Item 1. BUSINESS
Bowles Fluidics Corporation was incorporated under Maryland law in 1961 (originally as Bowles Engineering Corporation) for the purpose of advancing and exploiting the technology of fluidics. For about ten years the principal business of the Company was research and development primarily under contracts with agencies of the U.S. Government. From 1972 to 1979 its principal income was derived from the sale of proprietary consumer products it had developed based upon fluid oscillators, including massaging showers and oral irrigation devices. These consumer products have since been discontinued. Since 1979 its principal product has been proprietary windshield and rear window washer nozzles for the automotive industry. Late in FY 1989, the Company extended the automotive product line to include shipments of fluidic defroster nozzles. The Company also provides its automotive customers with tooling and application engineering services related to its products.
The Company continues to pursue its purpose of advancing the technology of fluidics (see Research and Development below). Such efforts are directed toward the development of products for which, in the opinion of management, substantial markets exist.
Principal Products and Markets
The Company is the leading designer, manufacturer and supplier of windshield and rear window washer nozzles for passenger cars and light trucks in North America. Defroster nozzles for a limited number of these same light vehicles are also being manufactured and sold.
The Company's market for its fluidic nozzles, both windshield washer and defroster, consists of North America, i.e., the "Big Three" U.S. automotive manufacturers and foreign transplants. The Company is also open to opportunities presented to it in other parts of the world. The Company believes that it supplies about 75% of the total windshield washer nozzle requirements for light vehicles (cars and light trucks) manufactured in the United States, Canada and Mexico. The defroster nozzle is currently being supplied to four vehicle models in this market.
Over 90% of the Company's production of nozzles is incorporated in vehicles produced by General Motors, Ford and Chrysler, each of whom typically represents over 10% of the Company's sales volume. The Company is, therefore, dependent upon the requirements of the U.S. automotive industry producing cars and light trucks. Although the Company enters into agreements with its customers to meet 100% of their production requirements, notice of firm shipping requirements for the coming week generally takes place weekly from the assembly plants and at somewhat longer intervals from the first-tier suppliers.
The Company's fiscal year, beginning in November and ending in the following October, follows closely the length and timing of the typical model year for an automobile or light truck. The Company's annual sales follow the seasonal pattern dictated by the production levels of its customers.
Sales also include technical services, i.e., design, tooling, and prototyping services for the Company's customers. The requirements of the automotive customers are for designs and tools to meet the needs of forthcoming vehicle models or changes in existing models, as well as for prototypes of new products desired for testing. These sales are, for the most part, undertaken as a service to the customers, and the Company contracts these services and tools so as to recover projected direct costs.
Patents and Competitive Products
The Company has engaged, since its inception, in research and development in the fields of fluidics and fluid effect devices, encompassing both gases and liquids. Over the past 18 years, 45 U.S. patents have been granted to the Company's employees and assigned to the Company. Five applications are presently in process for U.S. patents. Foreign patents have also been granted, in countries in which the Company has an interest, for most of the art covered by the U.S. patents. Although these patents embody new and novel technology or product, there is available competitive technology and alternative product. The extent to which the expiration of an individual patent may affect the Company's competitive position is difficult to determine.
In the past, U.S. patents were granted for a period of 17 years from the date of issue. However, beginning in June 1995, those granted in the past can be for a period of either 17 years from date of issue or 20 years from date of filing the application, whichever expiration date is later. Those granted on applications filed after June 1995 are for a period of 20 years from date of filing.
The Company's fluidic windshield washer and defroster nozzles, which are covered by issued U.S. and foreign patents, are in direct competition with conventional nozzles of traditional design. The Company believes that its products have advantages both in performance and in economy of assembly to the vehicle by the car manufacturers.
The Company is of the opinion that, in the long run, a history of service, delivery, quality and economic supply is the most important factor in binding its customers to it. Customers of the Company place a great deal of emphasis on quality. The Company has maintained Ford's preferred supplier rating (Q1 award) since 1985, has been rated an excellent status in a supplier assessment by General Motors, has been a self-certified supplier for Chrysler since 1991, and achieved a Quality Excellence Award from Chrysler with a 98% rating in 1995. The Company's material testing laboratory has been accredited by General Motors since 1992. In addition, the Company's customers mandated that the Company put into place a QS-9000 compliant quality system, the automotive version of ISO 9000, to be assessed and, if qualified, registered by an independent organization. Chrysler required registration by July 1997 and General Motors by December 1997. The Company went through initial assessment in September 1996 and received certification in December as a QS-9000 supplier with ISO 9001 addendum.
The Company does not grant North American licenses for its own patents in which it has an interest in marketing a product. The Company does pursue interests expressed by others in the Company's technology in an attempt to broaden its use. To the extent that there may be additional uses in markets not related to those of primary interest to the Company, efforts are made to license the patents for such use.
Foreign Affiliates and Licensing
The Company has no foreign affiliates. The Company has licensing agreements with foreign companies with respect to certain of its foreign patents. Income from such agreements was $16,215 in FY 1996, down from $21,770 in FY 1995.
Raw Material Sources and Availability
Raw materials, primarily plastic resin, are sourced within the United States. The market was stable during the current year with no significant price changes, and adequate supply is expected to be available in the coming year. The resins purchased are restricted to those approved by our customers.
Working Capital Requirements
The Company's standard credit terms for receivables is net 30 days. Adequate levels of inventories are normally maintained in order to ensure compliance with the stringent delivery requirements of our customers.
The design and acquisition of production tools, which represent the major portion of technical services sales, normally take several months to complete, during which period the Company has to make progress payments which are included in work-in-process inventories. Sales for these tools and services are rendered only after completion and customers' acceptance of qualified products produced by the tools.
Research and Development
The Company's research and development costs, all Company-funded, were:
FY 1996 $1,175,890 FY 1995 $ 636,970 FY 1994 $ 842,332
In FY 1996, the Company's research and development efforts were expanded and directed primarily toward the advancement of its knowledge of the workings of its fluidic washer nozzles, including wind tunnel testing, and in addition the development of fluidic air conditioning outlets for cars and light trucks. With regard to the latter products, to date the Company has received one contract for the design and development for one vehicle with a major customer.
In FY 1993, 1994, and 1995, its research and development efforts were primarily directed toward the improvement of the characteristics of natural gas and propane burners utilizing fluidic devices. The applications, however, did not prove out due to marketing and technical problems. During these years, efforts were also directed toward various product development, product improvement, and process improvement projects related to the automotive industry.
Potential sales of products still in the development stage cannot be predicted since product capability and customer acceptance of the new technology are difficult to determine.
Employees
The Company averaged approximately 246 employees during FY 1996 and employed 242 people on a full-time basis on October 26, 1996. The increase from the 223 employed on October 28, 1995, was primarily in the engineering and support departments in response to the increase in research and development and application engineering activities.
Compliance with Environmental Regulations
The Company believes it is in compliance with all known environmental regulations and has no plans for significant expenditures to meet these requirements in the future.
Item 2.
Item 2. PROPERTIES
In September 1993, the Company entered into an amendment to its original lease agreement for 62,600 sq. ft. of space in a building located in Columbia, Maryland, its sole location. The amended lease provided for the Company's occupancy of the premises until April 16, 2004, and the addition in September 1993 of 14,226 sq. ft. and in February 1994 of 12,000 sq. ft. The Company is now the sole occupant of the premises. In an addendum to the lease, the landlord agreed to make certain improvements to the premises financed by a supplement to the rent. The lease amendment further provides an option to continue the lease for an additional ten years or to purchase the premises at 94% of fair market value at the first termination of the lease.
The facility, which now totals 88,826 sq. ft., provides for the Company's needs for manufacturing windshield washer and defroster nozzles at levels adequate to meet near-term projected customer needs. In addition to the capacity for supporting more manufacturing equipment, the enlarged premises allow for larger engineering capabilities.
The facilities are currently utilized as follows:
Manufacturing, Materials, Quality Control 60,560 sq. ft. Administration and Sales 8,538 sq. ft. Laboratories and Engineering 19,728 sq. ft.
Total Area 88,826 sq. ft.
In its production operations, the Company generally utilizes tools purchased for the account of its customers and used for their unique requirements. The Company has also designed and built for its own account specialized assembly and test equipment to meet quality assurance and economic performance requirements.
Item 3.
Item 3. LEGAL PROCEEDINGS
During FY 1994 and 1996, the Company discovered in the market two instances of windshield washer nozzles which infringed upon its windshield washer patents. As a result, the Company filed suits for patent infringement in the United States District Court for the District of Maryland. One suit was settled favorably to the Company in June 1995 and the other is still proceeding.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5.
Item 5.
5a. STOCK PRICE AND MARKETS
The Common Stock of the Company is traded in the "over-the-counter" market and is quoted on the NASD OTC Bulletin Board; symbol BOWE. The Preferred Stock is unregistered and is not publicly traded.
The high and low bid and asked prices of the Common Stock over the last two fiscal years are listed below:
Bid Asked ------------------ ------------------- FY High Low High Low ---- --- ---- --- 1996 1st Quarter 5/8 3/8 1 3/4 2nd Quarter 3/8 3/8 3/4 3/4 3rd Quarter 3/8 3/8 3/4 5/8 4th Quarter 7/8 1/8 1-1/4 7/16
1995 1st Quarter 3/8 1/4 7/8 3/4 2nd Quarter 7/8 1/4 1-3/8 3/4 3rd Quarter 3/4 1/2 1-3/8 1 4th Quarter 3/4 1/2 1-3/8 1
Note: The above quotes represent prices between dealers and do not include retail mark-up, mark-down or commissions. They do not represent actual transactions.
5b. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
Approximate Number of Record Holders Title of Class (as of October 26, 1996) ------------------ ------------------------
Common Stock $.10 Par Value 428
Preferred Stock 8% Cumulative 33
Included in the number of stockholders of record are shares held in "Nominee" or "Street" name.
5c. DIVIDENDS
The Company has never paid cash dividends on its Common Stock. Payment of dividends on Common Stock is within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating financial condition of the Company.
For information concerning dividends on Preferred Stock, see Note 6 of Notes to Consolidated Financial Statements.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
FY 1996 vs FY 1995
Total sales in FY 1996 rose 7% over FY 1995, reaching another record for the Company of $18,128,274 compared with $16,972,876 in FY 1995. Income before taxes, however, decreased 53% from FY 1995 to FY 1996. Net income also declined to $884,306 from $1,783,875 in FY 1995, a 50% reduction. Profitability was significantly affected by increased spending for application engineering and research and development expenses and for an accrual for the costs of terminating a sales agreement.
Product sales of light vehicle windshield washer and defroster nozzles increased 8% to $17,292,030 in FY 1996 from $15,960,301 in FY 1995. Higher volume of shipments of new products to the Company's major customers was the major reason for the increase, which more than compensated for a 3% decline in total North American light vehicle production for the fiscal year 1996 versus 1995.
In contrast, technical services sales in FY 1996 decreased 17% to $836,244 from FY 1995's $1,012,575. Sales of tooling for new windshield washer and defroster nozzles were down significantly as there was a lower rate of culmination of programs for these products. However, sales were recorded for the first time for prototype tooling for new air conditioning outlets for one automotive customer.
Gross profit on total sales declined to 34% in FY 1996 from 36% in FY 1995. The gross profit on product sales declined due to higher manufacturing expenses mainly related to the modification and repair of injection molding tooling. Additionally, application engineering costs directed to the customization of new air conditioning outlets increased significantly. In contrast, the gross loss on technical services sales declined for FY 1996 compared to FY 1995 because of cost containment efforts applied to the tooling programs for new windshield washer nozzles.
Selling, general and administrative expenses increased $1,033,217 or 40% in FY 1996 from FY 1995 principally because of increases in sales commissions. These commissions in FY 1996 include accruals of $760,000 related to the planned termination in May 1997 of the Company's sales agreement with its manufacturer's representatives. The Company is reorganizing its sales force using its own employees rather than independent representatives. Aside from this special accrual, expenses increased 10% due to higher patent, personnel, and computer expenses, partially caused by the efforts to obtain QS-9000 certification and the implementation of a new information system.
Research and development costs increased to $1,175,890 in FY 1996, a $538,920 or 85% increase over the prior year. The Company discontinued its efforts to develop fluidic nozzles for natural gas burner appliances. It redirected those same resources plus additional personnel and outside contractors to the development of automotive air conditioner outlets, improvements in the design of windshield washer nozzles, and fluidic technology research.
In FY 1996, the provision for income taxes was $506,629, reflecting the lower income before taxes and somewhat lower effective tax rate of 36.4% versus 39% for FY 1995.
FY 1995 vs FY 1994
Total sales in FY 1995 improved 12% over FY 1994, reaching another new record for the Company of $16,972,876 compared with $15,111,829 in FY 1994. Income before taxes increased 22% from FY 1994 to FY 1995. Net income in FY 1995 improved 3% to $1,783,875 from $1,727,020 for FY 1994. Net income increased at a lower rate than income before taxes as the result of the higher effective income tax rate at 39% in FY 1995 as compared with 28% in FY 1994.
Sales of component products rose 19% to $15,960,301 in FY 1995 from $13,365,761 in FY 1994. As a result of the addition and enhancement of windshield washer products and new defroster nozzle products, the Company's increase in shipments of component products was greater than the zero growth in total North American vehicle production experienced by our customers during the fiscal year 1995. The gross profit on sales of component products declined to 43% in FY 1995 from 47% in FY 1994 as engineering activities related to customizing new washer nozzle products expanded and various manufacturing expenses increased.
Technical services sales in FY 1995 decreased 42% to $1,012,575 from FY 1994's $1,746,068. The shipments of tools for future automotive products declined in FY 1995, reflecting the culmination of fewer tooling programs for new windshield washer and defroster nozzles. In addition, the FY 1994 sales included $250,000 of revenue from a specific application engineering customer contract. The loss in this segment of the business at the gross profit level increased to $704,656 from the prior year's loss of $372,000. This deterioration occurred primarily as a result of the lack of last year's $250,000 of revenue referred to above, costs of which were incurred in prior years. Also, higher costs were incurred in FY 1995 from extra tool work necessary to achieve operational capability as well as additional time required for customer approval of the tools for use in parts production.
Selling, general and administrative expenses remained the same as the prior year and as a percentage of sales were 15.4% in FY 1995 versus 17.2% in FY 1994. Sales and marketing expenses rose due to higher commissions as a result of the increase in component sales. However, general and administrative expenses were lower than last year as a result of decreases in U.S. and foreign patent costs.
The Company in FY 1995 continued to invest in research and development projects, although the dollar amount was 24% less than FY 1994. Emphasis was placed on applying fluidic technology to natural gas burner nozzles as well as various other improvements to the Company's present products and manufacturing systems.
Interest expense was lower in FY 1995 as a result of lower debt levels. Other income was higher due to an increase in interest income from larger investments of available cash and higher interest rates.
In FY 1995, the provision for income taxes was $1,148,902, resulting in an effective tax rate of 39%, approximately the statutory rate. In FY 1994, after the remaining available research and development and investment tax credit carryovers from prior years were utilized, the Company's effective tax rate was 28%. (See Note 6 of the Notes to the Consolidated Financial Statements.)
Liquidity and Capital Resources
Current assets at 1996 fiscal year end were $7,183,195 compared with $6,324,208 at the 1995 fiscal year end. Liquidity of these assets improved as cash and cash equivalents, short-term investments, and receivables rose to $4,640,605 from $4,117,888 from the positive cash flow during FY 1996.
Inventories rose 5% to meet projected requirements for sales of nozzle products. The tooling work in process decreased compared to the prior year, as there were fewer tools being built for future products.
Current liabilities increased 25%, reflecting the current portion of the special sales commission accrual plus normal increases in operational accounts payables and other accruals.
The current ratio of 2.8:1 at the 1996 fiscal year end declined in comparison to the 3.1:1 ratio at the 1995 fiscal year end due to the addition of the current portion of the special sales commission accrual at the end of the 1996 fiscal year end.
Cash provided by operating activities in the amount of $2,144,438 in FY 1996 resulted principally from net income of $884,306, plus non-cash charges for depreciation and amortization of $750,449 and accrual of the special sales commissions of $760,000 ($465,400 net of income taxes).
Funds were used for capital expenditures in the amount of $1,321,331 principally for additional computer equipment, building improvements for enlarged office space, and assembly and laboratory equipment. The Company purchased $566,664 of U.S. Treasury bills and sold $700,000 of such bills.
The principal payment of term loan debt during FY 1996 was $271,668, the prepayment of all outstanding bank debt in February 1996. The Company's $1,000,000 short-term line of credit was not utilized during the fiscal year 1996 and had no balance outstanding at October 26, 1996. The preferred stock dividend was declared and paid in December 1995.
The Company's credit facilities and financial position should provide an adequate base for sales and production resulting from forecasted production rates by the U.S. car manufacturers, additional market penetration, and near-term requirements for potential new products resulting from R & D efforts.
Fiscal Year 1997
The Company's operating plans assume that industry production levels for the 1997 fiscal year as a whole will be somewhat less than the FY 1996 levels, in line with external market forecasts, but that there will be additional production requirements for new nozzles expected to be added in the course of the fiscal year, resulting in the Company's anticipating windshield washer nozzle sales slightly below the 1996 fiscal year. However, defroster nozzle sales are expected to decline significantly in FY 1997 as certain products were discontinued.
Present knowledge of customer plans indicates that the Company's billings for technical services related to the introduction of new products and new or revised windshield washer nozzles will increase from the FY 1996 level.
The automotive parts industry has become more competitive in general due to consolidation of suppliers, customers' expectations of higher quality and more service, and price pressures.
The Company's customers mandated that a QS-9000 compliant quality system be developed and registered by an independent organization. Chrysler required registration by July 1997 and General Motors by December 1997. The Company received certification as a QS-9000 supplier with ISO 9001 addendum in December 1996. QS-9000 is a quality system standard developed by the three major U.S. automotive manufacturers based on the ISO 9000 International Standard but incorporating general automotive and specific customer requirements. Management believes that the Company's technology coupled with a QS-9000 compliant quality system should provide a solid platform for future competitiveness and growth.
Research and development expenditures are planned to remain at the same level or decrease in FY 1997. Efforts will continue to be made in the development of new product lines, principally air conditioning outlets for light vehicles, and for the improvement of windshield washer nozzles, which would result in a significant increase in application engineering expenses.
Item 7 (continued) SCHEDULE A: RELATIONSHIP TO NET SALES
Item 8
Item 8
FINANCIAL STATEMENTS
BOWLES FLUIDICS CORPORATION
FOR THE YEAR ENDED OCTOBER 26, 1996
BOWLES FLUIDICS CORPORATION
INDEX FOR THE YEAR ENDED OCTOBER 26, 1996
Page
Report of Independent Accountants 16
Financial Statements: Consolidated Statements of Income 17
Consolidated Balance Sheets 18
Consolidated Statements of Changes in Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
REPORT OF INDEPENDENT ACCOUNTANTS
----------
To the Board of Directors and Stockholders, Bowles Fluidics Corporation
We have audited the accompanying consolidated balance sheets of Bowles Fluidics Corporation as of October 26, 1996, and October 28, 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three fiscal years in the period ended October 26, 1996. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bowles Fluidics Corporation as of October 26, 1996, and October 28, 1995, and the results of its operations and its cash flows for each of the three fiscal years in the period ended October 26, 1996, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Baltimore, Maryland December 20, 1996
BOWLES FLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these financial statements.
BOWLES FLUIDICS CORPORATION CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
BOWLES FLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements
BOWLES FLUIDICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
BOWLES FLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
General. The Company and its wholly owned subsidiary, Fluid Effects Corporation, operate on a 52/53-week fiscal year which ends on the last Saturday of October. All years presented are 52 weeks. Assets and liabilities, and revenues and expenses, are recognized on the accrual basis of accounting.
Cash equivalents. Cash equivalents are highly liquid investments with original maturities of 90 days or less.
Investments. Investments, which are available for sale, consist of U.S. Treasury Bills with original maturities over 90 days, but not greater than 365 days, and are carried at cost plus accrued interest, which approximates market.
Inventory Pricing. Inventories are carried at the lower of cost (first-in, first-out) or market.
Property, Equipment and Depreciation. The cost of property and equipment is depreciated over the estimated useful life of the related assets. Depreciation is computed on the straight-line method for all assets based on the following estimated lives:
Years Production machinery and equipment 3 - 10 Office furniture and equipment 5 - 7 Laboratory and machine shop equipment 3 - 10 Leasehold improvements lease term
Depreciation expense for the fiscal years ended 1996, 1995, and 1994, was $711,282, $612,294 and $577,811, respectively.
Patents. Costs associated with obtaining United States patents are capitalized and amortized using the straight-line method over the life of the patent beginning with the date of issue or date of filing the application. The Company initially charges all costs associated with the acquisition of U.S. and foreign patents to expense, then capitalizes those costs related to U.S. patents upon issuance of those patents.
Management reviews all of the patent costs and writes off any patents which are considered to be of no foreseeable economic benefit to the Company. The Company recognizes income from patent licenses in accordance with the respective payment terms of each license agreement.
Income Taxes. The Company uses the asset and liability method for accounting for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statements carrying amounts and the tax bases of existing assets and liabilities.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
BOWLES FLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Inventories
Inventories are comprised of: 1996 1995 ---------- ---------- Raw Material $ 678,494 $ 703,864 Work and tooling in process 242,369 416,090 Finished Goods 1,065,202 779,392 ---------- ---------- Total $1,986,065 $1,899,346 ========== ==========
3. Property and Equipment, net
Property and Equipment, net, is comprised of:
October 26, October 28, 1996 1995 ----------- ----------- Production machinery and equipment $ 4,397,018 $ 4,047,602 Office furniture and equipment 1,992,152 1,580,026 Laboratory and machine shop equipment 1,395,837 1,159,087 Leasehold improvements 796,928 539,274 ----------- ----------- Total property and equipment 8,581,935 7,325,989 Less accumulated depreciation (5,153,170) (4,504,185) ----------- ----------- Property and equipment, net $ 3,428,765 $ 2,821,804 =========== ===========
4. Line of Credit
In May 1996, the Company entered into a fourth amended and restated agreement with Mercantile-Safe Deposit & Trust Company to reaffirm and extend its $1,000,000 line of credit until May 8, 1997, and to set forth the Company's and the Bank's decision to continue the line of credit on an unsecured basis. At the Company's request and the Bank's discretion the line of credit may be affirmed as of May 8, 1997, and each year thereafter. The interest rate is Mercantile's prime rate, floating, which was 8 1/4% as of October 26, 1996. In addition, a 3/8% annual fee is assessed on the unused portion of this credit facility. Advances on the line of credit are limited to 85% of eligible accounts receivable and 40% of finished goods inventory. No amount was outstanding on this credit line at October 26, 1996, or on October 28, 1995.
In addition to the maintenance of certain financial ratios, the covenants of the fourth amended loan agreement require the Company's tangible net worth to be not less than $2,000,000 as of the close of each fiscal year.
BOWLES FLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Debt
Balances as of October 26, 1996, and October 28, 1995, are as follows:
1996 1995 ------------ ------------ $ -- $ 271,668 ============ ============
In June 1993, the Company entered into a third amended and restated loan agreement with Mercantile-Safe Deposit & Trust Company for a term loan facility for a period up to seven years in the maximum amount of $1,100,000. Advances under this agreement were made for the purchase of specified capital equipment and leasehold improvements. This loan facility was cross-collateralized and cross-defaulted with all other loans with Mercantile and was subject to certain loan covenants. In December 1993, the Company borrowed $365,000 under this facility. During fiscal 1994, a fixed interest rate of 8 3/4% was elected for borrowing under this agreement through April 1997. The unpaid balance of the outstanding loan was paid in total in February 1996.
Cash paid for interest during 1996, 1995, and 1994 was $6,018, $37,586, and $91,079 respectively.
6. Stockholders' Equity
The 8% convertible preferred stock of the Company at October 26, 1996, and October 28, 1995, consists of 3,000,000 authorized shares, par value $1.00 per share, with 933,080 shares issued and outstanding on both dates.
The common stock of the Company at October 26, 1996, and October 28, 1995, consists of 17,000,000 authorized shares, par value $.10 per share, with 12,610,011 shares issued and outstanding on both dates.
The Company's preferred stock provides for an annual dividend of $.08 per share from the net earnings of the Company and is cumulative only for those years in which the Company has earnings, and $1.00 per share in liquidation before any distribution can be made to holders of common stock. If any dividends payable on the preferred stock with respect to any fiscal year of the Company are not paid for any reason, the rights of the holders of the preferred stock to receive payment of such dividends shall not lapse or terminate; but unpaid dividends shall accumulate and shall be paid without interest to the holders of the preferred stock when and as authorized by the Board of Directors before any dividends shall be paid on any other class of stock.
The Company's preferred stock may at the option of the holder, at any time dividends are current, be converted into common stock of the Company at the conversion rate of four shares of common for each share of preferred. Additionally, the preferred stock is redeemable at par in whole or in part at the option of the Board of Directors at any time the dividends are current after a period of 10 years subsequent to issue. At October 26, 1996, 683,080 shares have been outstanding for more than 10 years and dividends are current, and thus can be converted. The common stock has one (1) vote per share and the preferred stock has four (4) votes per share.
BOWLES FLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. (continued)
Reserved Shares. As of and for the three fiscal years in the period ended October 26, 1996, there were 300,000 shares of common stock reserved for issuance in connection with the Company's stock option plans. None of the authorized shares of common stock are reserved for conversion of preferred stock. Under the laws of the State of Maryland, the authorization of the preferred stock in itself provides the authorization of common stock necessary for conversion.
Stock Options. In May 1992, the Company adopted its key employee incentive stock option plan. Activity in the Company's incentive stock option plan was as follows:
1996 1995 1994 ------- ------- ------- Options outstanding, beginning of year 180,000 200,000 314,400 Options granted - - - Options exercised - (20,000) (41,200) Options expired - - (73,200) ------- ------- ------- Options outstanding, end of year 180,000 180,000 200,000 ======= ======= =======
Options activities are at exercise prices ranging from $.15 to $.65 per share.
In 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock Based Compensation." The Company has determined that it will retain its current accounting for stock options granted; therefore, the adoption of this new standard in fiscal 1996 will not impact the Company's financial position or results of operations.
Quasi-reorganization. Effective October 29, 1994, the Board of Directors approved a quasi-reorganization which had the impact of eliminating the retained earnings deficit as an adjustment to additional paid-in capital.
BOWLES FLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
The Company and its subsidiary file a consolidated federal income tax return and separate state income tax returns. The provision for income taxes consisted of the following:
1996 1995 1994 -------- -------- -------- Federal: Current $ 678,938 $1,019,525 $540,000 Deferred (222,600) (30,100) - --------- ---------- -------- 456,338 989,425 540,000 --------- ---------- -------- State: Current 68,791 164,377 139,506 Deferred (18,500) (4,900) - --------- ---------- -------- 50,291 159,477 139,506 --------- ---------- -------- $ 506,629 $1,148,902 $679,506 ========= ========== ========
The components of the deferred tax asset and liability for 1996 and 1995 were as follows:
1996 1995 -------- -------- Deferred tax asset: Accrued vacation and retirement programs $ 190,300 $ 167,800 Non-deductible reserves 387,100 121,700 --------- -------- Total deferred tax asset 577,400 289,500 --------- --------
Deferred liability: Property and equipment (312,800) (266,000) --------- -------- Total deferred tax liability (312,800) (266,000) --------- --------
Net deferred tax asset $ 264,600 $ 23,500 ========= =========
Reconciliations of the provisions for income taxes at the U.S. federal statutory rate to the effective tax rates were as follows:
1996 1995 1994 -------- ---------- --------- U.S. statutory income tax $472,918 $ 997,145 $ 818,219 State tax, net of federal income tax benefit 33,711 151,757 92,074 Utilization of investment and research and development credit carryforwards - - (226,000) Other - - (4,787) -------- ---------- --------- $506,629 $1,148,902 $ 679,506
Cash paid for income taxes was $877,000, $1,617,000, and $118,000 for 1996, 1995, and 1994, respectively.
BOWLES FLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Earnings per Share
Primary earnings per share are based on the weighted average number of common shares and the effects of shares issuable under stock options based on the treasury stock method. Fully diluted earnings per share assumes that the preferred stock is converted to common stock at the beginning of the year.
The number of shares used for computing primary earnings per share was 12,701,898, 12,706,408, and 12,672,647, in 1996, 1995, and 1994, respectively. The number of shares used in computing fully diluted earnings per share was 16,473,390, 16,445,005 and 16,404,967 in 1996, 1995, and 1994, respectively.
9. Commitments and Contingencies
The Company leases its facility under a non-cancelable operating lease which expires in 2004. As of October 26, 1996, minimum annual aggregate rentals are as follows:
Year Ended Amount ---------- ----------- 1997 $ 561,648 1998 561,648 1999 561,648 2000 561,648 2001 561,648 thereafter 1,404,120 ---------- Total minimum future rental payments $4,212,360 ==========
Rent expense under all leases for 1996,1995, and 1994 was $626,565, $622,671, and $598,427, respectively.
Management is unaware of any pending legal proceedings which would have a material adverse effect on the financial statements of the Company.
BOWLES FLUIDICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Benefit Plans
On November 1, 1990, the Company adopted a defined contribution (401k) plan covering substantially all of its employees. Contributions and costs were determined by matching 50% of employee contributions up to 4% of each covered employee's earnings. As of April 1, 1994, the Company increased its matching contribution to 50% of the employee contributions up to 6% of each covered employee's earnings. The Company's contributions to the plan were $119,640, $101,286 and $76,892, in 1996, 1995, and 1994, respectively.
The Company has agreed to retirement programs for certain former officers providing for the payment of certain retirement benefits. The unfunded present value, at a discount rate of 7.5%, of these benefits accumulated as of October 26, 1996, amounts to approximately $360,000, of which $301,000 is included in other liabilities. Expenses related to these programs were $44,000 in 1996, $102,000 in 1995, and $62,000 in 1994.
11. Termination of Sales Agreement
During the fiscal year 1996, the Company accrued $760,000 ($465,400 net of income taxes) for the termination in May 1997 of the sales agreement with its manufacturer's representatives. The payments will commence in May 1997.
12. Major Customers
Over 90% of the Company's production of nozzles is incorporated in vehicles produced by General Motors, Ford and Chrysler, each of whom typically represents over 10% of the Company's sales volume. The Company is, therefore, substantially dependent upon the North American production requirements of these three automotive companies. In addition, the Company's customers mandated a QS-9000 compliant quality system be developed and registered by an independent organization. Chrysler required registration by July 1997 and General Motors by December 1997. In September 1996, the Company was assessed by Underwriters Laboratories Inc. and received QS-9000 certification with ISO 9001 addendum as of December 20, 1996.
BOWLES FLUIDICS CORPORATION
Item 9
Item 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
Item 10a. - 10c. DIRECTORS OF THE REGISTRANT INCLUDED IN PROXY MATERIALS
Item 10b., d., e., & f. EXECUTIVE OFFICERS OF THE REGISTRANT:
Item 10b., d., e., & f. (continued)
d. The names, ages and positions of all of the executive officers of the Company are listed above, along with their business experience during the past five years. Officers are appointed annually by the Board of Directors at the annual meeting of directors, immediately following the annual meeting of shareholders. There are no family relationships among any of the officers of the Company, nor any arrangements or understanding between any such officers and another person pursuant to which they were elected as officers.
Item 11
Item 11 EXECUTIVE COMPENSATION INCLUDED IN PROXY MATERIALS.
Item 12
Item 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT INCLUDED IN PROXY MATERIALS.
Item 13
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS INCLUDED IN PROXY MATERIALS.
PART IV
Item 14
Item 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 Financial Statements
Included in Part II of this report:
Report of Independent Accountants
Consolidated Statements of Income for the three years ended October 26, 1996, October 28, 1995, and October 29,
Consolidated Balance Sheets at October 26, 1996, and October 28, 1995
Consolidated Statements of Changes in Stockholders' Equity for the three years ended October 26, 1996, October 28, 1995, and October 29, 1994
Consolidated Statements of Cash Flows for the three years ended October 26, 1996, October 28, 1995, and October 29,
Notes to Consolidated Financial Statements
(a) 2 Financial Statements Schedules
Schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(a) 3 Exhibits
Exhibit 11 -
Schedule showing computations of earnings per share for each of three years ended October 26, 1996, October 28, 1995, and October 29, 1994.
(b) Reports on Form 8-K
None