ITEM 1. BUSINESS.
The Registrant has owned and managed businesses in a variety of industries. With the sale of its S.K. Wellman business on June 30, 1995, the Registrant no longer has recurring revenues or operating subsidiaries and is engaged in the active search for acquisition opportunities which meet its financial acquisition criteria. These criteria generally focus the Company's search on mid-sized entities which are involved in manufacturing, distribution or assembly of non-consumer products and which offer continuing management.
Reference is made to the information set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," elsewhere in this Form 10-K for a discussion of the development of the business since January 1, 1995.
ITEM 2.
ITEM 2. PROPERTIES.
No response under this item is required.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Registrant is unaware of any litigation that is expected to have a material effect on the results of operations or financial condition of the Registrant.
ITEM 4.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the three months ended December 31, 1995.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Reference is made to the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Market, Share Ownership and Dividend Information" in Section 7 of this report, which information is incorporated into this Item 5 by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULT OF OPERATIONS
BASIS OF PRESENTATION: On June 30, 1995 the Company completed the sale of all the common stock of its subsidiary, S.K. Wellman Limited, Inc., following the approval of such divestiture by the Company's shareholders at the 1995 Annual Meeting. The accompanying financial statements report the financial condition and results of operations of the Wellman business as a discontinued operation and, accordingly, the results of operations of Wellman for all the periods presented are excluded from earnings/loss from continuing operations. The gain on the disposal of the Wellman subsidiary is reported as a gain from the disposal of a discontinued business.
The discussion below addresses the operations and financial condition of the Registrant only.
OPERATIONS: After the disposal of S.K. Wellman, the Registrant has no recurring revenues or operating subsidiaries. The general and administrative expenses of the Registrant are incurred for acquisition search, compensation, occupancy, shareholders costs (such as printing, distribution and stock transfer fees) and legal and professional matters. The sale of the Wellman business is not expected to materially alter the level of such expenses incurred by the Registrant.
In the short-term, the Company intends to invest the proceeds of the Wellman transaction in short-term repurchase instruments managed by selected commercial banks. At December 31, 1995 the Company's average rate of return on these investments was approximately 5.17%. As these investments account for all of the Company's income subsequent to the sale of Wellman, the Company's future financial results will be impacted by changes in the short-term interest rates available to the Company. Since the divestiture of S.K. Wellman, the Company has been actively engaged in pursuing the acquisition of new businesses where purchase valuations are attractive. No agreements have been entered into with respect to any acquisition opportunity.
The Company believes that it will not meet the definition of an investment company under the Investment Company Act of 1940 at least through June 30, 1996, which is the first anniversary of the sale of Wellman. However, the inability of the Company to control the timing of any acquisition of an operating business after such anniversary makes it possible that it will then be deemed to be an investment company. In such case, it would be required to register under and be subject to the various regulations contained under the Investment Company Act of 1940, which could add significant expenses to the operations of the Company and fundamentally alter the presentation of the Company's financial statements.
1995 VERSUS 1994: On June 30, 1995 the Registrant completed the sale of the Wellman business. The proceeds of this transaction amounted to $60.0 million, which included certain amounts related to the repayment or assumption of debt and capital leases by the purchaser. After purchase price adjustments and expenses, the transaction resulted in a gain to MLX of $31.4 million. The gain was reduced by $3.3 million for estimated income taxes due and payable as well as by $10.0 million for a charge in lieu of federal income taxes which are not due or payable resulting in a net gain to the Company of $18.1 million. No such sale or gain occurred in 1994. General and administrative expenses in 1995 were approximately $1.0 million versus a 1994 level of approximately $800,000, an increase of 23%. Principal components of this increase were higher expenses associated with employee compensation, insurance charges, shareholder costs and legal and professional matters.
Interest income in 1995 amounted to $1.1 million compared to a nominal amount in 1994 as a result of the investment of the proceeds of the Wellman transaction. Correspondingly, interest expense of the Company dropped from $200,000 in 1994 to $100,000 in 1995 since the debt obligations of MLX were repaid following the divestiture of the Wellman business.
A portion of the proceeds of the Wellman transaction was used to repay the Registrant's Zero Coupon Bonds and Variable Rate Subordinated Notes. These repayments resulted in a pre-tax extraordinary gain on the early retirement of debt of $412,000. No such gain occurred in 1994.
Dividends and accretion on the Registrant's Series A Preferred Stock amounted to $700,000 in 1995 versus $1.1 million in 1994. This decrease resulted from the redemption of such Preferred Stock at the time of the Wellman transaction.
In 1995, the Company had net earnings of $20.8 million (or $7.53 per share net of obligations on the Series A Preferred Stock) compared to $2.7 million in 1994 (or $0.65 per share). In 1995, the gain on disposal of Wellman amounted to $6.76 per share and the extraordinary gain amounted to $0.10 per share.
1994 VERSUS 1993: General and administrative expenses amounted to $800,000 in 1994 compared to $1.3 million in 1993. This decrease resulted from lower expenses for incentive compensation, shareholder costs (principally distribution and printing) and legal and professional matters. A one-for-ten reverse stock split executed on June 25, 1993 served to reduce the administrative charges for printing and distribution of shareholder communication material.
Interest expense at MLX dropped by $164,000 year over year due to the repayments of the minority interest purchase note in February and December 1993.
Included in the results for 1993 is an extraordinary gain from early retirement of debt resulting from an exchange of Series A Preferred Stock for certain debt obligations described in Note 3 to the financial statements. No such exchange or gain occurred in 1994.
Dividends and accretion applicable to Series A Preferred Stock increased to $1.1 million in 1994 versus $900,000 in 1993 due to increases in the prime rate component in the dividend rate structure.
In 1994, the Company had net earnings of $2.7 million (or $0.65 per share net of obligations on the Series A Preferred Stock) compared to earnings before extraordinary item in 1993 of $2.0 million (or $0.45 per share net of obligations on the Series A Preferred Stock). The extraordinary gain in 1993 amounted to $1.38 per common share.
[BOXED COPY] The Company is able to offset substantially all of its federal taxable income with its pre- reorganization tax loss carryforwards and therefore has a federal tax liability only for Alternative Minimum Tax amounts. Accordingly, the charge in lieu of federal income taxes included in the statements of income is not accruable or payable. These pro forma charges in 1995, 1994 and 1993 were $11.3 million, $1.3 million and $3.1 million, respectively. The following table illustrates the effect of this pro forma charge on the Company's earnings and earnings per share.
1995 1994 1993 (in thousands, except per share data) Net earnings $20,810 $2,747 $5,666 Less dividends and accretion on preferred stock (652) (1,058) (873) Plus pro forma federal tax charge not due or payable 11,325 1,314 3,112 Total earnings $31,483 $3,003 $7,905 Total earnings per common share $ 11.76 $ 1.15 $ 3.02 [END BOX COPY]
FINANCIAL POSITION AND LIQUIDITY
Consolidated working capital at December 31, 1995 was $36.4 million compared to a nominal amount at the end of 1994. Working capital at December 31, 1995 consisted principally of cash and short-term investments of $32.9 million and estimated short-term obligations of $700,000 for income taxes, transaction expenses and compensation. This increase resulted from the receipt of the proceeds from the Wellman divestiture.
The Company invests its available funds in short-term repurchase agreements managed by five selected commercial banks and collateralized by U.S. Treasury and federal agency obligations. The Company has issued instructions to each such bank providing guidelines on investments and restrictions on any disbursement of the Registrant's funds.
In connection with the sale of Wellman, the Company funded an escrow fund with a cash payment of $4 million to partially collateralize the indemnification obligations of the Registrant in the purchase and sale agreement. The Company's maximum liability under such indemnity provisions is $5 million and any amount remaining in the escrow fund after September 30, 1996, net of allowed and asserted claims, will be disbursed to MLX. An additional escrow fund amounting to $1,250,000 was established at June 30, 1995 (adjusted to $1,347,000 in August 1995) relating to certain estimated income tax obligations arising from the sale.
The Registrant's Zero Coupon Bonds were originally issued in 1990 and amended in 1992. The proceeds of the Wellman transaction were used to repay all outstanding obligations under these Bonds.
The 1993 Variable Rate Subordinated Notes were issued in April 1993 in exchange for certain of the Zero Coupon Bonds. All obligations under such Notes were repaid with proceeds from the Wellman divestiture.
The Series A Preferred Stock was issued as of December 31, 1992 and April 22, 1993 and included an escalating dividend rate feature and provision for redemption solely at the option of the Registrant. In connection with the Wellman transaction, all such Preferred Stock was redeemed.
OTHER DATA
CAPITAL EXPENDITURES: There were no material commitments for capital expenditures outstanding at December 31, 1995.
EMPLOYEES: Subsequent to the sale of S.K. Wellman, and as of December 31, 1995, the Registrant's business is conducted by two full-time and four part-time employees. The services of the part-time employees are obtained through a facilities and service sharing arrangement with Pameco Corp. At December 31, 1994 the Company had 559 employees including 247 which were covered by collective bargaining agreements.
MARKET, SHARE OWNERSHIP AND DIVIDEND INFORMATION: As of December 31, 1995 (and commencing on April 28, 1994) the Company's common shares were traded on the NASDAQ National Market under the trading symbol "MLXR". From August 30, 1993 until April 28, 1994, the Company's shares were traded on the NASDAQ Small Cap Market. From January 26, 1993 until August 30, 1993, the Company's shares were traded on the Domestic OTC Electronic Bulletin Board regulated by NASD.
The Company was advised by NASDAQ on February 5, 1996 that it failed to comply with Section 3(a)3 of Schedule D of the NASD By-Laws by not having an operating business activity. A temporary exception was granted on that date permitting the Registrant's common shares to remain listed on the NASDAQ National Market until June 30, 1996. At that time if an additional exception is not granted or if compliance is not achieved, the Registrant's shares will be delisted and traded on the Domestic OTC Electronic Bulletin Board.
As of December 31, 1995 the Company estimated there were approximately 6,600 shareholders of record of its common stock. In addition, the Company believes that there are approximately 2,400 shareholders whose shares are registered in names of nominees.
MLX's current policy is to retain earnings to finance future growth and acquisition opportunities and, accordingly, does not currently expect to pay any cash dividends on its common stock in the foreseeable future.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the consolidated financial statements of MLX Corp., consisting of the Report of Independent Auditors, the Consolidated Balance Sheets as of December 31, 1995 and 1994, the related Consolidated Statements of Income, Consolidated Statements of Cash Flows, and Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1995, together with the Notes to Consolidated Financial Statements. See Section F of this report, which information is incorporated into this Item 8 by reference.
Reference is made to the information set forth under "Quarterly Data" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," elsewhere in this Form 10-K, which information is incorporated into this Item 8 by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Registrant incorporates by reference herein information appearing under the caption "Remuneration of Directors and Executive Officers" contained in the Registrant's definitive Proxy Statement for the fiscal year ended December 31, 1995 in connection with the Registrant's 1996 Annual Meeting of Shareholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Registrant incorporates by reference herein information appearing under the caption "Remuneration of Directors and Executive Officers" contained in the Registrant's definitive Proxy Statement for the fiscal year ended December 31, 1995 in connection with the Registrant's 1996 Annual Meeting of Shareholders.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Registrant incorporates by reference herein information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" contained in the Registrant's definitive Proxy Statement for the fiscal year ended December 31, 1995 in connection with the Registrant's 1996 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Registrant incorporates by reference herein information appearing under the caption "Employment Agreements with Executive Officers," and "Compensation Committee Interlocks and Related Transactions" contained in the Registrant's definitive Proxy Statement for the fiscal year ended December 31, 1995 in connection with the Registrant's 1996 Annual Meeting of Shareholders. PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements The following consolidated financial statements of the Registrant are incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1995 and 1994.
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements - December 31, 1995.
(2) Schedules
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(3) Listing of Exhibits
Exhibit 3.1 & 4.1 -- Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1993). Exhibit 3.2 & 4.2 -- By-Laws of the Registrant (incorporated herein by reference to Exhibit 3.2 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1993). Exhibit 4.3 & 9.1 -- Voting Trust Agreement dated December 11, (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991).
Exhibit 4.4 & 9.2 -- Amendment No. 1, dated October 26, 1987, to the Voting Trust Agreement dated December 11, 1984 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.5 & 9.3 -- Amendment No. 2, dated April 2, 1991, to the Voting Trust Agreement dated December 11, (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.6 -- Restricted Transfer Trust Agreement dated October 10, 1986 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.7 -- Amendment No. 1, dated October 26, 1987, to the Restricted Transfer Trust Agreement dated October 10, 1986 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.8 -- Amendment No. 2 dated June 4, 1991 to the 1990 Restricted Transfer Trust Agreement dated October 10, 1986 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.9 -- MLX Exchange Agreement dated as of April 13, 1990, as amended and restated as of March 19, 1992, as amended and restated as of April 21, 1993, among the Registrant, the Lenders listed therein, and Morgan Guaranty Trust Company of New York, as Bond Agent. Exhibit 4.10 -- MLX Limited Guarantee, dated as of March 19, (incorporated herein by reference to Exhibit 2.17 to the Registrant's Current Report on Form 8-K, dated April 10, 1992). Exhibit 4.11 -- Management Services Agreement, dated as of March 19, 1992, between the Registrant and Pameco Holdings, Inc. (incorporated herein by reference to Exhibit 2.16 of the Registrant's Current Report on Form 8-K, dated April 10, 1992). Exhibit 4.12 -- Amendment to Management Services Agreement, dated as of November 30, 1992, between the Registrant and Pameco Holdings, Inc. (incorporated herein by reference to Exhibit 4.12 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.13 -- Nomination Agreement, dated as of December 15, 1992, among the Registrant and the Investors listed therein (incorporated herein by reference to Exhibit 4.13 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.14 -- Exchange Agreement, dated as of January 15, 1993, among MLX Corp. and the Investors listed therein (incorporated herein by reference to Exhibit 4.14 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.15 -- Loan and Security Agreement, dated as of January 15, 1993, between S.K. Wellman Limited, Inc. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.15 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.16 -- First Amendment to Loan and Security Agreement, dated as of February 19,1993, between S.K. Wellman Limited, Inc. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.16 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.17 -- Second Amendment to Loan and Security Agreement, dated as of March 15,1993, between S.K. Wellman Limited, Inc. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.17 of Registrant's Report on Form 10-k for the year ended December 31, 1992). Exhibit 4.18 - - Stock Pledge Agreement (S.K. Wellman S.p.A.), dated as of January 15, 1993, between The S.K. Wellman Corp. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.18 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.19 -- Stock Pledge Agreement (S.K. Wellman S.p.A.), dated as of January 15, 1993, between S.K. Wellman Limited, Inc. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.19 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.20 -- Stock Pledge Agreement (The S.K. Wellman Company of Canada Limited), dated as of January 15, 1993, between The S.K. Wellman Corp. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.20 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.21 -- Patent Collateral Assignment and Security Agreement, dated as of January 15, 1993, between The S.K. Wellman Corp. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.21 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.22 -- Trademark Security Agreement, dated as of January 15, 1993, between The S.K. Wellman Corp. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.22 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.23 -- Exchange Agreement, dated as of April 2, 1993, among MLX Corp. and the Bondholders Listed Herein. - -18-
Exhibit 4.24 -- First Consolidated Amendment to Loan and Security Agreement, dated as of November 16, 1994, between S.K. Wellman Limited, Inc. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.24 of Registrant's Report on Form 10-K for the year ended December 31, 1994.) Exhibit 10.1# -- Employment Agreement, dated February 10, 1991, between the Registrant and Brian R. Esher (incorporated herein by reference to Exhibit 10.1 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990). Exhibit 10.1a# -- First Amendment to Employment Agreement, dated as of March 19, 1992, between the Registrant and Brian Esher. Exhibit 10.1b# -- Second Amendment to Employment Agreement, dated as of January 1, 1994, between Registrant and Brian Esher. Exhibit 10.1c# -- Third Amendment to Employment Agreement, dated as of January 1, 1995, between the Registrant and Brian Esher. Exhibit 10.1d*# -- Fourth Amendment to Employment Agreement, dated as of January 1, 1996, between the Registrant and Brian Esher. Exhibit 10.3 -- Severance/ Consulting Agreement, dated January 14, 1991, between the Registrant and William P. Panny (incorporated herein by reference to Exhibit 10.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990). Exhibit 10.4 -- Purchase Agreement, dated as of March 19, 1992,among the Registrant, Pameco Holdings, Inc., and Pameco Corporation (incorporated herein by reference to Exhibit 21 of Registrant's Current Report on Form 8-K dated April 10, 1992). Exhibit 10.5# -- MLX Corp. Stock Option Plan, dated as of December 29, (incorporated herein by reference to Exhibit 10.5 of Registrant's Report on Form 10-K for the year ended December 31, 1992). - -19-
Exhibit 10.6# -- Senior Management Discretionary Bonus Plan, dated as of January 21, (incorporated herein by reference to Exhibit 10.6 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 10.8# -- MLX 1995 Stock Option and Incentive Award Plan (incorporated herein by reference to Exhibit C of Registrant's definitive Proxy Statement for the fiscal year ended December 31, 1994 in connection with the Registrant's 1995 Annual Meeting of Shareholders). Exhibit 10.9 -- Wellman Sale Agreement (incorporated herein by reference to Exhibit B of Registrant's definitive Proxy Statement for the fiscal year ended December 31, 1994 in connection with the Registrant's 1995 Annual Meeting of Shareholders). Exhibit 23* -- Consent of Independent Auditors. Exhibit 27* -- Financial Data Schedule.
- -----------
*Filed with this Report on Form 10-K #Management compensatory plan or arrangement
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1995. - -20-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MLX Corp.
Dated: March 13, 1996 By:/S/ THOMAS C. WAGGONER President & Chief Financial Officer
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 indicated on March 13, 1996.
Signature Title
/s/ Brian R. Esher Chairman of the Board & Chief Executive Officer and Director (Principal Executive Officer)
/s/ Thomas C. Waggoner President & Chief Financial Officer(Principal Financial and Accounting Officer)
/s/ Willem F.P. de Vogel Director
/s/ Alfred R. Glancy III Director
/s/ S. Sterling McMillan, III Director
/s/ J. William Uhrig Director
/s/ W. John Roberts Director
/s/ H. Whitney Wagner Director
- -21-
MLX CORP. ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1995 ITEM 8 REPORT OF INDEPENDENT AUDITORS FINANCIAL STATEMENTS
SECTION F - -22-
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS MLX CORP.
We have audited the accompanying consolidated balance sheets of MLX Corp. as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MLX Corp. at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
Ernst & Young LLP
March 7, 1996 Atlanta, Georgia - -F1-
See accompanying notes - -F2-
- -F-3-
- -F-4-
- -F-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
MLX Corp. (MLX or the Company) is a publicly traded company which has invested in operating subsidiaries in a variety of industries.
During 1995 the Company sold its sole remaining operating subsidiary, S.K. Wellman Limited, Inc. (Wellman). Accordingly, the accompanying financial statements and notes have been restated to report the financial condition and operating results of Wellman as a discontinued operation.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of MLX and, prior to their sale, its wholly owned subsidiaries. The wholly owned subsidiaries include S.K. Wellman Limited, Inc. and each of its wholly owned subsidiaries - comprising the Wellman business. Upon consolidation, all significant intercompany accounts and transactions were eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of investments in short-term asset management accounts with five banking institutions, none of which holds greater than $8 million of these assets. All investments are stated at cost plus accrued interest which approximates market value. At December 31, 1995 the Company's average rate of return on these investments was approximately 5.17%. As these investments account for all of the Company's income subsequent to the sale of Wellman, the Company's future financial results will be impacted by changes in the short-term interest rates available to the Company. For purposes of the accompanying Consolidated Statements of Cash Flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
FEDERAL INCOME TAXES
Any tax benefits resulting from the utilization of the Company's federal net operating loss or other carryforwards existing at December 11, 1984, the date of confirmation of the Plan of Reorganization (Confirmation Date), are excluded from operations and credited to capital in excess of par value in the year such tax benefits are realized. - -F-6-
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
Proceeds from the sale of stock under options are credited to common stock at par value and the excess of the option price over par value is credited to capital in excess of par value.
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and intends to continue to do so.
EARNINGS PER COMMON SHARE
Primary earnings per common share is based on the weighted average number of shares outstanding during each year and dilutive common stock equivalents. Earnings applicable to common stock is determined by adjusting net earnings for dividends and accretion on preferred stock.
RELATIONSHIP WITH PAMECO CORPORATION
MLX has an arrangement with Pameco Corporation (Pameco) pursuant to which MLX shares certain management, operational and administrative functions. The costs for such services are also shared. MLX paid $60,000 to Pameco Corporation under this agreement in 1995 and in 1994. MLX received $81,500 (net of amounts paid) in 1993. Such amounts are included as a component of general and administrative expenses in the accompanying Consolidated Statements of Income.
2. SALE OF S.K. WELLMAN SUBSIDIARY
On April 10, 1995 the Company entered into a stock purchase agreement (the Agreement) with a third party for the sale of all the common stock of Wellman for $60 million, which includes certain amounts related to the repayment or assumption of debt and capital leases by the purchaser. Such sale was approved by the common shareholders of MLX Corp. at the 1995 annual meeting of shareholders and was completed on June 30, 1995. The cash proceeds received by the Company pursuant to the transaction, less purchase price adjustments and estimated expenses, amounted to $48.9 million.
In connection with the sale of the Wellman subsidiary, the Company repaid its principal and interest obligations under the Variable Rate Subordinated Notes and Zero Coupon Bonds and redeemed its Series A Preferred Stock along with unpaid dividends. The net proceeds to the Company from the transaction after such repayments were $38.5 million.
A portion of these proceeds was used by the Company to fund an escrow account of $4 million to partially collateralize its indemnification obligations in the purchase and sale agreement. This escrow fund is expected to exist for a period of 15 months from the date of the sale and accordingly has been classified as a current asset at December 31, 1995. The Company's maximum liability under the indemnification provisions in the Agreement is $5 million. An additional escrow - -F-7-
2. SALE OF S.K. WELLMAN SUBSIDIARY (CONTINUED)
fund amounting to $1,250,000 was established at June 30, 1995 (and adjusted to $1,347,000 in August 1995) relating to certain estimated income tax obligations arising from the sale. This escrow fund has been classified as long-term in the Consolidated Balance Sheet. Other Long-Term Liabilities include taxes related to this escrow fund which are estimated to be payable after one year.
The transaction resulted in a gain of $31.4 million. Income taxes were provided for this gain as follows (in thousands):
Federal and state income taxes due and payable $ 3,291 Pro-forma charge in lieu of federal income taxes 10,020 -------- $13,311
The accompanying consolidated financial statements reflect the operating results, balance sheet and cash flows of the discontinued operations separately from continuing operations for all years presented.
The operating results of the discontinued operations were as follows (the 1995 results include operations through the date of the sale):
Net assets of the discontinued operations at December 31, 1994 were as follows:
Cash and cash equivalents.................. $ 447 Accounts receivable........................ 9,638 Inventories................................ 9,681 Prepaid expenses and other current assets.. 958 Property, plant and equipment, net......... 13,361 Intangible assets, net..................... 2,288 Other assets............................... 509 Accounts payable and accrued expenses...... (9,464) Debt and capital leases.................... (11,807) Other accrued liabilities.................. (2,379) --------- $ 13,232
- -F-8-
2. SALE OF S.K. WELLMAN SUBSIDIARY (CONTINUED)
The following table provides supplemental information pertaining to the discontinued operations in the Consolidated Statements of Cash Flows (the 1995 cash flows include operations through the date of the sale):
3. GAIN ON EARLY RETIREMENT OF DEBT
In connection with the sale of Wellman (see Note 2), the Company retired Zero Coupon Bonds and Variable Rate Subordinated Notes with a carrying value of $2.5 million with cash payments totaling $2.1 million. The resulting net gain on early retirement of debt (net of a pro-forma charge in lieu of federal income taxes of $140,000) has been reported as an extraordinary item.
Also on June 30, 1995, the Company redeemed all its outstanding shares of Series A Preferred Stock for cash payments totaling $7.9 million, the contractual redemption value. The difference between this redemption amount and the carrying value of $7.4 million was charged to Capital in Excess of Par Value. - -F-9-
3. GAIN ON EARLY RETIREMENT OF DEBT (CONTINUED)
During the quarter ended June 30, 1993, the Company exchanged shares of its Series A Preferred Stock (see Note 5) with an approximate fair value of $1.6 million (face value of $1.9 million) and 1993 Variable Rate Subordinated Notes with an approximate fair value of $1.4 million for Zero Coupon Bonds with a carrying value of $8.5 million. The resulting net gain on early retirement of debt of $3.6 million was reported in the quarter ended June 30, 1993 as an extraordinary item.
4. LONG-TERM DEBT
The components of long-term debt are as follows (in thousands):
1995 1994 ---- ------ Zero coupon bonds net of unamortized discount of $130 in 1994. . . . . . . . . . . . . . $ -- $1,022 Variable rate subordinated notes. . . . . . . -- 1,441
$ -- $2,463
At December 31, 1994, the Company had outstanding Zero Coupon Bonds with a maturity date of March 2002. Such bonds were redeemed during 1995 in connection with the sale of Wellman.
In April 1993 MLX issued variable rate subordinated notes to certain holders of its Zero Coupon Bonds. The notes were initially recorded at their estimated fair value and were being increased to the redemption value of $1,444,000 during the period from date of issuance until March 19, 2002 (date of maturity). The notes were due in 2002 or, on a pro rata basis, whenever shares of the Series A preferred stock are repurchased. All such notes were redeemed during 1995 in connection with the sale of Wellman.
Interest paid was $127,000 in 1995, $197,000 in 1994, and $122,000 in 1993.
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS
The assets and liabilities of foreign operations of the discontinued operations were translated into U.S. dollars at current exchange rates with the resulting cumulative translation adjustment, $(1,018,000) at December 31, 1994 and $(1,127,000) at December 31, 1993, recorded as a separate component of shareholders' equity. In connection with the sale of Wellman, the cumulative translation adjustment at June 30, 1995 was included in the calculation of the gain on the sale.
The Company has two stock option plans. Under the MLX Corp. Stock Option Plan, adopted in 1985, the Company granted stock options to certain officers, directors and key employees at prices not less than the market value on the date the option was granted. At December 31, 1995 30,200 options were outstanding under this Plan (excluding 190,400 options issued to the Company's Chief Executive Officer - see below) with exercise periods extending through December 1999. No new options may be granted under this Plan. - -F-10-
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
Under the MLX Corp. Stock Option and Incentive Award Plan (the "1995 Plan"), adopted in 1995, stock-based awards may be issued to key employees (including directors who are also employees) and certain others in a variety of forms. Such awards may include incentive stock options, non-qualified stock options, restricted stock and outright stock awards. A total of 125,000 shares of MLX common stock are reserved under the 1995 Plan and no option granted under the 1995 Plan can have an exercise date greater than ten years from the date of the grant. The 1995 Plan terminates in June 2005.
A summary of transactions under both plans is as follows:
On February 11, 1991, MLX issued options to its Chief Executive Officer (CEO) to acquire 190,400 shares of the Company's common stock at $5.00 per share (the market value at date of grant), which are not reflected in the table above. At December 31, 1995, all such options are exercisable and will expire in February 1998. The options contain a clause that in the event that any new or existing shareholders increase their percentage ownership interest of the Company's common stock by 5% or more, the options are immediately converted to Stock Appreciation Rights (SAR). The options also provide for anti-dilution adjustments in certain events, including a stock dividend, merger, consolidation or other recapitalization.
The Company is authorized to issue up to 500,000 shares designated as Series A Preferred Stock with a par value and liquidation preference of $30 per share. The Series A Preferred Stock is non-voting. Dividends on shares of Series A Preferred Stock outstanding during 1995, 1994 and 1993 were payable in cash on the basis of an increasing rate formula (12.5% at June 30, 1995 and 11% at December 31, 1994). All outstanding shares of Series A Preferred Stock were redeemed by the Company with the proceeds from the sale of Wellman. - -F-11-
5. SHAREHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
An aggregate of 264,000 shares of Series A Preferred Stock was issued to certain holders of Zero Coupon Bonds as of December 1992 and April 1993. The Series A Preferred Stock was initially recorded at its estimated fair value and was being increased to the redemption price of $30 per share during the period from date of issuance until January 1, 1999 (commencement of maximum annual dividend rate). This annual accretion, based on the interest method, was charged to retained earnings and amounted to $117,000 in 1995, $284,000 in 1994 and $235,000 in 1993.
6. INCOME TAXES
The Company accounts for income taxes in accordance with the liability method as required by FASB Statement No. 109, "Accounting for Income Taxes."
At December 31, 1995, MLX has net operating loss carryforwards, existing as of the Confirmation Date, of approximately $240 million which are available to offset future taxable income for federal income tax purposes. Such carryforwards expire as of December 31 in each of the years as follows: $20.6 million in 1996, $144.3 million in 1997, $1.2 million in 1998 and $73.8 million in 1999. Any tax benefit derived from the utilization of these net operating loss carryforwards is excluded from operations and credited to capital in excess of par value in the year such tax benefits are utilized.
Subsequent to the Confirmation Date, the Company has available (for federal income tax purposes), net operating loss carryforwards of approximately $59.2 million, which expire as of December 31 in each of the years as follows: $2.7 million in 2000, $2.2 million in 2002, $5.0 million in 2005, $2.0 million in 2006 and $47.3 million in 2007.
The cumulative net operating loss for financial reporting purposes approximates the tax amount as shown above. The components of the income tax provision are as follows (in thousands):
Income tax expense associated with discontinued operations is set forth in Note 2. - -F-12-
6. INCOME TAXES (CONTINUED)
The charge in lieu of federal income taxes (federal income tax benefit) approximates the statutory rate applied to earnings before income taxes.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows (in thousands):
1995 1994
Federal net operating loss carryforward...... $102,000 $114,000 State net operating loss carryforward........ 3,000 3,000 Reserves and other........................... 1,000 1,000 Total.................................... 106,000 118,000 Valuation allowance for deferred tax assets.. (106,000) (118,000) Net deferred tax assets...................... $ -- $ --
The valuation allowance for deferred tax assets decreased $2 million during 1994. - -F-13-
[IBC}Corporate Data
Executive Office Legal Counsel 1000 Center Place Kilpatrick & Cody Norcross, Georgia 30093 Atlanta, Georgia
Independent Auditors Stock Transfer Agent & Registrar Ernst & Young LLP American Stock Transfer & Trust Atlanta, Georgia Company New York, New York
MLX Corp. common stock is traded on the NASDAQ National Market under the symbol "MLXR".
For more information about the Company contact the Investors Relations Department at (770) 798-0677 or write to MLX Corp., 1000 Center Place, Norcross, Georgia 30093.
The annual meeting of shareholders of MLX Corp. will be held on May 1, 1996 at 11:00 a.m. at the offices of Kilpatrick & Cody, 1100 Peachtree Street, Suite 2700, Atlanta, Georgia.
[recycle logo] Printed on Recycled paper
Designed and produced by Phoenix Communications, Inc. / Atlanta, Georgia
[BC] MLX LOGO MLX Corp. Headquarters 1000 Center Place Norcross, Georgia 30093 (770) 798-0677 FAX (770) 798-0633