape of the part, among other things. -6- As part of its sales and service, the Tooling Unit's design and development staff will advise customers about tooling issues and other engineering matters related to the production of hot and cold formed parts. Tool orders (without design services) typically can take 4 to 10 weeks to complete, while design and development orders can span over a period of months. SALES AND COMPETITION The Tooling Segment's customers manufacture items such as industrial fasteners, hand tools, automotive parts, tubing, consumer items, munitions and a wide array of OEM assembly parts. The Tooling Unit's customers include OEM and aftermarket suppliers and are predominantly related to the automotive industry. Continuing customer relations are important, as significant revenue is derived from tooling reorders. The Tooling Segment operates in fragmented markets with numerous competitors. Generally, independent competitors are smaller companies ranging in size from 10 employees to up to 100 employees. The Tooling Segment also competes with its customers internal tooling capabilities, as customers typically have their own tool facilities to support production. Management believes consistent success is dependent principally on tool quality and durability, on-time delivery and price competitiveness. The Tooling Unit's design and engineering services allow it to compete for tool development work; management believes these services provide the Company a significant advantage in attracting new customer business. The Tooling Segment sells principally to customers in the United States. MANUFACTURING AND ENGINEERING All tooling orders are manufactured to customer specifications as indicated on tool drawings. Tools are made from bar stock steel or carbide blanks and generally are routed through a production sequence that includes cutting, turning (CNC/lathe work), heat treating, grinding, polishing and coating. Form Flow, L & H and Micanol have separate plant facilities. Design and engineering services are located at a Form Flow facility, and are offered by all three of the Tooling Units. EMPLOYEES As of September 30, 1997, the Tooling Segment employed a total of 155 full-time employees compared to 158 in the prior year, as follows: 130 direct and indirect labor (including factory floor supervision), 5 engineering, 3 sales, 11 office and 6 management. -7- PRODUCTION MACHINING SEGMENT GENERAL The Company's Production Machining Segment is comprised of the Company's Milford unit (acquired November 1, 1996). Milford primarily manufactures various machined brake parts, although late in fiscal 1997 it began production of machined starter motor shafts for an automotive parts supplier. Parts are generally fabricated in one of five major machining areas. Production cycle time is generally two to four days. SALES AND COMPETITION Milford's sales for fiscal 1997 were comprised as follows: 95% the sale of machined brake parts to one customer, VKH, with starter motor shafts and miscellaneous parts comprising the remainder. In 1998, the sales mix is anticipated to change to approximately 85% - machined brake parts, with projected increases in sales of starter motor shafts. Milford operates in a highly competitive market, with numerous competitors involved in the machining of aluminum brake parts. Also, customers can be potential competitors, as they usually have the capital, engineering and manufacturing resources in place to make the same type of parts supplied by Milford. Generally, the machining of brake parts requires expensive single purpose machines, designed to complete the unique machining requirements of each respective major family of similar parts. As a result of the required level of investment in capital equipment by a supplier, longer customer purchase order commitments are common. Purchase order contracts typically span from one to five years or more. Actual part quantity releases from customers are ultimately dependent on end sales of specific automobile models that use parts supplied by Milford. MANUFACTURING AND ENGINEERING Milford predominantly manufactures various brake component parts made from aluminum. The parts are used in braking system assemblies for sale to various automotive companies. Milford manufactures three major variations of brake fluid parts. Within each major valve type there are a few part variations. The three major part types are manufactured on dedicated groups of machinery. In January 1998 management anticipates commencing production on a fourth major variation of aluminum fluid brake valve component for VKH. This part will be manufactured on a newly installed rotary dial-machining center. Brake parts are saw cut from extruded aluminum bars into blanks and routed through one of five major machining areas that are configured to machine and drill the cut blanks to certain specifications. After the machining operation is complete, parts are washed and deburred and then plated by an outside processor. Parts return to the plant for final inspection and shipment to the customer. In addition, another line is set up to machine and fabricate starter motor shafts. This line includes CNC machining, heat treating, grinding and drilling. The Company's Uniflow unit supplies the formed starter motor shaft blanks for machining and fabrication -8- at Milford. Parts are coated and shipped to the customer by an outside coating supplier. The Company employs a small engineering and quality assurance staff to support continuing production. EMPLOYEES As of September 30, 1997, Milford employed a total of 123, as follows: 103 direct and indirect, 4 engineering, 6 management and 10 office administration. ITEM 2. PROPERTIES The Company's corporate offices are located at 46035 Grand River Drive, Novi, Michigan. The subsidiaries operate in the following facilities, all of which are owned by the Company: 1) Form Flow is located in two 12,600 square foot adjacent buildings on approximately four acres of land at 6901 and 6999 Cogswell in Romulus, Michigan 48174. Its telephone number is (313) 729-3100. 2) L & H is located in a 12,600 square foot building on approximately two acres of land at 38200 Ecorse Road, Romulus, Michigan 48174 and its telephone number is (313) 722-8011. 3) Micanol is located in a 12,400 square foot building on approximately two acres of land at 46001 Grand River Avenue, Novi, Michigan 48374 and its telephone number is (248) 347-1230. 4) Uniflow is located in three buildings on approximately eight acres of land in Novi, Michigan: (1) 30,300 square feet at 26600 Heyn Drive, (2) 16,700 square feet at 46035 Grand River Avenue and (3) 32,000 square feet at 46009 Grand River Avenue. Its telephone number is (248) 348-9370. 5) Milford is located in an 81,500 square foot building on 6.6 acres of land at 101 Oak St., Milford, Michigan 48381. Its telephone number is (248) 685-1573. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various legal proceedings arising in the normal course of business. In the opinion of management (based on the opinion of counsel) the outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. -9- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No items were submitted to a vote of the Company's stockholders during its fourth fiscal quarter. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock (trading symbol "SECM") has traded on NASDAQ since June 1987 and the NASDAQ National Market System (NMS) since January 1992. The following table sets forth (for the respective period indicated) the high and low trade for the common stock as reported by NASDAQ. Trade prices do not include retail markups, markdowns or commissions.
Quarter Ended High Trade Low Trade ------------- ---------- --------- 12/30/95 3.37 2.50 3/31/96 3.37 1.75 6/30/96 3.44 1.87 9/30/96 3.12 2.00 12/31/96 3.06 2.50 3/31/97 3.31 2.19 6/30/97 2.94 2.00 9/30/97 2.69 2.19
On September 30, 1997 there were approximately 1,000 nominees/persons of record that held the Company's common stock. Of those listed of record, approximately 2.4 million shares were held by brokers and nominees representing an undetermined number of beneficial stockholders. Owners of common stock are entitled to receive dividends declared by the Board of Directors out of funds legally available therefor. The Company has never paid a cash dividend and does not anticipate paying cash dividends in the foreseeable future. Its policy is to retain earnings so it can provide funds for operations and expansion of its business. In addition, various bank loan agreements prohibit the payment of cash dividends without written consent from the lender(s). ITEM 6. SELECTED FINANCIAL DATA See page 44 for selected financial data as of September 30, 1997, 1996, 1995, 1994, and 1993 and for the years then ended as required by this Item. This information should be read in conjunction with the financial statements and the footnotes thereto referred to in Item 14(a)(1) of this Form 10-K. -10- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere in the Form 10-K. OVERVIEW This management's discussion and analysis of financial condition and results of operations includes a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that cause results to differ materially from historical results or those anticipated. In this report the words "expects", "anticipates", "believes", and similar expressions identify forward-looking statements, which speak only as to the date hereof. The Company's 1997 sales were $47.8 million and net income was $309,000 (six cents per share), compared to 1996 sales of $30.9 million and net income of $41,000 (one cent per share). The increase in sales and net income was due to results from Milford Manufacturing Corporation ("Milford"), which was acquired effective November 1, 1996. The Tooling Segment posted another solid year of profitability, while the Metal Forming Segment struggled with another year of operating losses (see segment review below). During 1997 the Company began shipments of parts for two major programs: starter motor shafts for an automotive supplier and transmission shafts for an automotive company. These two programs required the acquisition of substantial new equipment, which was primarily financed by $7 million in industrial development revenue bonds sold in 1996. The transmission shaft program involves part forging and machining by Uniflow. The starter motor shaft program involves value added manufacturing from Uniflow, for its parts forming capability, and Milford, which completes extensive machining of the part. The Company did not realize any significant contribution to sales and profitability from these programs in 1997, because production did not commence until the fourth quarter. Subsequent to year-end, the Company has experienced problems in achieving cycle times anticipated within its machining production line for the manufacture of starter motor shafts. Although efficiency improvements continue to be made, it is unclear how long it will take to bring this product to profitability. The Company's cash flow from operations and availability from lines of credit was adequate to fund operations as well as various new programs and initiatives. The Company's ability to meet ongoing debt obligations in the next year will be dependent, in part, on improvements in cash from operations, as availability on the lines of credit are significantly less. Making this matter more critical, subsequent to the year ended September 30, 1997, Milford's monthly operating results have significantly declined. Management is currently in discussions with Milford's primary customer to explore alternatives to turnaround this situation. Management is also evaluating the prospects of disposing underperforming assets, within its three business segments, to generate cash and reduce debt. -11- RESULTS OF OPERATIONS METAL PARTS FORMING SEGMENT Chart of three-year comparative operating results (in thousands):
1997 1996 1995 ---------------- ---------------- ---------------- AMOUNT % AMOUNT % AMOUNT % ------ ----- ------ ----- ------ ----- Net Sales $18,930 100.0 $14,748 100.0 $17,630 100.0 Gross Profit 331 1.8 1,197 8.1 2,226 12.6 Operating Expense 1,726 9.1 1,898 12.9 1,951 11.1 Operating Profit (loss)1 (1,395) (7.4) (701) (4.8) 275 1.6 1 Before interest, bad debt and corporate overhead expense.
The Metal Parts Forming Segment is comprised of the Company's Uniflow unit. Uniflow currently manufactures suspension ball-joint housings, truck wheel fasteners, transmission shaft parts and a variety of OEM cold-formed and forged parts. Customers are primarily automotive and trucking-related original equipment manufacturers ("OEM") and service part manufacturers ("after-market"). Net sales increased 28% in 1997 from 1996 and decreased 16.3% in 1996 from 1995. The sales increase in 1997 from 1996 primarily reflects higher sales of airbag housings, starter motor shafts and transmission shafts. Uniflow's existing business of suspension housings, transmission shafts and wheel studs also increased 15% in 1997 over 1996. The Company has decided to discontinue the manufacture of airbag housings due, in part, to the continuing investment required to achieve additional sales in relation to potential profit margins from those sales. Management is reviewing all of its sales with the objective of retaining only profitable product lines that will also allow for more efficient production through improved utilization of direct and indirect labor. Gross profit on sales was 1.8% in 1997, 8.1% in 1996 and 12.6% in 1995. The 1997 decline in gross profit reflects costs associated with the start up of two new programs (transmission parts and starter motor shafts), lower production efficiency and higher indirect labor expense. Efforts for the prior three years, aimed at improving Uniflow's gross profit, have been disappointing. Management is currently evaluating the merits of streamlining Uniflow's operations in order to reduce its cost of manufacturing. Management remains committed to achieving -12- compliance with the quality standard "QS 9000", as well as the implementation of a computerized information system that will provide on-line shop floor production and financial data. Operating expense as a percentage of sales was 9.1% in 1997, 12.9% in 1996 and 11.1% in 1995. The percentage fluctuation was largely due to the varying sales level. Actual operating overhead expense in 1997 was $1.7 million, down from $1.9 million in 1996 and $2.0 million in 1995. The decrease in 1997 from 1996 primarily reflects lower personnel expense. Uniflow's profit (loss) from operations was ($1.4 million) (-7.4% of sales), ($701,000) (-4.8% of sales) in 1996, $275,000 (1.6% of sales) in 1995. The increase in loss in 1997 from 1996 is the result of increased factory costs associated with developing new jobs for production as well as reduced production efficiency on Uniflow's traditional business. The profit decrease in 1996 from 1995 reflects the lower sales volume and higher costs of production. TOOLING SEGMENT Chart of three-year comparable operating results (in thousands):
1997 1996 1995 ---------------- ---------------- ---------------- AMOUNT % AMOUNT % AMOUNT % ------ ----- ------ ----- ------ ----- Net Sales1 $18,474 100.0 $18,166 100.0 $20,659 100.0 Gross Profit 4,879 26.4 4,317 23.8 4,902 23.7 Operating Expense 2,292 12.4 2,325 12.8 2,445 11.8 Operating Profit 2,587 14.0 1,992 11.0 2,457 11.9 1 Before elimination of intercompany sales.
The Tooling Segment is comprised of the Form Flow, L & H and Micanol units. The Triple unit was downsized and absorbed into Form Flow's operation in June 1995. The Tooling Units sell tools and dies for use in the production of hot and cold-formed metal parts. Net sales were flat in 1997, increasing by 1.7% over 1996, while in 1996 sales decreased 12.1% compared to 1995, primarily due to the downsizing of Triple Tool in late fiscal 1995. Although sales grew only 1.7%, gross profit on sales improved to 26.4% in 1997, compared to 23.8% in 1996 and 23.7% in 1995. The 1997 gross profit percentage increased as management was able to control shop floor labor and related support expense as well as -13- concentrate on tooling sales orders that complement its particular skilled labor and machining capabilities. Operating expense (as a percentage of sales) has remained steady for the periods shown, and was 12.4% in 1997, 12.8% in 1996, and 11.8% in 1995. The Tooling Segment's operating profit was $2.6 million (14.0% of sales in 1997) $2.0 million (11.0% of sales) in 1996, and $2.5 million (11.9% of sales) in 1995. The increase in operating profit in 1997 over 1996 primarily reflects the improved gross profit on sales. The decline in gross profit in 1996 compared to 1995 reflected lower profitability at Form Flow, L & H and Micanol. PRODUCTION MACHINING SEGMENT Chart of 1997 operating results (in thousands):
1997 1 ---------------- AMOUNT % ------ ----- Net Sales $12,718 100.0 Gross Profit 2,168 17.0 Operating Expense 1,287 10.1 Operating Profit 881 6.9 1 For the eleven months ended September 30, 1997, as the Production Machining Segment is comprised of Milford, acquired November 1, 1996.
Sales in 1997 were strong among all three major variations of brake valve parts supplied to the Unit's primary customer, VKH. The sales strength was largely related to the recent market popularity of "two-wheel" anti-lock braking systems in automobile sales. Two of the three existing brake valve parts are assembled in two-wheel anti-lock assemblies. For the period beginning November 1, 1996 through October 31,1997, the Unit received product pricing 10% above the agreed upon product pricing schedule. Beginning November 1, 1997, pricing reverted to the original pricing schedule. The Unit's gross profit was 17.0% for the entire year, however that margin declined markedly in the fourth fiscal quarter. This decline continued into the first quarter of fiscal 1998 and is due largely to higher release schedules from its principal customer, causing additional overtime and outside processing costs, inadequate machinery repair and maintenance, insufficient tool engineering support management, and resources diverted to the start-up of two major lines of parts -14- manufacturing. Remedial programs are currently in progress to fix the machinery and tooling that is in disrepair or not fully functional. Management believes that it could take up to six months to complete the necessary repairs and related remedial actions. In addition, management may request a product pricing adjustment from its primary customer although there are no assurances that one would be given. Operating expense, 10.1% of sales, increased during the year, as management filled quality assurance and engineering positions it believes are necessary to run a successful operation. Management expects this expense percentage to be fairly consistent in 1998. Operating profit was 6.9% of sales for fiscal 1997, however, operating profit trended downward during the last quarter of the fiscal year due to inadequate repair, maintenance and tooling programs as well as resources dedicated to the start up of two new part manufacturing programs. In addition to improving production, management is considering a repricing of certain parts. Management anticipates that Milford's ongoing operating loss situation will be resolved in the quarter ending March 31, 1998 through price adjustments and improvements in operations. Corporate Expenses Unallocated corporate overhead was $1,141,000 in 1997, $712,000 in 1996, and $858,000 in 1995. The increase in 1997 expense reflects additional administrative and personnel expense, primarily related to the establishment of new computer systems, higher amortization related to the financing completed mid-1996 and higher professional fee expense. Interest Expense, Miscellaneous Income and Income Taxes Interest expense was $1.3 million in 1997, $848,000 in 1996, and $1.1 million in 1995. The increase in interest expense in 1997 compared to 1996 resulted from higher term debt to finance equipment and higher line of credit borrowings used for working capital. The decline in interest expense in 1996 from 1995 resulted from lower average borrowings and lower average interest rates for the year. Other income (expense) was negligible for the periods presented; $(46,000) in 1997, and $15,000 in 1996, and ($8,000) in 1995. Income tax expense (benefit) was $227,000 in 1997, $18,000 in 1996, and ($373,000) in 1995. The higher income tax expense reflects the federal statutory rates adjusted for permanent differences between financial carrying amounts and tax carrying amounts. The income tax benefit in 1995 was the result of the utilization of net operating loss -15- carryforwards against taxable income and the reversal of portions of the valuation allowance in anticipation of future use of net operating loss carryforwards. FINANCIAL CONDITION The Company's working capital position improved to $5.7 million at September 30, 1997, from $4.9 million at September 30, 1996 and from $1.1 million at September 30, 1995. The increase in working capital in 1997 compared to 1996 was attributable to the addition of the Milford operation. The increase in working capital in 1996 from 1995 primarily resulted from (1) a refinancing of long-term debt, as excess proceeds of approximately $2.4 million from new long-term debt were used to reduce short-term borrowings and (2) the exercise of stock purchase warrants that provided $2 million in additional equity, proceeds of which were also used to reduce short-term borrowings. Scheduled debt payments due in fiscal 1998 total approximately $2.5 million and management believes that internally generated cash from operations, amounts available on bank lines of credit and proceeds from possible dispositions of underperforming assets will provide sufficient cash flow to cover the scheduled debt payments as well as fund continuing working capital requirements. Cash flows for 1997, 1996 and 1995 are summarized as follows:
1997 1996 1995 --------- --------- ---------- Cash flows from operating activities $ 1,423,000 $1,838,000 $1,772,000 Cash flows used in investing activities (10,214,000) (4,918,000) (494,000) Cash flows from (used in) financing activities 5,255,000 7,475,000 (1,274,000)
CASH FLOWS FROM OPERATING ACTIVITIES Cash flows provided by operating activities before changes in working capital items and discontinued operations were $3.5 million in 1997, $2.0 million in 1996, and $2.7 million in 1995. Working capital items used $2.1 million in 1997, as accounts receivable were established at Milford, partially offset by the establishment of normal accounts payables at Milford. In 1996, working capital items used $131,000, as inventories rose $1.2 million, partially offset by lower accounts receivable and higher accrued liabilities. In 1995, working capital items used $925,000, primarily the result of higher accounts receivable and prepaid items and lower accounts payable. -16- CASH FLOWS USED IN INVESTING ACTIVITIES In 1997, capital expenditures totaled $8.0 million. These expenditures primarily relate to equipment acquired to machine starter motor shafts for an automotive parts supplier, which represents a new line of manufacturing for the Company. The new line, which consists of machining, heat treating, grinding and drilling, is located at the Milford operation. Also in 1997, the Milford acquisition transaction (November 1, 1996) used $2.3 million in cash and received $1 million in lieu of product price increases. In 1996, capital expenditures totaled $5.5 million primarily for the manufacture of additional transmission component parts for sale to an automotive customer. In 1995, capital expenditures were $1.4 million, principally for a refurbished hydraulic press dedicated for airbag housing production and Form Flow's expansion of its die repair business, which included the acquisition of a new facility and additional grinding equipment. The Company received $42,000 in 1997, $301,000 in 1996, and $863,000 in 1995 from the disposals of machinery and equipment. Disposals in 1997 were negligible, while in 1996 and 1995 the reductions principally reflect the downsizing of the Triple unit. CASH FLOWS FROM FINANCING ACTIVITIES Cash flows provided by (used in) financing activities were $5.3 million in 1997, $7.5 million in 1996, and ($1.3 million) in 1995. In 1997, proceeds from the Company's bank revolving line of credit provided $4.8 million in cash to provide working capital requirements and short-term financing related to various capital projects. Also in 1997, $2.6 million in term debt financing was principally utilized to finance existing machinery at Milford, computers in all business segments and machinery at Uniflow. In 1996, the Company completed a major debt refinancing of its existing assets and secured $7 million in industrial development bond financing to fund new equipment purchases associated with new sales orders. The 1996 refinancing included a $5 million note with a bank finance company due in six years; a real estate mortgage of $2.9 million due in 15 years; and a $6 million collateralized bank line of credit, of which $4 million is a committed revolver that expires in 1999. Also in 1996, the Company received $1.9 million and reduced accrued interest by $132,000 through the exercise of two stock warrants, which resulted in the issuance of 1 million shares of common stock. In 1997, scheduled principal debt payments totaled $2.1 million, compared to scheduled payments of $1.3 million in 1996 and $1.6 million in 1995. Also, in 1995 the Company extinguished a $1 million note payable in connection with the exercise of a stock warrant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14(a)(1) for a list of the financial statements included in this Form 10-K. Refer to page 43 of this Form 10-K for the supplementary quarterly financial data required by this Item. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. -17- PART III The information called for by the items within this part is included in the Company's 1998 Proxy Statement, and is incorporated hereby by reference, as follows: Caption(s) in 1998 Proxy Statement Item 10. Directors and Executive Officers of Registrant...."Election of Directors"; "Executive Officers"; "Compliance with Section 16(a) of The Securities Exchange Act" Item 11. Executive Compensation...."Executive Compensation" Item 12. Security Ownership of Certain Beneficial Owners and Management............"Principal Stockholders"; "Security Ownership of Management" Item 13. Certain Relationships and Related Transactions......"Election of Directors -- Certain Information Regarding the Nominees"; "Certain Relationships and Related Transactions" "Executive Compensation -- Compensation Committee Interlocks and Insider Participation." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements and Financial Statement Schedule. Page ---- Independent Auditors' Report............................... 25 Consolidated Balance Sheets as of September 30, 1997 and 1996................................................ 26 Consolidated Statements of Operations for the Years Ended September 30, 1997, 1996 and 1995....................... 27 -18- Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1997, 1996 and 1995........... 28 Consolidated Statements of Cash Flows for the Years Ended September 30, 1997, 1996 and 1995....................... 29 Notes to Consolidated Financial Statements................. 30 Schedule II - Valuation and Qualifying Accounts............ 42 Schedules other than those listed above are omitted because of the absence of the conditions under which they are required or because the information called for is included in the consolidated financial statements or the notes thereto. (b) Reports filed on Form 8-K. The Company filed a report on Form 8-K dated December 17, 1997 to report the change in its corporate address to 46035 Grand River Avenue, Novi, Michigan 48374. (c) Exhibits. See the Exhibit Index on the following page. -19- EXHIBIT INDEX Exhibit Description Page* - ------- ----------- ----- 2.1 Asset Purchase Agreement between VarityKelsey-Hayes Corporation and Milford Acquisition Corporation. 2.1*(1) 3.1 Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on August 25, 1987. 3.1*(2) 3.2 Amendment to Articles of Incorporation filed on August 31, 1990. 3.2*(3) 3.3 Certificate of Merger between the Company and Secom General Corporation, a Utah corporation filed with the Secretary of State of Delaware in December 1987. 3.2*(2) 3.4 Certificate of Designation of Rights of the Class A Preferred Stock filed with the Secretary of State of Delaware in December 1987. 3.3*(2) 3.5 Amendment to Articles of Incorporation filed on December 17, 1991. 3.5*(6) 3.6 Bylaws of the Company. 3.4*(2) 4.1 List of instruments defining the right of security holders. 4.1*(9) 4.3 Nonqualified Stock Option Agreement dated November 23, 1993 between Secom General Corporation as grantor and Manubusiness Opportunities, Inc. as grantee. 4.2*(9) 10.1 Machined Valve Products Supply Agreement. 10.1*(10) 10.2 Amended and Restated Revolving Credit and Loan Agreement between Secom General Corporation, Uniflow Corporation, Miconol, Inc., L&H Die, Inc. and Form Flow, Inc. 10.2*(10) 10.3 Master Equipment Lease Agreement between Secom General Corporation and KeyCorp Leasing Ltd. 10.3*(10) 10.4 Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Filing between Secom General Corporation and Metlife Capital Financial Corporation. 10.4*(10) - --------- * See the footnotes on page 22 to locate these Exhibits. -20- 10.5 Loan Agreement among GE Capital Public Finance, Inc. as Lender, and Michigan Strategic Fund, as Issuer and Secom General Corporation as Borrower dated June 1, 1996. 10.5*(10) 10.6 Loan Agreement among GE Capital Public Finance, Inc. as Lender, and Michigan Strategic Fund, as Issuer, and Secom General Corporation, as Borrower dated as of Sept. 1, 1996. 10.6*(10) 10.7 1991 Nonqualified Stock Option Plan. 10.27*(5) 10.8 Form of Stock Option Agreement for Options granted under the 1991 Non-qualified Stock Option Plan. 10.28*(5) 10.9 Subordination Agreement dated December 15, 1993 between Larry McKnight as junior lender and NBD Bank, N.A. as senior lender. 10.17*(8) 10.10 Promissory Note and Security Agreement with Old Kent Bank dated August 22, 1997, as amended, relating to Milford Manufacturing Machinery and Equipment E-1 22. Subsidiaries of the Registrant 22*(10) 23. Consent of Deloitte & Touche LLP E-7 27. Financial Data Schedule - --------- * See the footnotes on page 22 to locate these Exhibits. -21- All exhibits that have page numbers followed by an * are incorporated by reference from the filings set forth below. The numbers set forth as page numbers for those exhibits are the exhibit numbers those documents were given in those other filings. All other exhibits are included in this Form 10-K at the page numbers shown. * (1) Incorporated by reference from the Company's Current Report on Form 8-K dated November 15, 1996. * (2) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1987. * (3) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1990. * (4) Incorporated by reference from the Company's Current Report on Form 8-K dated September 13, 1991. * (5) Incorporated by reference from the Company's Registration Statement on Form S-4 (File No. 33-40865) that was declared effective on November 20, 1991. * (6) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1991. * (7) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1992. * (8) Incorporated by reference from the Company's Current Report on Form 8-K dated December 15, 1993. * (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1993. *(10) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended September 30, 1996. -22- SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SECOM GENERAL CORPORATION By:/s/ Robert A. Clemente ---------------------- Dated: December 23, 1997 Robert A. Clemente Chairman, President and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Principal Executive Officer: /s/ Robert A. Clemente Chairman, President CEO December 23, 1997 - --------------------- and Director Robert A. Clemente Principal Financial and Accounting Officer: /s/ David J. Marczak Chief Financial Officer, December 23, 1997 - ------------------- Secretary, Treasurer and David J. Marczak Director /s/ Orville K. Thompson Director December 23, 1997 - ----------------------- Orville K. Thompson /s/ Richard Thompson Director December 23, 1997 - -------------------- Richard Thompson /s/ Gregory Adamczyk Director December 23, 1997 - ------------------- Gregory Adamczyk /s/ Rocco Pollifrone Director December 23, 1997 - -------------------- Rocco Pollifrone -23- - ----------------------------------------------------------------------------- Secom General Corporation and Subsidiaries Consolidated Balance Sheets as of September 30, 1997 and 1996, and the Related Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows for Each of the Three Years in the Period Ended September 30, 1997, and Independent Auditors' Report -24- INDEPENDENT AUDITORS' REPORT Stockholders and Board of Directors Secom General Corporation Novi, Michigan We have audited the accompanying consolidated balance sheets of Secom General Corporation and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(1) of Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Secom General Corporation and subsidiaries at September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP /s/ Deloitte & Touche LLP December 5, 1997 -25- SECOM GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 AND 1996 - ---------------------------- ASSETS 1997 1996 - ------ ---- ---- CURRENT ASSETS: Cash ......................................................... $ 346,800 $ 319,600 Receivables: Trade (net of allowances of $52,800 and $21,000) ........... 6,772,100 4,130,700 Other ...................................................... 222,200 33,200 Inventories (Note 4) ......................................... 6,136,900 5,170,500 Prepaids and other ........................................... 465,900 547,400 Deferred tax assets (Note 11) ................................ 651,000 569,800 ------------ ------------ Total current assets ................................ 14,594,900 10,771,200 CASH RESTRICTED FOR EQUIPMENT (Note 13) 526,500 4,089,000 PROPERTY, PLANT AND EQUIPMENT, NET (Note 5) 28,002,300 17,758,600 INTANGIBLE ASSETS (Note 1) ..................................... 1,857,800 1,994,100 OTHER ASSETS ................................................... 1,226,800 341,600 ------------ ------------ TOTAL ASSETS ................................................... $ 46,208,300 $ 34,954,500 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations (Note 6) ......... $ 3,435,500 $ 2,121,400 Trade accounts payable ....................................... 3,678,700 2,856,800 Accrued liabilities: Accrued wages and benefits ................................. 1,338,200 494,400 Accrued other .............................................. 453,500 390,400 ------------ ------------ Total current liabilities ........................... 8,905,900 5,863,000 LONG-TERM DEBT OBLIGATIONS (Note 6) ............................ 17,710,600 13,724,300 POST RETIREMENT HEALTH CARE BENEFITS (Note 10) ................. 3,396,100 OTHER LIABILITIES (Note 9) ..................................... 485,100 DEFERRED TAX LIABILITIES (Note 11) ............................. 1,411,000 1,331,300 ------------ ------------ Total liabilities ................................... 31,908,700 20,918,600 STOCKHOLDERS' EQUITY (Notes 8 and 9): Common stock, $.10 par value, 10,000,000 shares authorized; outstanding: 1997, 5,340,400 shares; 1996, 5,342,200 shares 534,000 534,200 Additional paid-in capital ................................... 18,412,400 18,457,100 Accumulated deficit .......................................... (4,646,800) (4,955,400) ------------ ------------ Total stockholders' equity .......................... 14,299,600 14,035,900 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................... $ 46,208,300 $ 34,954,500 ============ ============
See notes to consolidated financial statements. -26- SECOM GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 - --------------------------------------------- 1997 1996 1995 ---- ---- ---- NET SALES ............................ $47,755,300 $30,877,100 $36,276,200 COST OF SALES ........................ 39,713,600 25,064,900 29,016,100 ----------- ----------- ----------- GROSS PROFIT ......................... 8,041,700 5,812,200 7,260,100 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ........................... 6,196,900 4,920,700 5,282,300 ----------- ----------- ----------- INCOME FROM OPERATIONS ............... 1,844,800 891,500 1,977,800 OTHER INCOME (EXPENSE): Interest ........................... (1,262,900) (847,600) (1,137,800) Other, net ......................... (46,400) 14,600 (8,400) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES ........... 535,500 58,500 831,600 INCOME TAX BENEFIT (EXPENSE) (Note 11)........................... (226,900) (17,900) 372,700 ----------- ----------- ----------- NET INCOME ........................... $ 308,600 $ 40,600 $ 1,204,300 =========== =========== =========== NET INCOME PER COMMON SHARE .......... $ 0.06 $ 0.01 $ 0.28 =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1) ........................... 5,461,300 4,874,600 4,284,200 =========== =========== ===========
See notes to consolidated financial statements. -27- SECOM GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 - ----------------------------------------------- Common Stock Additional -------------------- Paid-in Accumulated Shares Amount Capital Deficit Total ------ ------ --------- ----------- ----- BALANCE, OCTOBER 1, 1995............ 3,700,500 $ 370,100 $ 15,666,900 $ (6,200,300) $ 9,836,700 Exercise of stock warrant......... 500,000 50,000 950,000 1,000,000 Issuances to 401(k) plan (employer match and employee elections)............. 42,300 4,200 79,900 84,100 Issuances for compensation........ 41,800 4,100 79,500 83,600 Stock repurchases, net............ (8,400) (800) (31,000) (31,800) Note issued for settlement of stock guarantee................. (266,400) (266,400) Net income........................ 1,204,300 1,204,300 --------- --------- ------------ ------------ ----------- BALANCE, SEPTEMBER 30, 1995......... 4,276,200 427,600 16,478,900 (4,996,000) 11,910,500 Exercise of stock warrants........ 1,000,000 100,000 1,900,000 2,000,000 Issuances to 401(k) plan (employer match and employee elections)............. 35,700 3,600 77,600 81,200 Stock issued for note receivable 25,000 2,500 35,000 37,500 Stock repurchases, net (14,300) (1,400) (32,500) (33,900) Stock issued for settlement of stock guarantees................ 19,600 1,900 (1,900) Net income........................ 40,600 40,600 --------- --------- ------------ ------------ ----------- BALANCE, SEPTEMBER 30, 1996......... 5,342,200 534,200 18,457,100 (4,955,400) 14,035,900 Stock repurchases................. (20,000) (2,000) (48,000) (50,000) Exercise of stock options......... 2,600 300 4,800 5,100 Stock issued for settlement of stock guarantees................ 15,600 1,500 (1,500) Net income........................ 308,600 308,600 --------- --------- ------------ ------------ ----------- BALANCE, SEPTEMBER 30, 1997......... 5,340,400 $ 534,000 $ 18,412,400 $ (4,646,800) $14,299,600 ========= ========= ============ ============ ===========
See notes to consolidated financial statements. -28- SECOM GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 - --------------------------------------------- 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................. $ 308,600 $ 40,600 $ 1,204,300 Adjustments to reconcile income from operations to net cash provided by operations: Depreciation and amortization ........................ 2,915,900 1,983,900 1,858,600 Provision for (benefit from) deferred taxes .......... 74,900 (214,700) 244,400 Change in valuation allowance ........................ (76,400) (766,300) Increase (decrease) in allowance for doubtful accounts 31,800 (72,500) 17,000 (Gain) loss on sales of assets ....................... (3,000) 115,800 (319,500) Provision for defined benefit obligations ............ 224,900 Stock issuances to 401(k) plan ....................... 32,000 64,700 Write-off of intangibles ............................. 84,200 309,700 Stock issuances for compensation ..................... 83,600 Changes in assets and liabilities that provided (used) cash, net of effects of acquisitions and discontinued operations: Trade and other receivables ........................ (2,862,200) 512,500 (298,400) Inventories ........................................ (526,400) (1,234,800) 134,300 Prepaids and other ................................. 163,400 (36,000) (193,700) Other assets ....................................... (556,900) (192,000) 78,300 Trade accounts payable ............................. 821,900 842,000 (491,400) Accrued liabilities ................................ 906,900 (181,800) (111,300) Net cash provided by (used in) discontinued operations 158,600 (42,300) ------------ ----------- ----------- Net cash provided by operating activities ..... 1,423,400 1,837,800 1,772,000 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from disposal of property, plant and equipment 42,400 301,000 863,000 Collections on notes receivable ........................ 22,100 259,800 2,300 Capital expenditures ................................... (7,984,100) (5,479,100) (1,359,200) Acquisition of Milford Manufacturing ................... (2,294,500) ------------ ----------- ----------- Net cash used in investing activities .......... (10,214,100) (4,918,300) (493,900) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in bank line of credit ...................... 4,766,300 (3,603,600) 210,600 Proceeds from long-term obligations .................... 2,634,600 8,205,500 273,100 Proceeds from refinancing of long-term obligations ..... 7,887,500 Proceeds from issuances of stock ....................... 5,100 1,918,800 Payments on long-term obligations due to refinancing ... (5,535,800) Retirements of common stock ............................ (50,000) (33,900) (12,500) Payments on long-term obligations ...................... (2,100,600) (1,314,600) (1,634,000) Payments on capital lease obligations .................. (48,500) (110,900) ------------ ----------- ----------- Net cash provided by (used in) financing activities .................................. 5,255,400 7,475,400 (1,273,700) ------------ ----------- ----------- NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH ...... (3,535,300) 4,394,900 4,400 CASH AND RESTRICTED CASH, BEGINNING OF PERIOD ............ 4,408,600 13,700 9,300 ------------ ----------- ----------- CASH AND RESTRICTED CASH, END OF PERIOD .................. $ 873,300 $ 4,408,600 $ 13,700 ============ =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest ................. $ 1,248,900 $ 902,900 $ 1,104,800 ============ =========== =========== Cash paid during the year for income taxes ............. $ 205,000 $ 153,600 $ 120,000 ============ =========== ===========
See notes to consolidated financial statements. -29- SECOM GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995 - ------------------------------------------------------------------------------ 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Business - Secom General Corporation (the "Company") is a publicly-traded holding company with five wholly-owned subsidiaries supplying the automotive, truck and construction markets. The Company operates in the following three business segments: Tooling: Form Flow, Inc. ("Form Flow") L&H Die, Inc. ("L&H Die") Micanol, Inc. ("Micanol") Metal Parts Forming - Uniflow Corporation ("Uniflow") Production Machining - Milford Manufacturing Corporation ("Milford" - acquired November 1, 1996) Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated. Inventories are stated at the lower of cost or market, as determined under the first-in, first-out method. Property, Plant and Equipment are recorded at cost. The Company capitalizes, as additions, expenditures which extend the useful life or increase the value of related assets. Maintenance and repairs are charged to operating expense as incurred. Expenditures for repairs and maintenance for the three years ended September 30, 1997 were $766,300, $433,700 and $408,400, respectively. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from two to 30 years. Intangible Assets consisting of goodwill (cost in excess of net assets acquired) is currently amortized on a straight-line basis over primarily 20 years. Previously, such was being amortized over 40 years. The impact of this change was not significant. Accumulated amortization was $799,000 and $662,700 as of September 30, 1997 and 1996, respectively. Income Taxes - Deferred income tax assets and liabilities are computed annually for differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Earnings per Share of common stock, has been computed in accordance with Accounting Principles Board (APB) Opinion No. 15, "Earnings Per Share," by dividing net income by the weighted average number of common and common equivalent shares outstanding. Common equivalent shares consist primarily of the warrants and options to purchase common stock outstanding during the periods presented. The Company has not yet adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," however, the impact of such adoption is not expected to have a significant effect on the financial statements. -30- Revenue Recognition - Revenues are recognized upon shipment of customer products. Significant Customer - The Company has one customer which comprised approximately 25% of total revenues in 1997 and one customer which comprised approximately 11% of total revenues in 1996. There were no significant customers in 1995. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. New Accounting Standards - Effective October 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In accordance with this standard, the Company periodically evaluates the carrying value of long-lived assets and certain identifiable intangibles to be held and used, when events and circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. The adoption of this new accounting standard did not have a material effect on the Company's financial position or results of operations. The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" which was effective for the Company beginning October 1, 1996. Under SFAS No. 123, compensation cost is measured at the grant date based on the fair value of the equity instrument awarded and is recognized over the service period, which is usually the vesting period. In accordance with this statement, the Company has elected to continue the application of APB Opinion No. 25 which recognizes compensation cost based on the intrinsic value of the equity instrument award. Under the instrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Noncash Transactions - The Company entered into the following noncash investing and financing transactions for the following years ended September 30 (in thousands):
1996 1995 ---- ---- Cancellation of accrued interest/note payable in exchange for exercise of stock warrant ................. $132 $1,000 Common stock issued for services or for reduction of other obligations ..... 32 148 Stock issued for note receivable ............ 37 Notes receivable issued for sale of Triple Tool equipment ..................... 249 Note payable issued for settlement of stock guarantee .......................... 266
Noncash transactions related to 1997 were not considered significant. Reclassifications - Certain amounts in the 1996 financial statements have been reclassified to conform with the presentation for 1997. -31- 2. ACQUISITION - MILFORD MANUFACTURING CORPORATION Effective November 1, 1996, the Company acquired the operations, assets and certain liabilities of Varity Kelsey-Hayes Corporation's ("VKH") Milford, Michigan brake fluid valve parts machining operation (renamed Milford Manufacturing Corporation). The acquisition was accounted for as a purchase. The operations of Milford Manufacturing Corporation ("Milford") are included in the income statement of the Company beginning November 1, 1996. Net cash paid to seller, assets acquired and liabilities assumed recorded in connection with the transaction are as follows (in thousands):
Liabilities assumed $3,656 Net cash paid to seller 2,295 ------ Fair value of assets acquired $5,951 ======
Concurrent with the acquisition, in an unrelated agreement, the Company also entered into a five-year agreement to supply VKH with various machined brake parts. VKH paid $1 million to the Company at closing, in lieu of a 10% product price increase for the first year of operation, which was recorded as deferred revenue and is being amortized over one year on an estimated units of production method. Approximately $80,000 remains unamortized at September 30, 1997. The following pro forma financial information (unaudited) is presented for the year ended September 30, 1996 as if the purchase of Milford had occurred on October 1, 1995 (in thousands, except per share amount):
Net sales $ 42,800 ======== Net loss $ (83) ======== Net loss per common share $ (0.02) ========
The pro forma financial information presented does not purport to be indicative of the results that actually would have been obtained if the acquisition had occurred during the period presented. 3. DOWNSIZED OPERATIONS During the third quarter of fiscal 1995, the Company completed its downsizing of Triple Technology (formerly "Triple Tool") by the sale of $725,800 (net book value) of equipment and the leasing of $342,000 (net book value) of equipment. The Company recorded a net gain of $2,500 on this transaction after writing down goodwill in the amount of $310,000 in connection with the downsizing. In June 1995, Triple Technology's remaining operations, primarily electro-diode machining (EDM), contracts and the related equipment (net book value $341,000) were transferred to Form Flow. For the year ended September 30, 1995, sales from Triple Technology were $1,559,000 and operating losses were $399,000. -32- 4. INVENTORIES Inventories at September 30 consist of (in thousands):
1997 1996 ---- ---- Raw materials ................ $1,102 $ 949 Work-in-process .............. 2,772 2,394 Finished goods ............... 2,263 1,828 ------ ------ Total ........................ $6,137 $5,171 ====== ======
5. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment at September 30 consist of (in thousands):
1997 1996 Life ---- ---- ---- Machinery and equipment............ $ 26,678 $ 18,192 2 to 20 years Building and improvements.......... 6,581 5,154 3 to 30 years Land and improvements.............. 897 572 N/A Furniture and fixtures............. 1,735 685 3 to 7 years Vehicles.......................... 149 168 3 years Construction-in-progress and deposits .................... 1,334 538 N/A -------- -------- Total 37,374 25,309 Less accumulated depreciation...... (9,372) (7,550) -------- -------- Total.............................. $ 28,002 $ 17,759 ======== ========
6. LONG-TERM OBLIGATIONS Long-term obligations at September 30 consist of (in thousands):
1997 1996 ---- ---- Bank line of credit (a) ...................... $ 4,939 $ 172 Real estate mortgage notes (b) ............... 3,446 3,609 Michigan Strategic Fund Limited Obligation Revenue Bonds (c) .......................... 5,891 6,896 Equipment term notes (d) ..................... 6,077 4,778 Other notes payable (e) ...................... 794 390 -------- -------- Total ............................. 21,147 15,845 Less current obligations ..................... (3,436) (2,121) -------- -------- Long-term obligations ........................ $ 17,711 $ 13,724 ======== ======== -33- (a) In July 1996, the Company entered into an amended and restated revolving credit and loan agreement with a bank, which is for a three year period and permits borrowings of up to $4 million under a revolving credit note and up to $2 million under a line of credit note. At September 30, 1997, $4,000,000 was outstanding under the revolving credit note and $939,000 was outstanding under the line of credit note. The interest is at prime or the 30 day LIBOR rate plus 215 basis points. This agreement replaced an existing agreement in which interest was at prime plus 1/2%. The revolving credit and loan agreement is collateralized by accounts receivable and inventory while borrowings are limited to stated percentages of accounts receivable and inventory. Under each note, interest is payable monthly and any unpaid principal is due in fiscal 1998 for the line of credit note and fiscal 1999 for the revolving credit note. The agreement prohibits the payment of cash dividends and requires the Company to maintain specific financial covenants including minimum tangible equity, working capital, and cash flow. The Company was in compliance with all financial covenants at September 30, 1997. (b) During 1996, the Company refinanced its existing mortgage loans to obtain new mortgage loans requiring monthly installments of principal and interest. Interest on a $2.88 million mortgage note is 8.25% per annum and is collateralized by land and buildings with a net book value of $3,614,100, while interest on a $775,000 mortgage note is at prime and is collateralized by land and building with a net book value of $1,100,000. Interest under the previous agreements was payable at prime plus 2% per annum. These agreements mature in fiscal 2001 and 2011. Additionally, during 1997, the Company entered into a bank agreement which provides for up to $300,000 in advances for facility improvements, to be converted into a five-year term note effective March 1998. Interest will be at a floating rate. At September 30, 1997, no amounts were outstanding under this agreement. (c) In June and September 1996, the Michigan Strategic Fund sold $3,000,000 and $4,000,000, respectively, of its Limited Obligation Revenue Bonds and the bondholders then loaned the proceeds to the Company for the purchase of equipment. The bonds require monthly interest and principal payments through September 1, 2002. The bonds bear interest at the rates of 6.15% and 5.99%, respectively, and are collateralized by equipment and cash with a net book value of $6,682,700. The bonds outstanding at September 30, 1995, were repaid in their entirety during fiscal 1996. Interest was at approximately 2% below the prime rate. (d) During 1996, the Company entered into an equipment term note with a financial institution with interest payable at the 30 day LIBOR plus 215 basis points (approximately 7.87% at September 30, 1997) or prime. During 1997, the Company entered into two equipment term note agreements which require monthly installments of principal and interest over a five-year period through February 2003. The first note provides for advances up to $1,500,000 through December 31, 1997 at which time it will be converted into a term note. At September 30, 1997, $507,200 was outstanding and interest is currently payable at prime. The second note was for $1,500,000 with interest payable at 8.5% per annum. This note was refinanced in November 1997 to increase the principal to $1,800,000. All of these equipment term notes are collateralized by the related equipment which amounted to a net book value of $13,478,600 at September 30, 1997. (e) Interest rates on other notes payable range from 4.9% to 12%. At September 30, 1997, the balance includes $639,700 in trade installment notes collateralized by certain property. Maturity dates range from 1998 to 2000.
The prime rate at September 30, 1997 and 1996 was 8.5% and 8.25%, respectively. -34- Principal payments on long-term obligations for the next five years are as follows (in thousands):
1998 $ 3,436 1999 6,660 2000 2,847 2001 3,201 2002 2,900 Thereafter 2,103 -------- Total $ 21,147 ========
7. RELATED PARTY TRANSACTIONS In December 1993, the Company issued a $1,000,000 subordinated note payable, maturing December 1, 1995 and requiring payment of interest only, at the prime rate plus 3% to Manubusiness Opportunities, Inc. (MOI), an entity controlled by three directors of the Company. Payment of principal was due at maturity. MOI also received warrants and options to purchase 1.7 million shares of common stock, as follows: 500,000 shares expiring in November 1994 with an exercise price of $2 per share, 500,000 shares expiring in November 1995 with an exercise price of $2 per share, and 500,000 shares expiring in November 1996 with an exercise price of $3 per share and 200,000 options expiring in 1998 with an exercise price of $2.63 per share. In November 1994, MOI exercised its first warrant to acquire 500,000 shares of common stock in exchange for the cancellation of the $1,000,000 note. In November 1995, MOI exercised its second warrant to acquire 500,000 shares of common stock in exchange for a payment of $1,000,000. In August 1996, MOI exercised its third and final warrant of 500,000 shares. In conjunction with this exercise, the Company reduced the exercise price on the final warrants from $3 per share to $2 per share, which approximated market value at the new measurement date. Upon exercise, the Company received approximately $868,000 in cash and canceled accrued interest due to MOI of approximately $132,000. As of September 30, 1997, 200,000 MOI options were outstanding and exercisable. 8. STOCK OPTIONS In 1991, the Board of Directors (the "Board") adopted a nonqualified stock option plan (the "1991 Plan"). The 1991 authorizes the Board to grant options to purchase a maximum of 400,000 shares of common stock to employees, at not less than the fair market value at the date of grant. The options vest at various dates as described in the related option agreement and expire 10 years from the date of grant. The Company accounts for stock option grants and awards under its stock-based compensation plan in accordance with APB Opinion No. 25. Accordingly, no compensation cost has been recognized for stock option grants since the options have exercise prices of not less than the market value of the Company's common stock at the date of grant. -35- There were no stock options granted during 1997 and 1995. For stock options granted during 1996, if compensation cost had been determined based on the fair value at the date of grant consistent with the method prescribed by SFAS No. 123, the Company's fiscal 1996 net earnings and earnings per share would have been adjusted to the pro forma amounts indicated below:
Net Income Net (Loss) Per Income Common (Loss) Share ------ ----------- As reported at September 30, 1996 $ 40,600 $ 0.01 Compensation costs for stock option grants, net of tax .............. (300,300) --------- ----- Pro forma at September 30, 1996 ... $(259,700) $(0.05) ========= =====
Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996: expected volatility of 38%, risk-free interest rate of 5.5% and expected lives of five years. A summary of the status of stock option grants under the Company's stock-based compensation plans as of September 30, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below:
1997 1996 1995 -------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- -------- ------- -------- ------- -------- Outstanding at the beginning of the year..................... 376,000 $ 2.15 162,500 $ 2.68 178,750 $ 2.68 Granted .......................... 272,000 1.94 Exercised......................... (2,600) 1.94 Terminated........................ (60,400) 1.94 (58,500) 2.65 (16,250) 2.63 ------- ------ ------- ------ ------- ------ Outstanding at the end of the year............................ 313,000 $ 2.19 376,000 $ 2.15 162,500 $ 2.68 ======= ====== ======= ====== ======= ====== Options exercisable at end of the year............................ 112,200 $ 2.44 80,800 $ 2.49 56,500 $ 2.78 ======= ====== ======= ====== ======= ====== Weighted average fair value of options granted during the year............................ $ 1.10 ======
-36- The following table summarizes information about stock options outstanding at September 30, 1997:
Remaining Exercise Options Options Life Price Outstanding Exercisable (Years) -------- ----------- ----------- --------- $1.94 209,000 41,800 3.5 2.63 84,000 50,400 1.3 3.00 20,000 16,000 0.5 ------- ------- 313,000 108,200 ======= =======
During the year ended September 30, 1996, 175,000 options exercisable at $1.94 were issued to an officer of the Company outside of the 1991 Plan. At September 30, 1997, 35,000 of these options were exercisable and the remaining options vest ratably over a five year period. These options expire 10 years from the date of grant. 9. PENSION AND OTHER EMPLOYEE BENEFIT PLANS The Company's Milford hourly employees have a defined benefit pension plan, pursuant to a collective bargaining agreement. Benefits are based on years of service and other factors. In conjunction with the Milford acquisition, the Seller contributed the underfunded amount over $350,000 as of the acquisition date. Subsequent to November 1, 1996 the Company assumed all future funding obligations related to the plan. Effective May 1997, the Company and the Milford employees' union agreed to transfer the plan assets to a union sponsored retirement plan and on an ongoing basis the Company would contribute 40 cents per straight-time hour worked. The transfer is expected to be completed in fiscal 1998 and the amount to be transferred will be based on a valuation at a date to be mutually agreed upon. After this transfer, the Company will have no further obligation related to the Milford pension plan other than for unpaid annual contributions. The following table sets forth the Plan's funded status and amounts recognized in the Company's balance sheet as of September 30, 1997: Actuarial present value of benefit obligations: Vested $(2,820,800) Nonvested (381,000) ----------- Accumulated benefit obligation $(3,201,800) =========== Projected benefit obligation for service rendered to date $(3,201,800) Plan assets at fair value 3,195,900 ----------- Plan assets less than projected benefit obligation (5,900) Unrecognized net gain (418,700) ----------- Pension liability included in the consolidated balance sheet $ (424,600) ===========
-37- Net periodic pension expense included the following components: Service cost benefits during the year $ 23,200 Interest cost on projected benefit obligation 203,200 Actual return on plan assets (701,200) Net amortization and deferral 507,100 --------- Net periodic pension expense $ 32,300 =========
The projected benefit obligation was determined using a discount rate of 7.25% at September 30, 1997. The annual long-term rate of return on assets was assumed to be 8.75% for 1997. Compensation increases for applicable employees were estimated using 4.5% for 1997 and thereafter. The Company maintains a defined contribution 401(k) plan to which it contributes stock on a discretionary basis. The cost of the stock contributed to the plan resulted in a charge to expense of $145,500, $123,000 and $116,000 for the years ended September 30, 1997, 1996 and 1995, respectively. Additionally, the Milford hourly employees are eligible to participate in a 401(k) Plan, pursuant to a collective bargaining agreement, under which the Company contributes 35 cents per hour worked to each employee's account. Contributions during the year ended September 30, 1997 were $65,900. 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS As a result of the Milford acquisition, the Company provides certain postretirement health care and life insurance benefits to eligible Milford employees, pursuant to a collective bargaining agreement. The Company accounts for these benefits in accordance with the provisions of SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," which requires the accrual of such benefits during the years the employees provide services. Effective May 1997, in conjunction with its new union contract, the Company negotiated an amendment to the Plan which eliminates spousal coverage and certain other types of benefits to be provided. The effect of this amendment reduced the accumulated postretirement benefit obligation by $2,350,300, which will be amortized as an adjustment to prior service cost over the remaining service period of the employees. Net periodic postretirement benefit cost for the year ended September 30, 1997 includes the following components: Service cost $ 84,200 Interest cost 136,300 Amortization of unrecognized prior service cost (77,700) -------- Net periodic postretirement benefit cost $142,800 ========
-38- The following table sets forth the amount recorded in the consolidated balance sheet at September 30, 1997: Accumulated postretirement benefit obligation: Active employees fully eligible for benefits $ 48,100 Other active employees 1,067,800 Current retirees -- ---------- Total 1,115,900 Unrecognized prior service costs 2,280,200 ---------- Accrued postretirement benefit liability $3,396,100 ==========
For measurement purposes, a 7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997 decreasing to 5% in 1999 and thereafter. The health care cost trend rate assumption has an effect on the amount reported. Changing the assumed health care cost trends by one percentage point in each year would change the accumulated postretirement benefit obligation as of September 30, 1997 by approximately $220,600 and net periodic postretirement benefit cost by $25,100 for 1997. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% in 1997. 11. INCOME TAXES The provision for income taxes consists of the following for the years ended September 30:
1997 1996 1995 ---- ---- ---- Current expense ................ $(228,400) $(232,600) $(149,200) Deferred benefit (expense) ..... (74,900) 214,700 (244,400) Change in valuation allowance... 76,400 766,300 --------- --------- --------- Income tax benefit (expense) ... $(226,900) $ (17,900) $ 372,700 ========= ========= =========
-39- Temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
September 30 ------------------------- 1997 1996 ---- ---- Deferred tax assets: Alternative minimum tax carryforwards .... $ 325,900 $ 272,900 Net operating loss carryforwards of acquired companies -- subject to limitations ........................... 438,800 506,100 Allowances and accruals .................. 278,600 206,600 Postretirement and pension benefits....... 1,224,000 Other .................................... 52,900 ----------- ----------- Total deferred tax assets ....... 2,267,300 1,038,500 Less valuation allowance ................... (392,300) (468,700) ----------- ----------- Net deferred tax assets ......... 1,875,000 569,800 Current portion ............................ 651,000 569,800 ----------- ----------- Long-term portion .......................... $ 1,224,000 None =========== =========== Deferred tax liabilities: Depreciation ............................. $ 650,200 $ 462,400 Book and tax basis differences from business combinations ................. 1,926,500 830,100 Other .................................... 58,300 38,800 ----------- ----------- Total deferred tax liabilities .. 2,635,000 1,331,300 Current portion ............................ None None ----------- ----------- Long-term portion .......................... $ 2,635,000 $ 1,331,300 =========== ===========
During 1997 and 1996, certain tax benefits from net operating losses and temporary differences creating deferred tax assets have been reserved with a valuation allowance due to their uncertainty of realization. Remaining net operating loss carryforwards as of September 30, 1997 are available for offset against future taxable earnings through the year 2007, subject to annual limitations as set forth in the Internal Revenue Code. A reconciliation of the Company's statutory income tax provision computed on pre-tax income to the recorded income tax provision for the years ended September 30 are as follows:
1997 1996 1995 ---- ---- ---- Statutory income tax liability ............ $(182,100) $ (20,200) $(283,300) Change in valuation allowance ............. 76,400 766,300 Nondeductible goodwill amortization ....... (46,400) (26,300) (128,000) Other ..................................... (74,800) (28,600) (17,700) --------- --------- --------- Income tax (expense) benefit .............. $(226,900) $ (17,900) $ 372,700 ========= ========= =========
-40- 12. COMMITMENTS AND CONTINGENCIES The Company's annual expense and future obligations related to operating leases is not significant. Additionally, the Company is involved in certain legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of counsel, the outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. 13. CASH RESTRICTED FOR EQUIPMENT The cash restricted for equipment was received from the Michigan Strategic Fund bondholders (see Note 6) to purchase equipment for future production requirements. Proceeds not yet utilized at September 30, 1997 totaled $526,500 and were classified as restricted cash. At September 30, 1997, the company has contractual obligations to purchase equipment sufficient to utilize the restricted cash. 14. SEGMENT INFORMATION The following is the business segment information applicable to continuing operations (in thousands):
Metal Eliminations Parts Production and Forming Machining Tooling Corporate Consolidated ------- ---------- ------- ------------ ------------ September 30, 1997: Net sales ............... $18,930 $12,718 $18,474 $(2,367) $47,755 Income from operations .. (1,395) 881 2,587 (228) 1,845 Identifiable assets ..... 13,753 9,182 7,433 15,840 46,208 Depreciation and amortization ......... 1,200 612 701 403 2,916 Capital expenditures .... 1,457 1,336 662 4,529 7,984 September 30, 1996: Net sales ............... $14,748 N/A $18,136 $(2,007) $30,877 Income from operations .. (701) N/A 2,093 (501) 891 Identifiable assets ..... 12,920 N/A 7,211 14,823 34,954 Depreciation and amortization ......... 1,098 N/A 671 215 1,984 Capital expenditures .... 1,803 N/A 163 3,513 5,479 September 30, 1995: Net sales ............... $17,630 N/A $20,659 $(2,013) $36,276 Income from operations .. 275 N/A 2,457 (754) 1,978 Identifiable assets ..... 14,444 N/A 8,852 3,651 26,947 Depreciation and amortization ......... 1,151 N/A 671 37 1,859 Capital expenditures .... 592 N/A 751 16 1,359
****** -41- SECOM GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - -----------------------------------------------
Column B Column C Column D Column E ----------------- --------------- ------------ ----------- Balance at Charged to Cost Deductions-- Balance at Column A Beginning of Year and Expenses Write Offs End of Year Description Allowance for doubtful accounts: Year ended September 30, 1995 ......... $ 78,800 $127,500 $112,800 $ 93,500 Year ended September 30, 1996 ......... 93,500 51,400 123,900 21,000 Year ended September 30, 1997 ......... 21,000 62,000 30,200 52,800 Inventory reserve: Year ended September 30, 1995 ......... 61,000 15,000 76,000 Year ended September 30, 1996 ......... 76,000 101,500 30,000 147,500 Year ended September 30, 1997 ......... 147,500 96,000 11,000 232,500 Deferred tax asset valuation allowance: Year ended September 30, 1995 ......... 1,235,000 766,300 468,700 Year ended September 30, 1996 ......... 468,700 468,700 Year ended September 30, 1997 ......... 468,700 76,400 392,300 -42-
SECOM GENERAL CORPORATION AND SUBSIDIARIES SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ---------------------------------------------
Quarter Ended ----------------------------------------------------------------------------- 1997 1996 ------------------------------------- ------------------------------------ September June March December September June March December 1997 1997 1997 1996 1996 1996 1996 1995 --------- ---- ----- -------- --------- ---- ----- -------- (In thousands; except per share amounts) NET SALES............... $11,995 $12,964 $12,987 $ 9,809 $7,834 $8,254 $7,529 $7,260 GROSS PROFIT............ 2,079 2,242 2,216 1,505 1,139 1,806 1,494 1,373 INCOME (LOSS) BEFORE INCOME TAXES.......... 78 280 379 (201) (221) 52 163 65 INCOME TAX (EXPENSE) BENEFIT ............. (20) (123) (152) 68 77 (12) (61) (22) ------ -------- ----- ------- ------ ------ ------ ------ NET INCOME (LOSS)....... $ 58 $ 157 $ 227 $ (133) $ (144) $ 40 $ 102 $ 43 ====== ======== ===== ======= ====== ====== ====== ====== EARNINGS (LOSS) PER COMMON SHARE-- Net income (loss)....... $ 0.01 $ 0.03 $ 0.04 $ 0.02 $(0.03) $ 0.01 $ 0.02 $ 0.01 ====== ======== ===== ===== ====== ====== ====== ====== PRICE RANGE OF COMMON STOCK: High bid.............. $ 2.69 $ 2.94 $ 3.31 $ 3.06 $ 3.12 $ 3.44 $ 3.37 $ 3.37 Low bid............... 2.19 2.00 2.19 2.50 2.00 1.87 1.75 2.50 WEIGHTED AVERAGE SHARES OUTSTANDING 5,424 5,460 5,480 5,494 5,257 4,879 4,820 4,611
-43- SECOM GENERAL CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (UNAUDITED) - ------------------------------------------
Year Ended September 30 -------------------------------------------------- 1997 1996 1995 1994 1993 (In thousands; except per share amounts) INCOME STATEMENT DATA NET SALES ........................................ $47,755 $30,877 $36,276 $32,571 $29,356 INCOME (LOSS) FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES ............................ 536 58 831 1,154 (13) INCOME TAX (EXPENSE) BENEFIT ..................... (227) (17) 373 (61) ------- ------- ------- ------- ------- INCOME (LOSS) FROM CONTINUING OPERATIONS ......... 309 41 1,204 1,093 (13) INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES ............................ (3,640) ------- ------- ------- ------- ------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE .............................. 309 41 1,204 1,093 (3,653) CUMULATIVE EFFECT OF CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES .................... ------- ------- ------- ------- ------- NET INCOME (LOSS) ................................ $ 309 $ 41 $ 1,204 $ 1,093 $(3,653) ======= ======= ======= ======= ======= BALANCE SHEET DATA TOTAL ASSETS ..................................... $46,208 $34,954 $26,947 $27,826 $31,291 LONG-TERM OBLIGATIONS ............................ 17,711 13,724 4,622 7,089 7,123 STOCKHOLDERS' EQUITY ............................. 14,300 14,036 11,910 9,837 8,574 COMMON STOCK SHARES OUTSTANDING .................. 5,340 5,342 4.276 3,701 2,901 EARNINGS (LOSS) PER COMMON SHARE: Continuing operations .......................... 0.06 0.01 0.28 0.29 Discontinued operations ........................ (1.27) ------- ------- ------- ------- ------- NET INCOME (LOSS) PER COMMON SHARE ............... $ 0.06 $ 0.01 $ 0.28 $ 0.29 $ (1.27) ======= ======= ======= ======= ======= EQUITY PER COMMON SHARE .......................... 2.68 2.63 2.79 2.66 2.96 CURRENT RATIO .................................... 1.64 1.84 1.13 1.02 0.82 LONG-TERM OBLIGATIONS TO STOCKHOLDERS' EQUITY .... 1.24 0.98 0.39 0.72 0.83
-44- EX-10.10 2 (Promissory Note OLD KENT BANK (Installment Payments) OLD KENT Address 27255 Lahser Road ----------------- City Southfield State MI Zip 48034 ---------- -- ----- November 14, 1997 ------------------ (Supersedes August 22, 1997 Promissory Note) FOR VALUE RECEIVED, the undersigned ("Obligor") promise (s) to pay to the order of the bank named above ("Bank") the principal amount of **One ----- MILLION EIGHT HUNDRED THOUSAND AND NO/100*** Dollars ($1,800,000) and - ------------------------------------------- ---------------- interest (computed on the basis of a 360-day year for the actual number of days elapsed) on the unpaid principal balance at a rate per annum of (check applicable box): _X_ 8.50% until Maturity and 10.50% after Maturity The principal and interest on this Note shall be paid as follows (check applicable box): _X_ Principal and interest shall be paid in installments commencing December 1, 1997 and on the first day of each MONTH thereafter until December 1, 2002, at which time the remaining balance of principal and interest shall be paid in full. Each installment shall be paid in an amount equal to the greater of $28,505.67 or the amount of unpaid interest accrued to the date of payment of the installment. LATE CHARGE: If any installment of principal or interest is not paid within ten days after it is due, Obligor shall forthwith pay to Bank a late charge in an amount equal to the greater of $50,00 or one-tenth (1/10) of one percent (1%) of the unpaid principal balance as of the date the late charge is assessed. This is in addition to Bank's other rights and remedies for default in payment of an installment of principal or interest when due. EXPENSES AND LOAN PROCESSING FEE: Obligor shall reimburse Bank for all out-of-pocket expenses heretofore or hereafter incurred by Bank in connection with making the loan evidenced by this Note and any renewals, extensions or modifications of the loan and in connection with taking any security for the loan, including, without limitation, filing and recording fees, attorneys' fees and expenses, and costs of credit reports, surveys, appraisals, title work and mortgagee's title insurance. Each out-of-pocket expense (if not reimbursed to Bank on or before the date of this Note) shall be reimbursed to Bank at the time of the first required interest payment under this Note after the expense is incurred. There is also a loan processing fee in respect of this loan in the amount of $750.00. The loan processing fee (check applicable box): _X_ has been paid to Bank on or before the date of this Note. Accepted: OLD KENT Old Kent Bank ------------------ By /s/ Timothy H. O'Rourke ----------------------- Timothy H. O'Rourke Its Vice President -------------- Nonindividual Obligor: Milford Manufacturing, Corporation ---------------------------------- a Michigan ---------------------------------- (State of Organization) Corporation ---------------------------------- (Type of Entity) /s/ David J. Marczak ---------------------------------- David J. Marczak Its Chief Financial Officer ------------------------------- E-1 Secom General Corporation - ------------------------- a Delaware Corporation - ------------------------- By /s/ David J. Marczak ----------------------- David J. Marczak Its Chief Financial Officer ----------------------- E-2 ADDITIONAL PROVISIONS OF PROMISSORY NOTE 1. Prepayments. Obligor may prepay all or part of the principal of this Note at any time, unless prepayment is prohibited, limited or conditioned in any Rider to this Note or in any other agreement signed by Obligor. Any partial prepayment will be applied to the installment or installments last falling due under this Note, and a partial prepayment shall not affect the amount or time of payment of succeeding required installments. 2. Security. This Note and all obligations of Obligor hereunder are secured by any and all security agreements, guaranties, mortgages, assignments and all other agreements and instruments heretofore or hereafter given by any Obligor or any third party to Bank ("Security Documents"), including, but not limited to, Security Documents given in connection with any prior promissory notes given to Bank by any Obligor. As additional security for the payment of Obligor's obligations under this Note, Obligor grant(s) to Bank a security interest in all tangible and intangible property of Obligor now or hereafter in the possession of Bank, including, without limitation, all deposit accounts. 3. Default. Each of the following shall be an event of default under this Note: (a) if default occurs in the payment of any installment of principal or interest hereunder or of any late charge, out-of-pocket expense, or loan processing fee at any time owing to Bank under this Note or in the payment of any other indebtedness or obligation now or hereafter owing by any Obligor to Bank, as and when the same shall be or become due and payable; (b) if default occurs in the performance of any other obligation to Bank under this Note or any Security Document or any loan agreement or other agreement heretofore or hereafter entered into between any Obligor and Bank or if there occurs any other event of default under any Security Document or any such loan agreement or other document; (c) if any warranty or representation heretofore or hereafter made to Bank by any Obligor or any guarantor of all or part of the indebtedness evidenced by this Note ("Guarantor"), in this Note, in any Security Document or in any financial statement, loan application or other document given to Bank, shall have been false in any material respect; (d) if any Obligor or any Guarantor or any of Obligor's or Guarantor's partners (if any Obligor or Guarantor is a partnership) shall die, dissolve, become insolvent, or make an assignment for the benefit of creditors; (e) if any levy, writ of attachment, garnishment, execution or similar process shall be issued against or placed upon any property of any Obligor or any Guarantor; (f) if any guaranty that now or hereafter secures payment of all or any part of the indebtedness evidenced by this Note shall be terminated or limited for any reason without the written consent or agreement of Bank; or (g) if at any time Bank for any reason shall in good faith believe that the prospect of payment or performance of this Note or any other indebtedness or obligation of any Obligor to Bank is impaired. Upon the occurrence of any event of default, all or any part of the indebtedness evidenced hereby and all or any part of all other indebtedness and obligations then owing by any Obligor to Bank shall, at the option of Bank, become immediately due and payable without notice or demand. If a voluntary or involuntary case in bankruptcy, receivership or insolvency shall at any time be begun by or against any Obligor or any Guarantor, or if any attachment, garnishment, execution, levy or similar process shall at any time be placed upon any deposit account at any time maintained with Bank by any Obligor or any Guarantor, then all such indebtedness and obligations shall automatically become immediately due and payable. All or any part of the indebtedness evidenced hereby also may become, or may be declared to be, immediately due and payable under the terms and conditions contained in any loan agreement, Security Document or other agreement heretofore or hereafter entered into between any Obligor and Bank. 4. Place and application of Payments. Each payment upon this Note shall be made at any of Bank's offices or such other place as the holder hereof may direct in writing. Any payment upon this Note shall be applied first to any accrued and unpaid interest, then to the unpaid principal balance, then to any expenses or loan processing fee then due and payable to Bank and then to any unpaid late charges, except that after Maturity of this Note, Bank may apply any payment or collection to any such amounts owing under this Note in such manner as Bank shall determine in its sole discretion. If any Obligor at any time owes Bank any indebtedness or obligation in addition to the indebtedness evidenced by this Note, and if any indebtedness owed by Obligor to Bank is then in default, Obligor shall not have, and hereby waives, any right to direct or designate the particular indebtedness or obligation upon which any payment made by, or collected from, Obligor or from any Guarantor or other security shall be applied. The manner of application of any such payment, as between or among such indebtedness and obligations, shall be determined by Bank in its sole discretion. 5. Maximum Interest Rate. Notwithstanding any other provision of this Note, Bank shall never be entitled to charge, take or receive as interest on this Note any amount in excess of simple interest calculated at the lesser of (a) a rate of thirty-five percent (35%) per year or (b) the highest rate to which Obligor may lawfully agree in writing ("Maximum Rate"). If Bank ever receives interest in excess of the Maximum Rate, the excess shall be considered a partial prepayment of the principal of this Note or, if the principal has been paid in full, shall be refunded to Obligor. 6. Setoff. Bank shall have the right at any time to set off any indebtedness that Bank then owes to any Obligor (including any deposit account) against any indebtedness evidenced by this Note that is then due and payable. E-3 7. Remedies. Bank shall have all rights and remedies provided by law and by agreement of any Obligor. Any requirement of reasonable notice with respect to any sale or other disposition of collateral shall be met if Bank sends the notice at least five (5) days before the date of sale or other disposition. Obligor agrees to pay any and all expenses, including reasonable attorneys' fees and legal expenses, paid or incurred by Bank in protecting and enforcing the rights of and obligations to Bank under any provision of this Note or any Security Document. 8. Environmental Compliance. Obligor represents and warrants to, and agrees with, Bank that: (a) none of Obligor's real or personal property is, and Obligor will not permit it to become, contaminated by any substance that is now or hereafter regulated by or subject to any present or future law or regulation that establishes liability for the removal or clean-up of, or damage caused by, any environmental contamination; (b) Obligor's operations, activities, and real and personal property are, and Obligor shall cause them to continue to be, in compliance with each such law and regulation; (c) if the indebtedness evidenced by this Note is not paid at Maturity, then at any time thereafter Bank may, but shall not be obligated to, conduct or obtain an environmental investigation or audit of any or all of Obligor's properties, and Obligor shall reimburse Bank for all costs and expenses incurred by Bank in connection with any such investigation or audit; and (d) Obligor shall indemnify and, at Bank's option, defend Bank with respect to all claims, damages, losses, liabilities and expenses (including attorneys' fees) asserted against or incurred by Bank by reason of any failure to comply with, or any inaccuracy in, any of the agreements, representations and warranties contained in this paragraph. 9. Waivers. No delay by Bank in the exercise of any right or remedy shall operate as a waiver thereof. No single or partial exercise by Bank of any right or remedy shall preclude any other or future exercise thereof or the exercise of any other right or remedy. No waiver by Bank of any default or of any provision hereof shall be effective unless in writing and signed by Bank. No waiver of any right or remedy on one occasion shall be a waiver of that right or remedy on any future occasion. Obligor waives demand for payment, presentment, notice of dishonor and protest of this Note and consents to any extension or postponement of time of its payment, to any substitution, exchange or release of all or any part of any security given to secure this Note, to the addition of any party hereto, and to the release, discharge, waiver, modification, or suspension of any rights and remedies against any person who may be liable for the indebtedness evidenced by this Note. 10. General. If Obligor is more than one person, firm or corporation, (a) each of them is primarily liable on this Note, (b) receipt of value by any one of them constitutes receipt of value by both or all of them, (c) their liability on this Note is joint and several, and (d) the term "Obligor" means each of them and all of them. In this Note, "Maturity" means such time as the entire remaining unpaid principal balance shall be or shall become due and payable for any reason, including acceleration under paragraph 3 hereof. 11. Applicable Law and Jurisdiction. This Note shall be governed by and interpreted according to the laws of the state in which Bank's principal office is located, without giving effect to principles of conflict of laws. Obligor irrevocably agrees and consents that any action against Obligor for collection or enforcement of this Note may be brought in any state or federal court that has subject matter jurisdiction and is located in, or whose district includes, any county in which Bank has an office and that any such court shall have personal jurisdiction over Obligor for purposes of the action. E-4 Affiliate #20 SECURITY AGREEMENT (Equipment and Fixtures) The undersigned ("Debtor") hereby grant(s) to OLD KENT BANK, a Michigan banking corporation, of 27255 Lahser, Southfield MI ("Bank") a continuing security interest in equipment, wherever located and owned by Debtor, and all proceeds thereof (collectively called "Collateral"). The term "equipment" includes, but is not limited to, machinery, furniture, fixtures, vehicles, and accessories, parts, special tools, and equipment now or hereafter affixed to or used in connection with equipment, and all goods described in any schedule or list attached hereto. THIS SECURITY INTEREST SECURES PAYMENT AND PERFORMANCE OF ALL INDEBTEDNESS AND OBLIGATIONS NOW AND HEREAFTER OWING BY DEBTOR TO BANK, including all obligations of Debtor under this Agreement, and all indebtedness and obligations now and hereafter owing to Bank that are evidenced by any instruments, documents and agreements listed below that have been executed by another person or persons, including any and all renewals, extensions and modifications thereof (collectively called the "Indebtedness"). The indebtedness and obligations now owing by Debtor to Bank include, BUT ARE NOT NECESSARILY LIMITED TO, the indebtedness and obligations evidenced by any instruments, documents and agreements listed below. Instrument, Document Principal Amount Maker or Agreement Date (If Any) (If Other Than Debtor) Promissory Note August 22, 1997 $1,500,000.00 This security interest secures all present and future indebtedness and obligations owing by Debtor to Bank, regardless of whether any such indebtedness or obligation is (a) not listed above, (b) not presently intended or contemplated by Debtor or Bank, (c) indirect, contingent or secondary, (d) unrelated to the Collateral or to any financing of the Collateral by Bank, (e) of a kind or class that is different from any indebtedness or obligation now owing by Debtor to Bank, or (f) evidenced by a note or other document that does not refer to this security interest or this Agreement. If Debtor is more than one person, the Indebtedness includes all indebtedness and obligations now and hereafter owing to Bank by any one or more of such persons, regardless of whether the remaining person or persons are not liable for such indebtedness and obligations or whether one or more persons who are not parties to this Agreement are also liable for all or part of such indebtedness and obligations. Additional provisions: Security interest and Equipment applies only to Equipment on attached Schedule "A" (Certain Machinery and Equipment at Milford Manufacturing Corporation) THE ADDITIONAL PROVISIONS PRINTED ON THE REVERSE SIDE ARE PART OF THIS AGREEMENT AND ARE INCORPORATED IN THIS AGREEMENT BY REFERENCE. Executed this August 22, 1997. ----------------- OLD KENT BANK By /s/ Timothy H. O'Rourke ----------------------- Timothy H. O'Rourke Its Vice President ---------------------- Nonindividual Debtor: Milford Manufacturing, Corporation - ---------------------------------- A Michigan -------------------------------- (State of Organization) Corporation -------------------------------- (Type of Entity) By /s/ David J. Marczak ------------------------------- Its CFO. ------------------------------ Taxpayer Ident. No. 38-3315254 -------------- E-5 Individual Debtor(s): - -------------------- ------------------- Social Security No. - -------------------- ------------------- Social Security No. Debtor Address: - -------------------------------------------- 26600 Heyne Dr. - -------------------------------------------- Novi MI 48376 - -------------------------------------------- E-6 EX-23 3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-45177 and 33-43557 of Secom General Corporation on Form S-8 of our report dated December 5, 1997, appearing in this Annual Report on Form 10-K of Secom General Corporation for the year ended September 30, 1997. Deloitte & Touche LLP /s/ Deloitte & Touche LLP Detroit, Michigan December 24, 1997 E-7 EX-27 4 ARTICLE 5 FDS FOR SECOM 10-K
5 YEAR SEP-30-1997 SEP-30-1997 $ 346,800 0 6,824,900 (52,800) 6,136,900 14,594,900 37,374,700 (9,372,400) 46,208,300 8,905,900 0 534,000 0 0 0 46,208,300 47,755,300 47,755,300 39,713,600 45,910,500 46,400 0 1,262,900 535,500 226,900 0 0 0 0 308,600 0.00 0.06
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