ITEM 1. BUSINESS
INTRODUCTION
Rexworks Inc. (the "Company") designs, manufacturers and sells truck mounted concrete mixers, compaction equipment and the Maxigrind materials reduction product. These products accounted for approximately 98% of sales in 1996. The remainder of the Company's sales are attributable to contract machining operations performed for others.
Truck mixers are concrete mixers mounted on chassis of various manufacturers. Compaction equipment (used to compact landfills and soil) includes sanitary landfill compactors and embankment compactors. The Maxigrind product grinds and reduces the volume of a variety of materials including green waste, asphalt, demolition debris, wood products and trash. The Company's products are used to build and repair roads, bridges, airports, sewers, pipelines and other infrastructure; to compact and cover sanitary landfill sites; and to reduce the volume of grindable material.
The Company operates in the highly competitive heavy equipment industry in which cost containment, product quality, and customer service are important factors of long term success. See "Competition".
PRODUCTS
Construction Equipment Products accounted for 37% of the Company's revenue in 1996, 38% in 1995 and 31% in 1994.
Waste and Recycling Products accounted for 61% of the Company's 1996 revenue, 60% in 1995 and 67% in 1994.
CONSTRUCTION EQUIPMENT PRODUCTS
Truck Mounted Mixers. REXR truck mixers are rotating-drum assemblies which are mounted on trucks supplied by others. They are used to mix concrete and agitate it after it is mixed, while conveying it to the pour-site.
The Company manufactures rear discharge truck mixers to meet varying highway weight laws and modes of operation in the ready-mix concrete industry. The two main types of truck mixers offered are the REX Premier, in 8 to 12 cubic yard sizes, and the REX Premier Booster in 10 to 12 cubic yard sizes. The Premier Booster includes a "trailing" axle at the rear of the truck to distribute the weight over a longer wheelbase. The Company also sells the REX Mark III paving mixer line for applications that demand particularly fast charging and discharge cycles. The market for truck mounted concrete mixers consists principally of ready mix concrete producers and paving contractors. By dollar volume of sales, the Company believes it is the second largest domestic manufacturer of truck-mounted rear discharge mixers.
During 1996 the Company formed a joint venture with Crane Carrier Company to design, manufacture, and sell front discharge concrete mixers. The first units were offered for sale in early 1997.
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WASTE AND RECYCLING PRODUCTS
Landfill and Embankment Compactors. Compactors are large, heavy, specially-designed machines equipped with dozer blades and special wheels, which spread, crush and compact refuse or soil. Embankment compactors are used in compacting soil to specific densities in large earthmoving projects. Both are powered by diesel engines which the Company purchases from various suppliers.
The Company manufactures four models of REX Trashmaster TM landfill compactors. The smallest, the REX 3-35 Trashmaster, weighs approximately 40,000 pounds and provides 370 pounds per linear inch of compaction (a measure of compactive effort over the width of the wheel). The largest, the REX 3-90C Trashmaster, weighs approximately 99,000 pounds and provides 658 pounds per linear inch of compaction. The use of landfill compactors helps extend the life of a landfill site by compacting more refuse into a given volume.
REX Pactors are embankment compactors which are similar in design to Trashmasters but use an open-wheel design to compact heavy clay soils in construction projects. Typical uses include compaction of roadways, dams, berms, landfill liners and airport runway bases.
The market for landfill and embankment compactors is principally private and governmental landfill site operators and earthmoving contractors. By dollar volume of sales, the Company believes it is the second largest manufacturer for the domestic market of landfill compactors. Strict environmental laws and the limited availability of landfill sites are forcing landfill operators to increase the efficiency of their facilities. Accordingly, the Company expects these markets to remain attractive in the future.
Material Reduction Grinders. In February 1993, Rexworks purchased the rights to manufacture and market the Maxigrind materials reduction grinder product from Norkot Manufacturing Company, Inc. ("Norkot"). The Company began production at its plant in Milwaukee, Wisconsin in March 1993.
The Maxigrind is a large, specially designed materials grinder used in a variety of waste disposal and recycling applications. It grinds and reduces the volume of a wide range of material including green waste, asphalt, demolition debris, wood products, shingles, gypsum and trash. The Maxigrind utilizes a hydraulic push ram feeder to force material against the machine's cutting surface and an exclusive concave system to effectively size grindable material. The Company has patents and patents pending for this unique design. The Company manufactures two basic Maxigrind models. One model contains a grapple mechanism that is used to load material into the machine hopper, while the other model is fed by a loader.
In late 1995, the Company introduced a larger grinder unit called the Megagrind. This machine is roughly twice the size of the Maxigrind and used in high volume grinding applications. In mid-1996 the Company introduced a smaller grinder unit, the Biogrind. This unit is designed for smaller-volume grinding operations than either the Maxigrind or Megagrind, and is especially well suited to the grinding of brush, wood products, and other green waste. Both the Megagrind and Biogrind have been well received in the market place.
The Company's grinder products typically compete with tub grinder technology. The Company believes the unique designs of these machines, and significant feature advantages, makes Rexworks' grinder products superior to tub grinders.
Because the grinders can process a variety of material, their markets are wide in scope. Typical purchasers include governmental entities involved in the recycling of green waste, construction contractors interested in reducing the volume of construction waste, demolition contractors interested in reducing the bulk of demolished buildings, asphalt contractors involved in the recycling of asphalt paving into the asphalt manufacturing process, and a wide range of contract grinders involved in a variety of applications. The
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Company believes continued growth in the recycling industry will have a positive impact on future grinder sales.
OTHER
Approximately 2% of the Company's revenue in each of the last three years was attributed to contract machining operations performed for others.
The markets which the Company serves are generally sensitive to changes in the economy as a whole. Recessionary periods are characterized by lower construction and repair activity resulting in decreased sales. Periods of prosperity are generally characterized by increased construction and repair activity and increased sales.
DISTRIBUTION
In 1996, approximately 84% of the Company's products were sold through a network of 76 domestic and 52 foreign distributors.
Distributors generally represent several different manufacturers of equipment, with minimal competition among product lines. The Company sells its products to distributors, who in turn rent or sell the equipment to end users. The Company supports its distributors by maintaining regional sales offices in California, Colorado, Georgia, Michigan and Texas as well as its corporate headquarters and manufacturing facility in Milwaukee, Wisconsin.
The Company believes good relationships with its distributors are important to its success. Several distributors have been selling REX products for more than 60 years. No single distributor has accounted for more than 10% of the Company's sales in any of the past three years.
SOURCES OF SUPPLY
The Company purchases a number of components, including diesel engines, axles, bearings and transmissions, from outside suppliers. Although identical components are not always available from competing suppliers, the Company believes that comparable components are available from alternative suppliers, and as a result the Company is not dependent upon any single supplier for any of its purchased components.
PATENTS AND TRADEMARKS
The Company holds numerous United States patents and has applications for other patents pending. The Company considers its patents to be advantageous to its business but it is not dependent on any single patent or group of patents. All of the Company's equipment is sold under the trademark REX(R), REXWORKS(R), MAXIGRIND(R), BIOGRIND(R), or MEGAGRIND(R).
SEASONALITY
The Company typically experiences a seasonal variation in its quarterly sales, with the highest sales typically occurring in the second quarter and the lowest sales generally occurring in the fourth quarter of the year.
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BACKLOG
The Company's backlog of firm orders totaled $6,866,000 and $5,868,000 at December 31, 1996 and 1995, respectively. At February 28, 1997 and February 29, 1996, backlog totaled $6,058,000 and $6,594,000, respectively.
COMPETITION
The markets for the Company's products are highly competitive. In general, the Company competes on the basis of quality, technological expertise, performance features, product life, availability of parts and service, and responsiveness to customer's special needs, rather than competing solely on the basis of low price. Accordingly, the Company's products are not the lowest priced equipment available; instead, they maintain a reputation for high quality, durability and performance.
ENGINEERING
The Company employs 16 people in its engineering department, including 15 engineers, draftsmen and technical support personnel. For 1996, 1995, and 1994, the Company incurred product development, field testing and design modification expenditures of $754,000, $996,000, and $721,000, respectively.
EMPLOYEES
As of December 31, 1996 the Company had 233 employees, 222 of whom were employed or based at its Milwaukee facility. 149 employees at the Milwaukee facility are represented by the United Steelworkers of America union. No other employee groups are unionized. Management believes labor relations are good. There have been no work stoppages since the inception of the Company in 1982.
FOREIGN SALES
Export sales represented 12% of total sales in 1996, 17% of total sales in 1995, and 11% of total sales in 1994.
ENVIRONMENTAL MATTERS
The Company seeks to comply in all regards with applicable federal, state, and local environmental control requirements in its operations. Compliance costs have not had a material effect upon the Company's capital expenditures, results of operations or competitive position and are not expected to have a material adverse impact in the future.
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ITEM 2.
ITEM 2. PROPERTIES
The Company's Milwaukee, Wisconsin manufacturing facility (383,000 square feet) is owned by the Company and is subject to the Company's financing agreements with its principal lender. In general, the buildings are well maintained and well adapted for the purposes for which they are utilized.
The Company manufactures all of its products and performs subcontract work at this facility. The Company currently rents approximately 33,000 square feet of space to a tenant. The lease between the Company and the tenant expires in the third quarter of 1997.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Product liability claims against the Company arise from time to time in the ordinary course of business. The Company is currently party to a number of legal proceedings involving product liability claims in a number of states, some of which involve significant claims. These proceedings are now pending before courts in various stages or are in discovery stages. In most instances, pending claims allege the Company produced faulty product which led to injury. The Company generally denies liability and intends to vigorously defend these proceedings.
The Company does not purchase product liability insurance because, in the opinion of management, the premiums the Company would have to pay for such insurance are not justified by the Company's historical and expected future loss experience. Accordingly, all costs associated with product liability claims must be paid by the Company and are not covered by any insurance.
As of December 31, 1996, there were eight open product liability cases against the Company. There is a possibility that up to four of these cases, including two of the more significant cases, may come to trial in 1997. There is also the possibility that the trial dates for those cases may be postponed or the Company may consider settlement offers.
Management believes the Company has liability defenses for each of the cases that may come to trial in 1997, but does recognize there is an inherent uncertainty as to the eventual resolution of unsettled claims. In the opinion of management, based in part on the advice of outside legal counsel, any losses with respect to existing claims in excess of established reserves will not have a material impact on the Company's operating income or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1996.
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EXECUTIVE OFFICERS OF REGISTRANT
The names, ages and positions of all executive officers of the Company as of the date of this filing are listed below, together with their business experience during the past five years. Executive officers are elected annually by the Board of Directors at the annual meeting of directors immediately following the annual meeting of stockholders. There are no family relationships among any of the executive officers of the Company, nor any arrangements or understanding between any such officer and another person pursuant to which he was elected as an executive officer.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The common stock of the Company is traded on the NASDAQ Stock Market (Symbol REXW). Information as to high and low trade prices by quarter can be found in Note 11 to the financial statements on page 29 of this report. The Company has never paid cash dividends on its common stock and does not intend to pay cash dividends during 1997. The Company's borrowing agreement, in effect through April 1998, restricts the payment of dividends. The Company's policy with respect to the payment of dividends in subsequent years has not yet been determined. As of February 28, 1997 there were approximately 1000 shareholders of the Company's common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Results for 1994 were favorably impacted by the elimination of a valuation allowance of $428,000 for deferred tax assets which was recorded in the provision for income taxes.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, net sales declined $4,106,000, or 7.8%, to $48,373,000. Sales of the Company's Trashmaster landfill compactor line were adversely affected by lower sales to private (non-municipal) landfill operators, resulting from temporary capital spending reductions. The Company also experienced lower concrete mixer sales in 1996 as compared to 1995. The Company had an unusually high level of mixer export sales in 1995; these sales returned to more normal levels in 1996. Lower sales in the Trashmaster and cement mixer lines were partially offset by higher sales in the grinder product line, where the successful introduction of new products (Megagrind and Biogrind) had a positive impact on sales volume.
Gross profit declined $584,000, or 5.7% to $9,745,000 for 1996 compared to 1995. Gross profit as a percentage of sales increased to 20.1% compared to 19.7% in 1995. The dollar decline in margin was a result of lower sales volume. Margins as a percent of sales improved in the Company's cement mixer and Trashmaster lines, and more than offset the impact of higher manufacturing variances caused by lower levels of production.
Selling, general and administrative expenses declined $470,000 or 4.8% in 1996 compared to 1995. The decline reflects lower spending on product development and product introduction costs, and management's efforts to control spending in response to lower sales levels.
Interest expense declined by $96,000 to $811,000 in 1996. The decline reflects lower levels of average borrowings in 1996, and the impact of slightly lower interest rates. Other income (expense) moved to $30,000 of income in 1996 compared to $110,000 of expense in 1995. The change reflects a lower level of activity in sales of receivables under a factoring agreement with Bank One Milwaukee, N.A.
In 1996, the Company recorded a $214,000 after tax gain from the early retirement of debt, more fully described in Note 3 to the audited financial statements. There was no comparable item in 1995.
The Company's backlog of firm orders totaled $6,866,000 as of December 31, 1996 compared to $5,868,000 at December 31, 1995. The increase is due to a higher backlog of orders for the Company's grinder products.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
For the year ended December 31, 1995, net sales increased $1,456,000 or 2.9% compared to 1994. Strong market demand and a higher volume of exports resulted in increased sales of the Company's truck mounted Mixer product line and also the Trashmaster landfill compactor product line. The higher sales activity in these product lines more than offset weaker market demand and lower sales activity in the Company's Maxigrind material reduction product line.
Gross profit increased $38,000 or .4% to $10,329,000 for 1995 compared to 1994. Gross profit as a percentage of sales fell to 19.7% in 1995 from 20.2% in 1994. Higher costs for product warranties, and an unfavorable change in sales mix, offset the effects of improved productivity and reduced manufacturing spending and caused the decline in margins as a percentage of sales.
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Selling, general and administrative expenses increased $1,080,000 to $9,731,000 or 12.5% in 1995 compared to 1994 due to higher expenses related to product development, new product introduction, and customer support. The majority of the increase in the product development and new product introduction expenses were associated with the grinder product line.
Interest expense increased $208,000 in 1995 to $907,000 or 29.7% from 1994 due to higher average borrowings associated with working capital needs and higher interest rates. Other income (expense) moved from $40,000 of income in 1994 to $159,000 of expense in 1995. This swing was due to costs resulting from the sale of receivables, associated with a Trashmaster landfill compactor promotional program, under a factoring agreement with Bank One Milwaukee, N.A.
The results for 1994 include a $428,000 credit to earnings for the elimination of a deferred tax valuation allowance. This credit is included as a reduction in the provision for income taxes on the Company's 1994 Consolidated Statement of Operations.
The Company's backlog of firm orders totaled $5,868,000 as of December 31, 1995 compared to $8,359,000 at December 31, 1994. This decrease is due to a lower backlog for the Company's Trashmaster landfill compactor product line.
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YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
ANALYSIS OF FINANCIAL CONDITION
LIQUIDITY
Working capital and current ratio are financial measurements that provide an indication of the Company's ability to meet its short-term obligations. These data at December 31, 1996 and 1995 are as follows:
As of December 31, 1996 accounts receivable and inventory were both lower than the comparable amounts at December 31, 1995. The decline in receivables reflects lower sales levels in the fourth quarter of 1996 compared to the same period in 1995. The decline in inventories reflects management's efforts to reduce the level of finished machine and work in process inventories during the course of 1996. Lower levels of inventory and receivables led to correspondingly lower levels of accounts payable and bank debt at December 31, 1996 compared to 1995.
Inflation did not have a significant impact on the Company's operations in 1996 and is not expected to have a significant impact on the Company's operations in 1997.
CAPITALIZATION
The following table presents the relationships between long term debt and stockholders' investment as of December 31, 1996 and 1995:
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The line-of-credit agreement between the Company and Bank One Milwaukee, N.A. (as amended) provides for borrowings up to the lesser of $10.0 million or the sum of 80% of qualified accounts receivable (as defined), 40% of FIFO inventory and a fixed asset amount. The fixed asset amount was $2,415,000 at December 31, 1996, and will be reduced by $37,000 each month thereafter. A portion of the total outstanding line ($3,000,000) carries a fixed interest rate of 9.375%; interest rates on the balance of the line vary with the prime rate. The variable rate at December 31, 1996 was 8.50%. Substantially all the Company's accounts receivable, inventories and property, plant and equipment are pledged as collateral for this debt.
The loan agreement requires that the Company achieve agreed levels of net cash flow (as defined), and that the Company's ratio of total liabilities to tangible net worth be less than 2.5 to 1.0. The agreement also limits capital expenditures to no more than $1,000,000 in any year.
At December 31, 1996 the Company had $2,927,000 of borrowings available under its line-of-credit facility. In management's opinion, anticipated future cash generated from operations and the amended loan agreement will be sufficient to meet the Company's short and long term needs for working capital and required capital additions.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Covered by Report of Independent Public Accountants
Report of Independent Public Accountants Consolidated Balance Sheets - December 31, 1996 and 1995 For Years Ended December 31, 1996, 1995 and 1994: - Consolidated Statements of Operations - Consolidated Statements of Stockholders' Investment - Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Financial Statement Schedule: II. Valuation and Qualifying Accounts
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Rexworks Inc.:
We have audited the accompanying consolidated balance sheets of Rexworks Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' investment and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rexworks Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index on page 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin, February 11, 1997.
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REXWORKS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
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REXWORKS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (CONTINUED)
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
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REXWORKS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes to consolidated financial statements are an integral part of these statements of operations.
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REXWORKS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
The accompanying notes to consolidated financial statements are an integral part of these statements.
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REXWORKS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes to consolidated financial statements are an integral part of these statements.
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REXWORKS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(1) SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Rexworks Inc. (the "Company") and its wholly-owned subsidiaries, Rexworks International, a Domestic International Sales Corporation, and Rexworks International Trading Corporation, a Foreign Sales Corporation. All intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
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 reported period. Actual results could differ from those estimates. Specifically, the Company has recorded a product liability reserve which could be significantly different from actual settlements as described in Note 7.
Inventories
Substantially all inventories are stated at cost, which does not exceed market, determined on the last-in, first-out ("LIFO") basis. Inventory costs include the costs of material, labor and direct and indirect costs of manufacturing.
Inventory amounts as of December 31, 1996 and 1995 are as follows:
Property, Plant and Equipment
Plant and equipment is stated at cost and is depreciated over the estimated useful lives of the assets using the straight-line method. Asset lives used for financial statement purposes are:
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Upon retirement, the asset account is reduced by the original cost and the reserve account is reduced by the accumulated depreciation. The gain or loss on disposition is reflected in current earnings. Maintenance and repair costs are charged to expense as incurred. Renewals and improvements are added to plant and equipment accounts.
Effective January 1, 1996, the Company adopted the provisions of the Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets and certain identified intangibles be reviewed for impairment whenever circumstances indicate that the carrying amount of an asset may not be recoverable. Adoption of this statement did not have a significant impact on the Company's results of operations.
Noncompete Agreement and Other Intangible Assets
The Company has a noncompete agreement in place with the former owner of the Maxigrind product line. The related asset had an original value of $3,500,000 and is being amortized over six years, the term of the agreement. Accumulated amortization on the non-compete agreement was $2,272,000 and $1,682,000 at December 31, 1996 and 1995, respectively.
The Company also acquired patent rights from the former owner of the Maxigrind product line for $820,000, which are being amortized over 17 years. Accumulated amortization on patents was $187,000 and $141,000 at December 31, 1996 and 1995, respectively. Patents are included in other assets on the Consolidated Balance Sheets.
Advances from Customers
Advances from customers represent progress payments received by the Company for equipment to be delivered at a later date.
Export Sales
Export sales represented 12% of net sales in 1996, 17% in 1995 and 11% in 1994, respectively.
Reclassifications
Certain prior year financial statement amounts have been reclassified to conform with their current year classification.
(2) NATURE OF OPERATIONS
The Company designs, manufactures and sells truck mounted concrete mixers, compaction equipment and the Maxigrind materials reduction product as well as replacement parts for this equipment. Approximately 91% of 1996 sales (84% in 1995 and 91% in 1994) were made to equipment distributors, who in turn rent or sell equipment to end users. Approximately 13% of 1995 sales, consisting of waste and recycling products, were made to one customer. No one customer accounted for more than 10% of sales in 1996 and 1994.
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(3) DEBT
Debt as of December 31, 1996 and 1995 was as follows:
The Company maintains a line-of-credit agreement with Bank One Milwaukee, N.A. The agreement was originally entered into on May 31, 1990 and was most recently amended on January 1, 1997. The agreement provides for borrowings up to the lesser of $10.0 million or the sum of 80% of qualified accounts receivable (as defined), 40% of FIFO inventory, and a fixed asset amount. The fixed asset amount was $2,415,000 at December 31, 1996, and will be reduced by $37,000 each month thereafter. A portion of the total outstanding line ($3,000,000) carries a fixed interest rate of 9.375%; interest rates on the balance of the line vary with the prime rate. The variable rate at December 31, 1996 was 8.50%. Substantially all the Company's accounts receivable, inventories and property, plant and equipment are pledged as collateral for this debt.
The loan agreement requires that the Company achieve agreed levels of Net Cash Flow (as defined), and that the Company's ratio of total liabilities to tangible net worth be less than 2.5 to 1.0. The agreement also limits capital expenditures to no more than $1,000,000 in any year.
The amended loan agreement provides that the bank may terminate the line-of-credit at any time after April 30, 1998 upon 90 days notice to the Company.
Management does not expect to reduce line-of-credit borrowings below $2,984,000 during 1997; therefore, that amount has been classified as long term.
Additional data related to borrowings due under the line-of-credit agreement are summarized below:
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The weighted average interest rate on all borrowings was 9.3% in 1996 and 10.2% in 1995.
Based on borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of outstanding debt approximates its carrying value.
The original terms of the noncompete agreement with the former owner of the Maxigrind product line (see note 1) provided for the Company to make payments over future years. During 1996, the Company negotiated an arrangement with the former owners of the Maxigrind product line to settle in full the remaining liability and interest due under this agreement for $860,000. The early retirement of this liability resulted in an extraordinary gain of $214,000, after related income taxes, computed as follows:
(4) INCOME TAXES
The Company accounts for income taxes as prescribed by SFAS No. 109, "Accounting For Income Taxes." Under this statement, deferred income taxes are recorded on temporary differences between the book and tax basis at the tax rate expected to be in effect when the temporary differences reverse. A valuation allowance is provided when it is likely that some portion of the deferred tax assets arising from temporary differences and net operating losses will not be realized.
Information with respect to the Company's income tax provisions (credits) is as follows:
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A reconciliation of the Company's effective income tax rate to the statutory federal tax rate for the years ended December 31, 1996, 1995 and 1994 is as follows:
Temporary differences which give rise to net deferred taxes under FASB Statement No. 109 as of December 31, 1996 and 1995 are as follows:
(5) STOCKHOLDER'S INVESTMENT
In 1983, the Company established the Rexworks Inc. Employee Stock Plan (the "Plan") and Employee Stock Ownership Trust (the "Trust"). The plan is non-contributory and includes all employees who have completed one year of service. Under the plan provisions, the Company may make contributions to the Trust for the benefit of eligible employees. No contributions were made to the plan in 1996, 1995 or 1994 and the Board of Directors has not authorized any future contributions to the Plan at this time.
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Beginning in 1990, the Company granted options to purchase shares of Rexworks Inc. common stock to certain directors, officers and key employees. In 1992, the Company (with the approval of its Board of Directors) established the Rexworks Inc. Management Incentive Compensation Program (the "Program"). Program awards are in the form of cash or stock options and are based upon the Company's achievement of key financial performance measures and individual performance objectives. In February 1995, participants in aggregate were awarded $204,000 in cash and options to purchase 30,000 shares of Rexworks stock at an exercise price of $4.25 (the market value on the date of grant) for the 1994 Program. No awards were granted under the program for 1996 or 1995.
On December 30, 1996 the Company granted Michael C. Hadjinian, the Chairman of the Board and former President, options to purchase 50,000 shares of Rexworks stock at an exercise price of $2.25 per share. The options expire on November 30, 1997.
Effective January 1, 1996, the Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation. The Company will continue to apply the accounting provisions of Accounting Principles Board Opinion 25 to stock-based employee compensation arrangements as is allowed by the statement. The impact of the pro forma compensation cost on the earnings per share calculations for stock options granted in 1996 and 1995 was not material to the consolidated financial statements.
The number of options granted and outstanding is summarized below:
Of the 313,413 options outstanding at December 31, 1996, 218,413 have exercise prices between $2.00 and $4.00, with a weighted average exercise price of $2.84 and a weighted average remaining contractual life of 3.6 years. An additional 60,000 options outstanding at December 31, 1996 have exercise prices between $4.00 and $6.00, with a weighted average exercise price of $4.65 and a weighted average remaining contractual life of 7.1 years. The remaining 35,000 options outstanding have an exercise price of $8.00 and a weighted average remaining contractual life of 3.3 years.
(6) LEASES
The Company has no material noncancellable operating lease arrangements with expirations of more than one year. Rental expense under various operating leases was $31,000 in 1996 and 1995, and $87,000 in 1994.
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(7) LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES
Product liability claims against the Company arise from time to time in the ordinary course of business. The Company is currently party to a number of legal proceedings involving product liability claims in a number of states, some of which involve significant amounts. These proceedings are now pending before courts in various stages or are in discovery stages. In most instances, pending claims allege the Company produced faulty product which led to injury. The Company generally denies liability and intends to vigorously defend these proceedings.
The Company does not purchase product liability insurance because, in the opinion of management, the premiums the Company would have to pay for insurance are not justified by the Company's historical and expected future loss experience. Accordingly, all expenses related to product liability claims must be paid by the Company and are not covered by insurance.
The Company maintains a reserve for costs expected to arise out of known and expected product liability claims. The reserve is increased by provisions to current earnings and is decreased by payments of defense costs, settlements and judgments, if any. Activity in the reserve account is summarized as follows:
As of December 31, 1996, there were eight open product liability cases against the Company. There is a possibility that up to four of these cases, including two of the more significant cases, may come to trial in 1997. There is also the possibility that the trial dates for those cases may be postponed or the Company may consider settlement offers.
Management believes the Company has liability defenses for each of the cases that may come to trial in 1997, but does recognize there is an inherent uncertainty as to the eventual resolution of unsettled claims and the ultimate settlements could be for amounts significantly greater than recorded liabilities. In the opinion of management, based in part on advice from its outside legal counsel, any costs, losses and settlements with respect to existing claims in excess of established reserves will not have a material impact on the Company's operating income or financial condition.
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(8) EARNINGS PER SHARE
The weighted average number of common shares and common share equivalents used in calculating earnings per share as of December 31 is summarized as follows:
(9) RESEARCH AND DEVELOPMENT
The Company expenses research and development cost as incurred. These costs, net of proceeds from sales of prototypes, were $745,000, $996,000, and $721,000 in 1996, 1995 and 1994 respectively.
(10) SALES OF ACCOUNTS RECEIVABLE
The Company has an agreement with Bank One - Milwaukee that allows the sale of certain qualified receivables, with recourse, up to a maximum of $7,000,000. The amount of receivables that had been sold to Bank One, but not yet collected from customers, was $1,621,000 and $5,944,000 at December 31, 1996 and 1995, respectively. The costs associated with the sales were $84,000 in 1996 and $182,000 in 1995, and are included in other income and expense in the accompanying statements of income.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which establishes standards for asset and liability recognition when transfers occur. This statement, effective January 1, 1997, specifies conditions for when control has been surrendered which determines if sale treatment of the receivables would be allowed. At the present time, this new standard is not expected to materially impact the Company's financial position or results of operation.
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(11) QUARTERLY FINANCIAL AND STOCK PRICE INFORMATION (UNAUDITED)
Quarterly financial data for the years ended December 31, 1996 and 1995 is as follows:
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Incorporated herein by reference to the Election of Directors section of the Proxy Statement for the Annual Meeting of Stockholders dated April 25, 1997 (the "Proxy Statement") and Part I of this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Executive Compensation section of the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Security Ownership section of the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as apart of this report.
1. Financial Statements
The following Consolidated Financial Statements of Rexworks Inc. and subsidiaries at December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994, are included in Item 8 hereof:
a. Consolidated Balance Sheets b. Consolidated Statements of Operations. c. Consolidated Statements of Stockholders' Investment d. Consolidated Statements of Cash Flows. e. Notes to Consolidated Financial Statements. f. Report of Independent Public Accountants.
Individual financial statements of the Registrant have been omitted because consolidated financial statement have been filed.
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2. Financial Statement Schedule
The financial statement schedule appended hereto, as required at December 31, 1996, 1995 and 1994 and for the years then ended, consists of the following:
II. Valuation Qualifying Accounts
All other schedules have been omitted because they are not applicable, or not required, or because the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K.
_______________________ (1) Incorporated herein by reference to the Company's Registration Statement on Form S-18, Registration Number 33-12488 effective April 21, 1987. (2) Incorporated herein by reference to the Company's Annual Report on Form 10-K for 1988. (3) Incorporated herein by reference to the Company's Annual Report on Form 10-K for 1990. (4) Incorporated herein by reference to the Company's Annual Report on Form 10-K for 1991. (5) Incorporated herein by reference to the Company's Current Report on Form 10-K dated February 15, 1993. (6) Incorporated herein by reference to the Company's Annual Report of Form 10-K for 1992.
(b) Reports on Form 8-K.
Registrant has not filed any reports on Form 8-K during the last quarter of the period covered by this report.
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REXWORKS INC. AND SUBSIDIARIES FINANCIAL STATEMENT SCHEDULE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
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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.
REXWORKS INC.
By: /s/ Laurance R. Newman ------------------------ President and Chief Executive Officer Date: March 26, 1997
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 Company and in the capacities and on the date indicated.