ITEM 1. BUSINESS
Numatics, Incorporated ("Numatics" and, together with its subsidiaries, the "Company") is a global manufacturer and marketer, both directly and through its subsidiaries, of pneumatic valves, actuators, and related specialty products. The Company's principal market is the United States, in which it is the largest manufacturer in its core product: directional control, base mounted, 4-way pneumatic valves. The Company also conducts operations in several foreign countries, including Canada, Germany, England, Italy, France, the Netherlands, Hungary, Taiwan and Mexico.
Numatics was incorporated in 1990 to purchase the assets of its predecessor corporation. Its common stock is privately held, principally by management.
In 1998, in an exchange offer registered under the Securities Act of 1933, Numatics issued $115.0 million of Series B 9 5/8% senior subordinated notes (the "Series B Notes") in exchange for a substantially identical series of senior subordinated notes it had issued in a private placement earlier that year. The Series B Notes are guaranteed by all of Numatics' domestic subsidiaries. Some additional information concerning the Series B Notes and the indenture under which they were issued is provided below under "Risk Factors - --Leverage," "--Subordination," and "--Possible Inability to Repurchase Series B Notes Upon a Change in Control," and in Note 2 to the Company's 2001 consolidated audited financial statements. More extensive information concerning the Series B Notes is contained in the Form S-4 registration statement (SEC File No. 333-51355) under which the Series B Notes were registered for purposes of the exchange offer, which can be found at the SEC's web site (www.sec.gov).
Risk Factors - ------------
As noted above under "Cautions Regarding Forward-Looking Statements," the information provided under this item 1, as well as elsewhere in this Form 10-K report, includes forward-looking statements. Although management believes that the plans, intentions, and expectations concerning the Company reflected in those forward-looking statements are reasonable, it can give no assurance that those plans, intentions, or expectations will be achieved. Important factors that could cause actual results to differ materially from those included in or suggested by any forward-looking statements are set forth below and elsewhere in this report. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Risk Factors set forth below.
Leverage. The Company is highly leveraged. On December 31, 2001, the Company had total indebtedness of approximately $161.8 million and an accumulated
deficiency of approximately $78.7 million. As of that date, the aggregate debt of the Company to which the Series B Notes are subordinated ("Senior Debt"), which includes borrowings under its term loan and revolving credit facilities, was approximately $42.7 million, and approximately $18.5 million would have been available for additional borrowing under the revolving credit facility, subject to borrowing base limitations. The indenture governing the Series B Notes permits the incurrence of additional indebtedness, including Senior Debt, by Numatics and its subsidiaries in the future, subject to certain limitations.
The Company's current annual debt service requirement is approximately $17.8 million. The Company's ability to make scheduled payments of principal of or interest on, or to refinance, its indebtedness (including the Series B Notes) will depend on its future performance, which to some extent is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond its control. Based upon the Company's current level of operations and future business which has been awarded, management believes that cash flow from operations and available cash, together with available borrowings under the revolving credit facility, will be adequate to meet the Company's future liquidity needs until the scheduled expiration of the credit facilities at which time the Company would expect to replace the credit facilities. However, there can be no assurance that the Company's business will generate sufficient cash flow from operations, that anticipated growth opportunities and operating improvements will be realized, or that future borrowings will be available under the revolving credit facility, or a replacement credit facility, in an amount sufficient to enable the Company to service its indebtedness, including the Series B Notes, or to fund its other liquidity needs. The credit facilities, the revolving and term loans under them, and a $2.5 million industrial revenue bond for which the Company is responsible under the revolving credit facility mature prior to the maturity of the Series B Notes, and there can be no assurance that the Company will be able to replace the credit facilities, or refinance any other indebtedness, on commercially reasonable terms or at all.
The degree to which the Company is leveraged could have important consequences to investors, including, but not limited to, making it more difficult for the Company to satisfy its obligations with respect to the Series B Notes, increasing the Company's vulnerability to general adverse economic and industry conditions, limiting the Company's ability to obtain additional financing to fund future working capital, capital expenditures, and other general corporate requirements, or to fund acquisitions, requiring the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal of, and interest on, its indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, research and development or other general corporate purposes, limiting the Company's flexibility in planning for, or reacting to, changes in its business and the industries it serves, and placing the Company at a competitive disadvantage compared to less leveraged competitors. In addition, the indenture governing the Series B Notes and the credit facilities contain financial and other restrictive covenants that limit the ability of the Company to, among other things, borrow additional funds. Failure by the Company to comply with such covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on the
Company.
Subordination. The Series B Notes are subordinated in right of payment to all of Numatics' current and future Senior Debt (as defined in the indenture governing the Series B Notes), and the guarantees of the Series B Notes by the Guarantors (the "Subsidiary Guarantees") are subordinated in right of payment to all current and future Senior Debt of the Guarantors. As defined in the governing indenture, the term Senior Debt includes the credit facilities and the Guarantors' guarantees of those facilities. The credit facilities are secured by substantially all of the assets of Numatics, its domestic subsidiaries, all of the outstanding voting stock of Numatics' domestic, Canadian and German subsidiaries, and 66% of the capital stock of Numatics' foreign subsidiaries. Due to these subordination provisions, upon any distribution to creditors of Numatics or any Guarantor in a liquidation or dissolution of Numatics or the Guarantor or in a bankruptcy, reorganization, insolvency, receivership, or similar proceeding relating to Numatics, a Guarantor, or the property of Numatics or a Guarantor, the holders of Senior Debt of Numatics or the Guarantor, respectively, will be entitled to be paid in full before any payment may be made with respect to the Series B Notes or the related Subsidiary Guarantee. In addition, under the governing indenture, payments with respect to the Series B Notes and the Subsidiary Guarantees will be blocked in the event of a payment default on Designated Senior Debt (defined in the indenture to include the credit facilities and the related guarantees of those facilities) and may be blocked for up to 179 days each year in the event of certain non-payment defaults on Designated Senior Debt.
In the event of a bankruptcy, liquidation, or reorganization of Numatics or a Guarantor, holders of the Series B Notes will participate ratably with all holders of subordinated indebtedness of Numatics or the Guarantor that is deemed to be of the same class as the Series B Notes, and potentially with all general creditors of Numatics or the Guarantor other than holders of Senior Debt, based upon the respective amounts owed to each holder or creditor, in the remaining assets of Numatics or the Guarantor. In any of the foregoing events, there can be no assurance that Numatics or any or all of the Guarantors would have sufficient assets to pay amounts due on the Series B Notes. As a result, holders of Series B Notes may receive less, ratably, than the holders of other debt of Numatics or of a Guarantor, including Senior Debt.
The Company derives a significant portion of its revenue from Numatics' foreign subsidiaries, which have not guaranteed the Series B Notes. Holders of indebtedness of, and trade creditors of, those foreign subsidiaries generally would be entitled to payment of their claims from the assets of the affected subsidiaries before any of those assets are made available for distribution to Numatics. The indenture governing the Series B Notes permits the incurrence of substantial additional indebtedness by Numatics' foreign subsidiaries and permits investments by Numatics or other subsidiaries in those subsidiaries. In the event of a bankruptcy, liquidation, or reorganization of a subsidiary that has not guaranteed the Series B Notes, holders of any of that subsidiary's indebtedness will have a claim to the assets of the subsidiary that is prior to Numatics'
interest in those assets. As of December 31, 2001, the total liabilities of subsidiaries that have not guaranteed the Series B Notes was $9.7 million.
Dependence upon John Welker. The Company's continued success will be substantially dependent upon the efforts of John Welker. Mr. Welker has been Numatics' Chairman, President, and Chief Executive Officer since 1990. He also owns over 80% and controls the vote of over 93% of Numatics' outstanding common stock, which means he is in a position to elect its Board of Directors and to control its management, policies, and operations. When he acts in his capacity as a Numatics shareholder, Mr. Welker does not owe fiduciary duties to holders of Series B Notes or other Numatics' investors.
The Company could be adversely affected if Mr. Welker were to become unwilling or unable to continue as head of Numatics' management team. It is an event of default under the credit facilities if Mr. Welker ceases to be the President and Chief Executive Officer of Numatics or ceases to have the ability to elect a majority of its directors and if he is not replaced by a person satisfactory to the credit facility lenders. The Company maintains $27.5 million of key-man life insurance on Mr. Welker's life, but that amount would not be sufficient to retire all existing indebtedness under the credit facilities should it become necessary to do so.
Possible Inability to Repurchase Series B Notes upon a Change in Control. The indenture governing the Series B Notes requires Numatics to offer to repurchase all outstanding Series B Notes at 101% of their principal amount plus accrued and unpaid interest to the date of repurchase if a Change in Control (as defined in the indenture) should occur. However, there can be no assurance that sufficient funds will be available at the time of any Change of Control to make any required repurchases of Series B Notes tendered or that restrictions in the credit facility will allow Numatics to make the required repurchases.
The Company also is permitted under the indenture to enter into certain transactions, including certain recapitalizations, which would not constitute a Change of Control but would increase the amount of outstanding Senior Debt or indebtedness on parity with the Series B Notes.
Absence of Patent Protection. The Company relies on unpatented proprietary technology to produce its core products, particularly its "lapped spool and sleeve" pneumatic valve manufacturing technology. To protect its trade secrets and other proprietary information, the Company requires employees, consultants, advisors, and collaborators who have access to this technology to enter into confidentiality agreements and limits access to certain of its proprietary processes. However, there can be no assurance that these agreements or procedures will provide meaningful protection for the Company's trade secrets, know-how, or other proprietary information in the event of any unauthorized use, misappropriation, or disclosure of such trade secrets, know-how, or other proprietary information. If the Company is unable to maintain the proprietary nature
of its technology, particularly its "lapped spool and sleeve" valve manufacturing technology, the Company could be materially adversely affected.
Industry Overview - -----------------
The fluid power industry has grown out of manufacturers' needs to automate repetitive tasks that previously had been performed manually. The industry can generally be divided into two major segments: hydraulics (use of liquids) and pneumatics (use of air or inert gas). While hydraulics can produce higher forces and, in some applications, better control, pneumatics generally provide faster speeds, lower cost, greater ease of use, and a more environmentally clean process. The Company competes only in the pneumatic segment of the fluid power market.
Major components utilized in the pneumatic fluid power process include valves, actuators (cylinders), and air preparation equipment. A pneumatic system begins when air enters a compressor and the volume of air is reduced. The air then flows through a dryer and excess moisture is removed. (Typically, a pneumatic system contains a single compressor and an air dryer.) The dry air then flows through a system header to multiple workstations in a plant. At a workstation, the dry air flows initially through an FRL (filter, regulator, and lubricator). In the FRL, a filter removes particulates from the air, a regulator reduces and stabilizes downstream pressure, and a lubricator adds the appropriate amount of oil to the air, when necessary. This conditioned air then enters a valve.
A valve is the primary pneumatic component that controls the intake and withdrawal of air into the actuator, with the valve's movement typically controlled by a solenoid. In the Company's "lapped spool and sleeve" valve, the position of the spool determines the direction of the air as it flows into the actuator. The flow of air from the valve causes the actuator rod to extend or retract, thereby moving a specific load. In many cases, an automated component, such as a gripper or guiding unit, may be attached to the actuator for material handling purposes.
Certain market segments to which the Company sells its products have been reducing the number of suppliers they deal with, including pneumatic component suppliers. As a result, companies within these market segments increasingly have used suppliers that can provide a full line of pneumatic components. Continuing the product line expansion begun by the Company's predecessor in the late 1980s, the Company now offers its customers a full line of pneumatic components, including valves, actuators, and specialty products such as air preparation products, specialty valves, and grippers and guiding units.
Applications for pneumatic fluid power are numerous and diverse. Some of the largest industries that use pneumatic fluid power systems include packaging, automotive, machine tool, material handling, food and beverage, textile, printing,
electronics/semiconductor, robotics, paper, and medical equipment. Pneumatic components primarily are used in automated manufacturing applications, but also can serve other functions, as do certain of the Company's specialty valves used in oxygen concentrators sold by medical equipment manufacturers.
Products - --------
The Company offers a complete line of pneumatic components, which can be described in three groups: valves, motion control products, and air preparation products. The Company's core product historically has been pneumatic valves. Over recent years, the Company has expanded into additional product lines, decreasing its dependence on valves through its product diversification strategy. The table that follows illustrates this diversification trend since 1996.
1996 2001 --------------------------------------- Net Sales $132.0 million $113.6 million
Valves 71.5% 65.0% Motion Control Products 10.9% 18.6% Air Preparation Products 17.6% 16.4% --------------------------------------- Total 100.0% 100.0%
Valves. The Company is widely regarded as a leading manufacturer of high quality pneumatic valves used in fluid power applications. In a pneumatic system, the valve controls the flow of compressed air to an actuator (cylinder). The valve is the most important and complex component in any pneumatic system.
The Company's success is largely derived from its proprietary "lapped spool and sleeve" technology developed by the Company's founder in the 1950s. The original design is used in the Company's valves today, although the manufacturing process has been improved continuously. The inner (spool) and outer (sleeve) components are a matched set, with the sleeve remaining stationary and the spool moving inside it to produce the switching of air flow. The sealing of the spool and sleeve is accomplished by the minute clearance between the two parts, measured in millionths of an inch, rather than by using soft rubber seals as in other designs. This minute clearance provides an air bearing, which avoids any metal-to-metal contact and allows frictionless movements, virtually eliminating heat and wear. This results in extremely long product life.
The patent on the "lapped spool and sleeve" product expired in 1973. However, the process for manufacturing the "lapped spool and sleeve" to the required tolerances remains a trade secret. The Company continues to closely guard this trade secret and limits the number of visitors and employees who have access to the manufacturing process. Several competitors have attempted to imitate the process, but management
believes none has been able to duplicate the "lapped spool and sleeve" to the same high quality tolerances.
The Company manufactures a wide variety of valves, most of which can broadly be described as directional control, 4-way valves. Additionally, the Company manufactures and markets 3-way valves and a variety of other valves for specific customer applications.
The Company's valve sales were $92.8 million, $94.7 million, and $73.8 million in 1999, 2000, and 2001, respectively.
Motion Control Products. In a pneumatic system, the actuator (or cylinder) serves as an "arm" for an automated task, allowing an object to be moved. Grippers and guiding units are material handling components, often serving as the "hands" of an automated process.
The Company's actuator line includes: standard tie-rod cylinders, made to National Fluid Power Association specifications, its "M" series actuator, a non-repairable miniature cylinder, a rodless cylinder based on technology it acquired in connection with its purchase of 12% of the stock of Univer, a large manufacturer of pneumatic products in Italy, rotary actuators, and a variety of small actuators.
The Company's motion control sales were $22.7 million, $27.1 million, and $21.1 million in 1999, 2000, and 2001, respectively.
Air Preparation Products. The Company's air preparation products include FRLs and air dryers. Air preparation products condition the air for use in the pneumatic system.
The Company's air preparation products sales were $24.7 million, $24.0 million, and $18.7 million in 1999, 2000, and 2001, respectively.
Engineering - -----------
The Company is widely recognized as an innovator in the design, engineering, and manufacture of pneumatic components. The Company has a dedicated group of engineers, both domestically and internationally. Beginning with the "lapped spool and sleeve," the Company has continued to produce engineering innovations which include the following:
. On-board electronics, which allow electronic signals to be passed through a single input/output source at faster transmission speeds
. Electrical plug-in connections, which allow assembly of systems without the need for costly wiring
. Integral speed controls and integral pressure controls, which are mounted between the valve and manifold to provide a complete control package
. Manifolding, which reduces piping and space and allows factory assembly, reducing cost
. Direct solenoid, which eliminates unnecessary pilot valves, improving reliability due to fewer parts
. Die cast magnesium valves, providing maximum weight reduction and cost savings
. "Nu-Plex," the first fully integrated serial control system for fluid power applications
. Aluminum cast valve bodies, which reduces the weight and cost of valves that had previously been made of bronze, cast iron, and brass
. "Numasizing," the first precise method of determining component size so as to accurately match desired performance with a valve configuration that uses the smallest amount of energy to get the job done
The Numasizing process is based on a computerized database containing empirical data from more than 250,000 test firings of pneumatic cylinders under different conditions. Numasizing is used at all of the Company's locations throughout the world. The Company conducts seminars on Numasizing for its customers and offers its distributors a proprietary program to enable them to use Numasizing in helping to design efficient systems for their customers.
Customers, Marketing, and Distribution - --------------------------------------
The Company's customers consist of end users, machinery manufacturers (which incorporate the Company's products in their machines), and distributors. As is common practice in the U.S. market, end users and machinery manufacturers generally purchase the Company's products through its network of distributors. Alternatively, in international markets, customers typically purchase directly from the Company. In some cases, the end user will specify the Company's products, regardless of distribution channel. The products sold by the Company are utilized in a diverse group of industries, and no one customer accounted for more than 2.3 % of total net sales in 2001.
Approximately 63.0% of the Company's net sales in 2001 were from sales to distributors. The Company believes it maintains excellent relationships with its distributor network, which consists of over 115 distributors, including over 75 in North America, 14 in Europe, 15 in Asia and 8 in South America.
The Company's North American distributors are pneumatics specialists who sell only pneumatic components and do not sell hydraulic components. In most cases, the Company's products represent these distributors' principal source of income. Additionally, the only pneumatic valves these distributors carry are Numatics' valves. The Company maintains an interactive relationship with its distributors, conducting periodic meetings in several cities and intensive training programs while encouraging feedback. The Company employs nine regional managers in North America to train and assist its distributors. The Company's distributors purchase products from the Company and maintain their own inventories.
The Company has a direct sales force of 133 employees, who sell to over 9,000 direct customers worldwide, of which a significant portion are outside the United States. The Company also has maintained direct selling efforts with certain large end users and machinery manufacturers in North America.
Manufacturing - -------------
The Company has six domestic manufacturing facilities, including four in Michigan and one each in Ohio and Tennessee. The Company also has manufacturing plants in Ontario, Canada and Germany. The Company's core valve products primarily are manufactured in its Highland, Michigan facility, which also is the Company's headquarters. The final machining and matching of the Company's proprietary "lapped spool and sleeve" valve components are carried out in a specially designed, temperature and humidity controlled area. This process is highly confidential. Visitors and employees who do not require access are not permitted in the facility, nor are equipment suppliers. All equipment setup for such operations is performed by the Company's own employees.
The Company stresses quality control in all of its manufacturing and distribution facilities, and each valve is individually tested to meet specific tolerances before it can be shipped. Currently, the facilities in Germany and Canada are ISO certified. Additionally, all of the Company's domestic manufacturing facilities were ISO certified by the end of 2001. The Company believes that the achievement of ISO certification at each of its manufacturing facilities is a significant factor in maintaining its competitive position.
Components and Raw Materials - ----------------------------
The principal raw materials and components used in manufacturing the Company's products are aluminum castings, stainless steel, solenoids, and screw machine parts. All of these items are readily available from multiple suppliers, and the Company also produces a substantial portion of its own requirements of solenoids and screw machine parts. The Company purchases a significant portion of its aluminum castings from Taiwanese suppliers through its subsidiary in Taiwan. The Company has never experienced significant difficulty in acquiring needed parts and raw materials, and management believes the Company is not substantially dependent on any particular supplier.
Competition - -----------
The markets in which the Company operates are highly competitive. Competition is based primarily on quality, price, timely delivery, service, and breadth of product line. The markets in which the Company competes are highly fragmented, and many of its competitors do not currently offer the full range of products sold by the Company. However, some of the Company's competitors are significantly larger and have greater financial and other resources than the Company.
The Company has the largest U.S. market share in its core product of directional control, base mounted, 4-way pneumatic valves. The Company's most significant competitors in North America are Parker Hannifin, SMC Pneumatics and MAC Valves. Some of the Company's major competitors in the valve market outside North America are SMC Pneumatics, Festo, and CKD. The motion control and air preparations products markets have
different competitors such as Norgren IMI, Wilkerson, Phd., Robohand, Lee, and Clippard.
International Operations - ------------------------
Numatics, Ltd. in Ontario, Canada and Numatics GmbH in Germany operate manufacturing facilities, both of which are ISO certified. Numatics, Ltd. markets a full line of the Company's products to the Canadian market and manufactures, among other products, lockout valves for the Company's worldwide needs. Numatics GmbH manufactures some of the Company's products and markets a full line of Numatics' components to customers in Europe and Africa. Numatics GmbH maintains a dedicated engineering staff, which works together with the Company's North American engineering personnel. Numatics' other foreign operations primarily are sales and distribution facilities.
International sales accounted for approximately 17.2% of the Company's 2001 net sales, and international assets accounted for approximately 15.3% of its total assets as of December 31, 2001. For additional financial information regarding foreign sales and exports, see Note 7 of the notes to the Company's audited consolidated financial statements filed as exhibit 99.1 to this Form 10-K.
Employees - ---------
At December 31, 2001, the Company had 685 employees. Approximately 75 of those employees at that time were represented by the United Auto Workers under a contract expiring on March 20, 2005. The Company considers its employee relations to be good.
Environmental Matters - ---------------------
The Company's plant on North Milford Road in Highland, Michigan, is the site of a groundwater contamination problem that became known in the early 1980s. The contamination was caused by a chemical (trichloroethylene) that was used for many years to degrease parts but which has not been used at the site since the early 1970s. A soil vapor extraction system was used to clean up the soil contamination, and a pump and treat system has been installed to purge the groundwater. The soil cleanup has been completed, but completion of the groundwater remediation is expected to take approximately another six years. Based on past expenditures and its current evaluation of site conditions, management expects to spend approximately $70,000 annually to complete the groundwater remediation. The Company has recorded a reserve for these future expenditures, which at December 31, 2001 was approximately $425,000. Management believes this reserve will be adequate to complete the remediation, although actual expenditures will depend on actual site conditions and other factors and are subject to change.
In 1989, a fluid spill site containing PCBs was discovered at the Company's East Highland Road facility in Highland, Michigan. The source of the PCBs is believed to be a transformer that was accidentally ruptured in 1973 while sitting on the ground awaiting disposal. The area of the spill has been disturbed by subsequent paving of a portion of the area and soil removal following a non-PCB waste oil spill. Management estimates that future soils remedial work at this site will cost approximately $200,000, and has reserved this amount in the Company's December 31, 2001 financial statements.
The sites discussed above are the only sites where the Company to date has identified any environmental contamination. However, most of the Company's facilities have been in operation for many years, and several of the facilities have undergone little or no invasive testing to determine the presence or absence of environmental contamination. Except as discussed above concerning the two identified sites, compliance by the Company with federal, state, and local laws and regulations pertaining to the discharge of material into the environment has not had any material effect upon the Company in conducting its business, and management currently does not anticipate that compliance with these laws and regulations in the future will have any material effect upon the Company in conducting its business. However, due to the nature of its current operations (and those of its predecessor), and the history of industrial uses at some of its facilities, the Company does face some risk of additional exposure to environmentally-related liabilities.
ITEM 2.
ITEM 2. PROPERTIES
The Company conducts its business in Company-owned facilities, totaling approximately 348,150 square feet, and leased facilities, totaling approximately 77,968 square feet, of office, engineering, manufacturing and warehouse space. All of these facilities are suitable to meet the current capacity needs of the Company's various business units. Leases expire at various times through 2006, and the Company generally has extension options.
The table that follows provides additional information concerning each of these facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Various legal matters arising during the normal course of business are pending against the Company. Management does not expect that the ultimate liability, if any, of these matters will have a material effect on future consolidated financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of Numatics' shareholders during the quarter ended December 31, 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Numatics' only authorized class of equity security is its common stock. On March 29, 2002, there were six holders of the outstanding shares of the common stock, all but one of whom were Numatics employees. The common stock has no public trading market, all outstanding shares are subject to transfer restrictions, and the shares held by employees are subject to a Numatics repurchase option. See "Compensation Committee Interlocks and Insider Participation" under item 11.
The common stock of the Company was split on the basis of 125 shares for each issued and outstanding share effective May 15, 2000. In connection with the stock split, the authorized share capital was changed from the previously authorized 250,000 shares of common stock to 9,950,000 shares of common stock.
To date, no dividends have been paid on the common stock, except for a $6 million extraordinary dividend paid on March 26, 1998. The agreements governing the credit facilities and the indenture governing the Series B Notes substantially limit the payment of future dividends on the common stock, and no such dividends are expected to be declared or paid for the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data (in thousands)
(1) The Michigan Single Business Tax is a state tax which is calculated based on operating activity and capital expenditure levels and is in lieu of a state income tax.
(2) For 2001, represents write off of deferred financing costs, net of tax. For 1998, represents $1.6 million (net of income taxes) write off of deferred financing costs, $2.1 million (net of income taxes) for the amortization of the previously unamortized discount on a series of subordinated notes that was prepaid during the year and $1.2 million (net of income taxes) for associated prepayment penalties.
(3) "EBITDA" represents the sum of operating income plus depreciation and amortization (less amortization of deferred financing costs) and Michigan Single Business Tax. Information regarding EBITDA is presented because management believes (i) it is a widely accepted financial indicator of a company's ability to incur and service debt, (ii) it reflects the non-cash effect on earnings of amortization and depreciation expense, and (iii) it is the basis on which compliance with certain of the financial covenants contained in the credit facility is principally determined. However, EBITDA does not purport to represent cash provided by operating activities as reflected in the Company's consolidated statements of cash flow, is not a measure of financial performance under generally accepted accounting principles and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Also, the measure of EBITDA may not be comparable to similar measures reported by other companies.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's financial statements and the notes thereto, included elsewhere in this report.
Overview - --------
The Company is a leading global manufacturer and marketer of pneumatic components. The Company's net sales are principally derived from the sale of its products worldwide to over 9,000 customers, including a network of over 115 distributors. In recent years, the Company has diversified its revenue base through its expanded product lines and an increase in its percentage of international sales. In the U.S., the Company's products are principally sold through a network of 45 distributors who purchase and stock Numatics' products. In non-U.S. markets, a majority of sales are derived from direct customers.
The Company's cost of products sold consists primarily of raw materials, labor, manufacturing overhead and purchased product costs. The Company has generally had success in passing through price increases in raw materials to its customers, although there can be no assurance that it will be able to continue to do so.
Results of Operations - ---------------------
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Net Sales. The Company's net sales for 2001 decreased 22.1%, or $32.3 million, from $145.9 million in 2000 to $113.6 million in 2001 as a result of the recession and general economic slowdown. Net sales in North America decreased 24.2%, or $30.0 million, while international sales decreased 10.5%, or $2.3 million, approximately $0.4 million of which was a result of currency translation losses. The slowdown was experienced first in the United States, which suffered a decline of 25.7%. The drop in sales in Canada and Mexico began early 2001, bringing their total sales decreases to 18.2% and 11.1%, respectively. The international group sales began falling mid-year for the total drop in international sales of 10.5%. The sales decline was spread equally among products groups with valves, motion control, and air preparation products all down 22% for the year.
Gross Profit. Gross profit for 2001 increased to 37.9% of net sales from 36.7% in 2000. Cost savings and containment programs implemented in response to the economic downturn were responsible for the overall improvement in gross profit. These cost savings included decreases in direct and indirect labor as a result of an overall 28% headcount reduction, depreciation savings on reduced capital expenditures, reduced scrap costs and the elimination of discretionary spending in manufacturing overhead.
Marketing, Engineering, General and Administrative. Marketing, engineering, general and administrative expenses decreased $6.9 million in 2001, ending the year at $27.4 million. This decrease was a result of cost savings and containment programs implemented in response to the economic downturn. In addition to an overall 28% headcount reduction, the Company eliminated or reduced discretionary spending to offset the effects of the lower sales volume, including the elimination of management bonuses. Unusual expenditures in 2000, such as the $0.7 million for implementation and enhancement of the computer system, did not recur in 2001.
Single Business Tax. Single business tax for 2001 was a credit of $0.1 million compared to an expense of $0.2 million in 2000 as a result of the loss in 2001.
Operating Income. Operating income in 2001 was $15.7 million, or 13.8% of sales, compared to $19.0 million, or 13.0% of sales, in 2000. This $3.3 million decrease was a direct result of the lower sales volume.
Interest and Other Financing Expenses. Interest expense decreased $0.5 million from $16.8 million in 2000 to $16.3 million in 2001 as a result of the general decrease in interest rates and less long-term debt.
Other Expense. Other expense consisted primarily of unrealized foreign exchange gains and losses, along with minority interest. Expense in 2001 was $0.6 million lower than 2000.
Income Taxes. The Company's income taxes at the statutory rate differed from its recorded income tax expense due to international rate differences.
Extraordinary Item. The write off of unamortized debt financing costs related to the refinancing of the Company's senior credit facility in November 2001 resulted in an extraordinary expense of $0.3 million, net of $0.1 million tax benefit.
Net Loss. Due to the factors discussed above, net loss increased $1.1 million, to a loss of $1.8 million for 2001.
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Net Sales. The Company's net sales for the total year 2000 increased 4.1%, or $5.7 million, from $140.1 million in 1999 to $145.9 million in 2000, although net sales for the fourth quarter exhibited a 10.6% decrease from prior year, as a result of the general economic slowdown. Net sales in North America increased 4.3%, or $5.1 million, while international sales increased 2.8%, or $0.6 million.
Gross Profit. Gross profit for 2000 decreased to 36.7% of net sales from 37.4% in 1999. This decline was a result of product mix changes and one-time inventory adjustments.
Marketing, Engineering, General and Administrative. Marketing, engineering, general and administrative expenses increased $2.5 million in 2000, ending the year at $34.4 million. This increase was primarily attributable to expanded marketing programs, professional fees, and costs associated with the implementation of a new enterprise-wide
computer system at the U.S. Valves and FRL divisions in the first quarter of 2000. Incremental ongoing costs related to the computer system were $1.3 million while incremental one-time costs for implementation and enhancements to the system were $0.7 million. The $1.3 million of incremental ongoing costs are expected to continue.
Single Business Tax. Single business tax for 2000 was $0.2 million compared to $0.4 million in 1999.
Operating Income. Operating income in 2000 was $19.0 million, or 13.0% of sales, compared to $20.2 million, or 14.4% of sales, in 1999. This $1.2 million decrease was principally due to reduced gross profit and increased marketing, engineering, general and administrative expenses, as explained above.
Interest and Other Financing Expenses. Slightly higher debt levels, combined with increased general interest rates, resulted in a $0.8 million increase in interest expense in 2000 compared to 1999.
Other Expense. Other expense consisted primarily of unrealized foreign exchange gains and losses. Expense in 2000 was substantially equal to 1999.
Income Taxes. The Company's income taxes at the statutory rate differed from its recorded income tax expense due to international rate differences and other various differences.
Net Income (Loss). Due to the factors discussed above, net income decreased $1.5 million, to a loss of $0.7 million for 2000.
Liquidity and Capital Resources - -------------------------------
Working capital was $41.3 million at December 31, 2001, compared with $44.3 million at December 31, 2000. Historically, the Company has utilized cash from operations and borrowings under its credit facilities to satisfy its operating and capital needs and to service its indebtedness.
On November 28, 2001, the Company entered into credit agreements with LaSalle Business Credit, Inc. and its Canadian affiliate providing for $30.0 million of three-year revolving credit facilities, subject to borrowing base requirements, and into a note purchase agreement with American Capital Strategies, Ltd. providing for $31.4 million of five-year term loans.
The new credit facilities and loans are secured by liens on substantially all of the assets of Numatics, Incorporated and its U.S., Canadian, and German subsidiaries. The new revolving credit loans bear interest at variable rates based on prime or LIBOR, at the Company's election. $14.2 million of the new term loans bear interest at the greater of
prime plus 6.5% per annum or 12% per annum. The remaining $17.0 million of the new term loans bear interest at 19% per annum, 2% per annum of which may be paid in kind at the Company's option.
The credit facilities include: (i) term loans of $28.7 million, $1.7 million and $1.0 million to Numatics and its German and Canadian subsidiaries, respectively and (ii) revolving credit facilities, including letters of credit, of $26.0 million and $4.0 million to Numatics and its Canadian subsidiary, respectively. The revolving credit facilities permit each of Numatics and its Canadian subsidiary to borrow up to the lesser of the total amount of its respective revolving credit facility or a borrowing base computed as a percentage of inventory and accounts receivable. Management estimates that the borrowing base limitations would have limited the Company's total revolving credit availability to approximately $19.4 million as of December 31, 2001. All borrowings under the revolving credit facilities mature in November 2004. The term loans are payable in quarterly installments, which totaled $2.7 million for 2001, and will total $1.4 million for 2002 and $1.4 million for 2003. The credit facilities include certain financial and operating covenants, which among other things restrict the ability of the Company to incur additional indebtedness, make investments, and take other actions. The Company expects to be in compliance with its covenants through 2002.
Significant Accounting Policies - -------------------------------
The Company's significant accounting policies are more fully described in Note 1 of the consolidated financial statements. Certain of the accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty.
Long-Lived Assets. The Company periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant and equipment, goodwill and other intangible assets) whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. The dynamic economic environment in which our business operates and the resulting assumptions used to estimate future cash flows impact the outcome of all impairment tests.
Pension and Other Postretirement Benefits. The Company maintains defined benefit pension plans on substantially all United States hourly employees and postretirement benefit plans for certain domestic employees. For financial reporting purposes, net period pension and other postretirement benefit costs are calculated based upon a number of actuarial assumptions including discount rate, rate of return on assets and certain demographic data. Each of these assumptions is based on Company judgment, considering all known trends and uncertainties. Any future changes to the discount rate will impact future net periodic pension expense. Actual asset returns for our pension plans significantly below the assumed rate of return would result in higher net periodic expense in future years. Actual
annual rates of increase in costs of covered postretirement healthcare above assumed rates of increase would result in higher net periodic postretirement benefit costs in future years.
Income Taxes. The Company must provide an estimate of actual current tax exposure together with an assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Based on known and projected earnings information and tax planning strategies, the Company must then assess the likelihood that the deferred tax assets will be recovered. To the extent that the Company believes recovery is not likely, it must establish a valuation allowance. Significant management judgment is required in determining provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. For the period ended December 31, 2001 Numatics had no valuation allowance recorded. In the event that actual results differ from the estimates, or facts or circumstances change in future periods, the effects of these adjustments could materially impact the financial position and results of operations.
Other Matters - -------------
As further discussed in item 11, under "Compensation Committee Interlocks and Insider Participation," Numatics, Mr. Welker, and all of the Company's other employee-shareholders are parties to an agreement under which the Company has the option, but not the obligation, to redeem the shares of any such shareholder upon the happening of certain events, including death, disability, or termination of employment. This agreement covers over 93.0% of the Numatics' shares currently outstanding. At December 31, 2001, the total redemption value of these optioned shares was immaterial. The indenture governing the Series B Notes and the agreements governing the credit facilities contain substantial limitations on Numatics' ability to redeem shares but permit redemptions, including limited cash redemptions, in certain cases. If one of the triggering events were to occur, the Numatics Board of Directors would decide whether to exercise the option based on the facts and circumstances existing at that time. In making such a determination, the Board could be expected to consider the following factors, among others: the limitations contained in the indenture and the credit facilities, the Company's ability to pay or finance the redemption price, the Company's other anticipated cash needs, and other then-existing business and economic conditions.
Each of the management shareholders of certain Numatics subsidiaries (Numation, Numatech and the Company's subsidiary in Taiwan) is required to sell his subsidiary shares to Numatics (or the subsidiary) upon such shareholder's (i) death, (ii) permanent disability or (iii) termination of employment with the Company. The price to be paid by the Company for such shares will be determined by a formula based upon a multiple of earnings of the relevant subsidiary. The obligations of the Company to purchase such shares are not subject to any limitations. However, the payment of these amounts may be prohibited by the terms of the Series B Note indenture. Currently, the amounts that would be payable under these agreements are approximately $475,000.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to the levels of indebtedness subject to interest rate fluctuation is contained in Note 2 to the consolidated financial statements filed with this Form 10-K as exhibit 99.1. Information with respect to the Company's level of business outside the United States that is subject to foreign currency exchange rate market risk is contained in Note 7 to those consolidated financial statements under the caption "Segment and Geographic Information." Those notes hereby are incorporated in this item by reference.
Interest Rate Risk - ------------------
The Company is subject to market risk associated with adverse changes in interest rates and foreign currency exchange rates, but does not hold any market risk sensitive instruments for trading purposes. The Company had total debt of $161.8 million at December 31, 2001, of which $28.2 million was variable rate debt. The Company measures its interest rate risk by estimating the net amount by which potential future net earnings would be impacted by hypothetical changes in market interest rates related to all interest rate sensitive assets and liabilities. Assuming a hypothetical 20% increase from the interest rates in effect as of December 31, 2001 and consistent levels of debt and cash, the estimated reduction in future earnings, net of tax, would be approximately $ 0.3 million.
Foreign Currency Risk - ---------------------
The Company mitigates its foreign currency exchange rate risk principally by establishing local production and sales facilities in the markets it serves and by invoicing customers in the same currency as the source of the products. The Company also monitors its foreign currency exposure in each country and implements strategies to respond to changing economic and political environments.
As of December 31, 2001, the Company's net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk were $14.4 million. The potential decrease in net assets from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $1.4 million.
The sensitivity analysis presented assumes a parallel shift in all foreign currency exchange rates. Exchange rates for different currencies do not necessarily move in the same direction. Accordingly, this assumption may overstate the impact of changing exchange rates on the Company's assets and liabilities denominated in a foreign currency.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated in this item by reference to the Company's audited consolidated financial statements filed with this Form 10-K as exhibit 99.1.
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 OF THE REGISTRANT
The table that follows sets forth the name, age at December 31, 2001, and position with the Company of each person who currently is a Numatics director or an executive officer of the Company. Information concerning the business experience for at least the past five years of each of the persons named is provided after the table. All Numatics directors are elected for terms of one year and until their successors are elected and qualified.
Name Age Position ----------------------------------------------------------------------- John H. Welker 61 Chairman, President and Chief Executive Officer
Robert P. Robeson 55 Vice President, Treasurer, Secretary and Chief Financial Officer
David K. Dodds 53 Vice President--Sales & Marketing
David M. Tenniswood 65 Director
Albert A. Koch 59 Director
John P. Musat 56 Director
John J. Collins 50 Director
Mark D. Schindel 38 Director
John H. Welker has been with Numatics (and its predecessor) for a total of 36 years. He has been Numatics' Chairman of the Board, President, and CEO since 1990. He was President of Numatics' predecessor from 1983 until 1990 and prior to 1983 held a variety of management positions within that predecessor company.
Robert P. Robeson joined Numatics' predecessor as Chief Financial Officer in 1988 and in 1990 also was named Vice President, and its Treasurer and Secretary. Prior to joining Numatics' predecessor, Mr. Robeson was CFO of Gelman Sciences, a publicly traded company.
David K. Dodds has been Vice President-Sales & Marketing since 1994. Prior to
that, he was President of Numatics, Ltd., the Company's Canadian subsidiary, a position he was appointed to in 1980.
David M. Tenniswood has been a Numatics Director since 1990. He has been the President and Chief Executive Officer of Aqua-Chem, Inc. (manufacturer of boilers and water purification and treatment products) since October 20, 1999. Prior to that he was Vice President - European Operations of the Company from 1996 through March 31, 1998 and prior to 1996, Mr. Tenniswood was President of the Controls Group at MascoTech for ten years.
Albert A. Koch has been a Numatics Director since 1990. He is the Chairman of Jay Alix & Associates, where he has been since 1995. Prior to joining Jay Alix & Associates, he was a Managing Director of Equity Partners of America, Ltd. (investment banking and financial consulting).
John P. Musat has been a Numatics Director since 1996. He is Vice President, Manufacturing Technology at Metaldyne Precision Forming (cold steel extruder) and has been with them since 1982.
John J. Collins has been a Numatics Director since 2000. He has been the Senior Vice President and General Counsel of Champion Enterprises, Inc. since 1997. Prior to joining Champion Enterprises, Inc. he was a Senior Principal and Managing Director of Miller, Canfield, Paddock and Stone, P.L.C. (law firm).
Mark D. Schindel has been a Numatics Director since 2001. He has been a Principal of American Capital Strategies (publicly traded mezzanine fund) since 1998. Prior to joining American Capital Strategies he was a Managing Director at PENMAN Partners (private equity fund).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Information - --------------------------------
The table that follows provides information for the Company's last three fiscal years concerning the compensation of John H. Welker, Numatics' CEO, and the two other individuals who were the highest paid executive officers of Numatics during 2001.
(1) Does not include perquisites and other personal benefits provided to named executives, the incremental cost of which to the Company in each case was less than 10% of the pertinent executive's salary and bonus for the year.
(2) For each executive, includes a Company contribution of $3,500 in 2001 and 2000 and $2,000 in 1999 to the Company's deferred contribution and employee savings plan and, in each year, a Company matching contribution to that plan based on the executive's contribution.
Welker Employment Agreement - ---------------------------
Numatics has an agreement with John Welker for his employment as CEO through December 31, 2003. Under this agreement, he is entitled to salary at specified rates ($380,000 for 2001, increasing annually thereafter to $440,000 for 2003), and to a cash performance bonus supplementing his salary determined pursuant to a formula based on the Company's operating performance relative to its operating budget. The agreement also contemplates that Numatics' Board of Directors annually will consider whether he should be paid a discretionary bonus, whether or not a performance bonus also is payable.
During the term of the agreement, Numatics is entitled to terminate Mr. Welker's employment at any time for any reason, upon 60 days' prior notice to him, and also is entitled to terminate him for "cause" or in certain cases of "permanent disability" (as defined in the agreement), upon less prior notice. If the Company were to terminate him not for cause or permanent disability, or terminated him for permanent disability without having maintained certain disability insurance in effect for his benefit, he would be entitled to continuation of his regular salary for a one-year period commencing on his termination date. In addition, if Mr. Welker were to die while employed by the Company, the equivalent of his regular salary for a 60-day period thereafter would be payable to his estate.
The agreement imposes non-competition obligations upon Mr. Welker during his employment and for one year thereafter and also imposes confidentiality obligations upon him, which continue for five years after his employment termination date.
For 2001, Mr. Welker voluntarily accepted less salary than he was entitled to under the agreement.
Deferred Compensation Plan - --------------------------
Numatics has a "top-hat" non-qualified deferred compensation plan, under which a small group of management-level employees could become entitled to receive cash distributions if certain conditions are satisfied. In general, under the plan as currently in effect, if a plan participant's employment with the Company continues until his death, retirement at or after age 65, or disability (determined as specified in the plan), or if a participant remains in active Company service through the later of (a) November 29, 2002 or (b) the twelfth anniversary of the commencement of his employment; and his employment thereafter terminates other than in an Involuntary Discharge for Cause (as defined in the plan), which involuntary discharge would cause the forfeiture of his right to any distribution, then Numatics would become obligated to pay his distribution, without interest, in regular installments over a five-year period commencing within 60 days of his employment termination date. Similar five-year installment payment obligations also would arise under the plan with respect to all participants if Numatics elected to terminate the plan or if a Company Change in Control (as defined in the plan) should occur.
However, the current terms of the plan also provide for a pro rata reduction in the amounts of annual installment payments to distributees and for lengthening the installment
payment period if Numatics becomes obligated to make payments to more than one distributee at the same time, to the extent (if any) necessary to prevent total annual payments to the distributees in excess of 3.0% of the Company's prior year earnings before interest, taxes, depreciation, and amortization. In addition, the plan provides that no distribution payments whatsoever may be made prior to January 31, 2004.
Six of the Company's employees participate in this plan, including all of the named executives. The distribution amounts for the named executives are as follows: Mr. Welker, $2,643,546; Mr. Robeson, $105,398; Mr. Dodds, $151,757.
Directors' Compensation - -----------------------
Numatics pays a meeting fee of $1,600 to each director not also employed by the Company for each meeting of the Numatics Board of Directors that he attends. For 2001, these fees were voluntarily waived.
During 2000, Numatics issued three of its non-employee directors options to purchase shares of Numatics common stock for $17.50 per share. Messrs. Tenniswood and Koch were each issued options to purchase 6,000 shares; Mr. Musat was issued options to purchase 3,000 shares. Each option is currently exercisable with respect to 40% of the covered shares and will become exercisable as to an additional 20% each year for the next three years if the holder continues to be a director. As a condition to exercising an option, the director will be required to enter into a stock transfer agreement that will, among other things, restrict the transfer of the purchased shares, give Mr. Welker the right to vote them, give the Company the right to repurchase them in certain events (including the death or resignation of the director), and give the director the right to sell them to the Company (subject to certain limitations and in any event only if the Board of directors determines that the purchase would be in the Company's best interest). Repurchases under the stock transfer agreement would be at a formula price based on the Company's operating income for its most recently completed twelve-month period. None of the options has been exercised.
Employee directors are not paid any additional compensation for Board service.
Compensation Committee Interlocks and Insider Participation - -----------------------------------------------------------
All decisions concerning the 2001 compensation of the Company's executive officers were made by the Numatics Board of Directors. Except as described below, no current or former officer and no current employee of Numatics or of any of its subsidiaries participated in deliberations of the Board concerning executive compensation during 2001.
Mr. Welker is the controlling shareholder of Numatics and its Chairman, CEO, and President. Until March 24, 1998, Mr. Tenniswood also was an executive officer of the Company. None of the other directors is or ever has been an officer or employee of Numatics or of any of its subsidiaries.
Numatics advanced $185,000 to Mr. Welker during 1996 to purchase the stock of
a departing executive, all of which remains outstanding. In February 1998, Numatics advanced an additional $400,000 to Mr. Welker, all of which also remains outstanding. These loans are unsecured, bear interest at 6.5% per annum, and are payable on demand.
Numatics, Mr. Welker, each other current executive officer of the Company, and all of its other employees who own Numatics' stock are party to a shareholder agreement that gives Numatics the option, but not the obligation, to purchase the shares of any shareholder party, including Mr. Welker, if the shareholder ceases to be a Company employee due to his death, his Total and Permanent Disability or Involuntary Discharge Without Cause (each as defined in the agreement), his retirement at or after age 65, or his resignation (if after the later of (i) November 29, 2002 or (ii) the twelfth anniversary of his date of hire by Numatics or its predecessor) for a redemption price to be determined by a formula intended to approximate the shares' fair market value at the time of employment termination. This agreement covers 93.34% of the outstanding shares of Numatics common stock, 82.23% of which are held by Mr. Welker.
The Company employs Mr. Jeffrey Welker, son of John Welker, as Application Engineer. His total 2001 compensation was $68,098.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Over 5% Owners - --------------
So far as is known to the Company, the only persons who are beneficial owners (within the meaning of SEC Rule 13d-3) of over 5.0% of Numatics' outstanding common shares are: (a) John H. Welker, whose ownership information is set forth below under "Management and Directors" and who maintains an address at the Company's principal executive office; and (b) Harvard Private Capital Holdings, Inc. (the address of which is c/o Charlesbank Capital Partners LLC, 600 Atlantic Avenue, Boston, Massachusetts 02210), which holds 159,575 shares, representing 6.66% of the outstanding shares.
Management and Directors - ------------------------
The table that follows sets forth the beneficial ownership (for purposes of SEC Rule 13d-3) of shares of Numatics' common stock by each Numatics director, each executive officer named in the Summary Compensation Table above, and all directors and current executive officers as a group.
Name of Beneficial Owner Shares Owned Percentage Owned -------------------------------------------------------------------------- John H. Welker (1) 2,237,660.00 93.34% Robert P. Robeson 78,391.25 3.27% David K. Dodds 112,881.25 4.71% David M. Tenniswood 0 -- Albert A. Koch 0 -- John P. Musat 0 -- John J. Collins 0 -- Mark D. Schindel 0 -- All directors and executive officers 2,237,660.00 93.34% as a group (8 persons) (1)
(1) Mr. Welker has sole voting and dispositive power over 1,971,196.25 (82.23%) of the reported shares, which are his own, and sole voting power over all other outstanding shares, excluding those owned by Harvard Private Capital Holdings, pursuant to a voting agreement among Numatics, Mr. Welker and all of Numatics' other shareholders who are Company employees.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is included under item 12 and incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. (All contained in Exhibit 99.1 to this report. Page numbers shown below.)
Consolidated Financial Statements Numatics, Incorporated Years ended December 31, 2001, 2000, and 1999 with Report of Independent Auditors
Page in Exhibit 99.1 Report of Independent Auditors 1 Consolidated Balance Sheets 2 Consolidated Statements of Operations 4 Consolidated Statements of Stockholders' Deficiency 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7
2. Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts (found at page of this report)
3. Exhibits. The following exhibits are filed with this Form 10-K or incorporated herein by reference:
Exhibit No Description - --------------------------------------------------------------------------------
(e) 3.1.1 Article of Incorporation of Numatics, as amended
(a) 3.1.2 Bylaws of Numatics
(a) 3.2.1 Articles of Incorporation of Numation, Inc., as amended
(a) 3.3.2 Bylaws of Numation, Inc., as amended
(a) 3.2.1 Articles of Incorporation of Numatech, Inc., as amended
(a) 3.3.2 Bylaws of Numatech, Inc., as amended
(a) 3.4.1 Articles of Incorporation of Micro-Filtration, Inc. as amended
(a) 3.4.2 Bylaws of Micro-Filtration, Inc., as amended
(a) 3.5.1 Articles of Incorporation of Ultra Air Products, Inc. as amended
(a) 3.5.2 Bylaws of Ultra Air Products, Inc., as amended
(a) 3.6.1 Articles of Incorporation of Microsmith, Inc., as amended
(a) 3.6.2 Bylaws of Microsmith, Inc., as amended
(a) 3.7.1 Articles of Incorporation of I.A.E. Incorporated
(a) 3.7.2 Bylaws of I.A.E. Incorporated
(a) 4.1.1 Indenture, dated as March 23, 1998, among Numatics, the Guarantors identified there, and First Trust National Association, as trustee
(a) 4.1.2 Form of Series B Notes (including related Subsidiary Guarantees by the Guarantors indentified in Indenture)
(c) 4.1.3 Supplemental Indenture, dated as of January 25, 1999, by which Empire Air Systems, Inc. became a Guarantor
(f) 4.2.1 Loan and Security Agreement dated as of November 28, 2001 between LaSalle Business Credit, Inc., as the lender and collateral agent, and Numatics, Incorporated, Micro-Filtration, Inc., Numation, Inc., Numatech, Inc., Ultra Air Products, Inc., Microsmith, Inc., and Empire Air Systems, Inc., as the borrowers (exhibits and schedules omitted)
(f) 4.2.2 Joint and Several Revolving Note dated as of November 28, 2001 from each of the borrowers under the Loan and Security Agreement to LaSalle Business Credit, Inc.
(f) 4.3.1 Credit Agreement dated as of November 28, 2001 between Numatics Ltd. and LaSalle Business Credit, a division of ABN AMRO Canada (exhibits and schedules omitted)
(f) 4.3.2 Revolving Promissory Note dated as of November 28, 2001 from Numatics Ltd. to LaSalle Business Credit, a division of ABN AMRO
Bank Canada
(f) 4.4.1 Note Purchase Agreement dated November 28, 2001 among Numatics, Incorporated, Numatics GmbH, Numatics Ltd., Micro-Filtration, Inc., Numation, Inc., Numatech, Inc., Ultra Air Products, Inc., Microsmith, Inc., and Empire Air Systems, Inc., American Capital Strategies, Ltd., and American Capital Financial Services, Inc., as agent (exhibits and schedules omitted)
(f) 4.4.2 Senior Secured Term A Note Due November 27, 2006 from Numatics, Incorporated to American Capital Strategies, Ltd.
(f) 4.4.3 Senior Secured Term B Note Due November 27, 2006 from Numatics, Incorporated to American Capital Strategies, Ltd.
(f) 4.4.4 Senior Secured Term A Note Due November 27, 2006 from Numatics Ltd. to American Capital Strategies, Ltd.
(f) 4.4.5 Senior Secured Term A Note Due November 27, 2006 from Numatics GmbH to American Capital Strategies, Ltd.
4.5.1 First Amendment to Loan and Security Agreement dated March 25, 2002 among Numatics, Incorporated, Micro-Filtration, Inc., Numation, Inc., Numatech, Inc., Ultra Air Products, Inc., Microsmith, Inc., Empire Air Systems, Inc., and LaSalle Business Credit, Inc.
4.5.2 First Amendment to Note Purchase Agreement dated March 29, 2002 among Numatics, Incorporated, Numatics, GmbH, Numatics Ltd., and American Capital Financial Services, Inc.
(a) 10.1.1 Securities Purchase Agreement, dated as of January 3, 1996, between Numatics and Harvard Private Capital Holdings
(a) 10.1.2 Numatics, Incorporated Tag-Along and Drag-Along Agreement, dated January 3, 1996, among Numatics, Harvard Private Capital Holdings, and shareholders of Numatics
(a) 10.1.3 Registration Agreement, dated as of January 3, 1996, between Numatics and Harvard Private Capital Holdings
(a) 10.1.4 Form of Guaranty Agreement between Harvard Private Capital Holdings and I.A.E. Incorporated, dated as of March 23, 1998 (Each of the other guarantors has executed an Amended and Restated Guaranty Agreement in substantially the same form.)
(a) 10.1.5 Agreement, dated as of March 23, 1998, between Numatics and Harvard Private Capital Holdings
(a) 10.2 Amended and Restated Stock Transfer Agreement, dated December 28, 1995, among Numatics, John H. Welker, individually and as trustee of the John H. Welker Trust u/a dtd December 28, 1995, David K. Dodds, Donald E. McGeachy, Henry Fleischer, individually and as trustee of the Henry Fleischer Trust u/a dtd March 10, 1993, Robert P. Robeson, John
A. Acuff, Bruce W. Hoppe, David King, and Philip Robinson
(b) 10.2.1 First Amendment, dated June 30, 1998, to Amended and Restated Stock Transfer Agreement
(a) 10.3 Voting Agreement, dated as November 29, 1990, among Numatics (under its former name, Numatics Acquisition Corporation) and certain shareholders of Numatics
(a) 10.4 Employment Agreement, dated January 3, 1996, between Numatics and John H. Welker**
(a) 10.5 Numatics, Incorporated Amended and Restated Deferred Compensation Plan, adopted December 28, 1995, and related acknowledgements by Eligible Employees (as therein defined)**
(d) 10.6.1 Numatics, Incorporated Incentive Plan adopted June 29, 2000**
(d) 10.6.2 Form of Stock Transfer Agreement referred to in Incentive Plan**
21.1 List of subsidiaries of Numatics
99.1 Consolidated Financial Statements--Numatics, Incorporated--Years ended December 31, 2001, 2000 and 1999 with Report of Independent Auditors
(a) Incorporated by reference to exhibit to Registration Statement on Form S-4 filed on April 29, 1998 (File No. 333-51355)
(b) Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-4 filed on July 10, 1998 (File No. 333-51355)
(c) Incorporated by reference to exhibit to Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 333-51355)
(d) Incorporated by reference to exhibit to Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 333-51355)
(e) Incorporated by reference to exhibit to Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 333-51355)
(f) Incorporated by reference to exhibit to Form 8-K filed on December 3, 2001 (File No. 333-51355)
** Indicates contract or compensatory plan or arrangement with one or more Numatics executive officers and/or directors
(b) Reports on Form 8-K.
On December 3, 2001 the Company filed with the Securities and Exchange Commission a Form 8-K, dated November 28, 2001, reporting the successful refinancing of the Company's credit facility.
SCHEDULE II - Valuation and Qualifying Accounts (in thousands)
(1) Uncollectible accounts charged off net of recoveries (2) Reduction in inventory reserves for inventory disposed of during the year and allowance for valuation changes (3) Utilization of foreign net operating loss carry-forwards.
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.
NUMATICS, INCORPORATED
/s/ John H. Welker -------------------------------- John H. Welker President and Chief Executive Officer
Date: March 29, 2002
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Capacity Date
/s/ John H. Welker President and Chief Executive March 29, 2002 - --------------------------- Officer and Director John H. Welker
/s/ Robert P. Robeson Vice President, Treasurer and March 29, 2002 - --------------------------- Chief Financial Officer (also Robert P. Robeson principal accounting officer)
/s/ David M. Tenniswood Director March 29, 2002 - --------------------------- David M. Tenniswood
/s/ Albert A. Koch Director March 29, 2002 - --------------------------- Albert A. Koch
/s/ John P. Musat Director March 29, 2002 - --------------------------- John P. Musat
/s/ John J. Collins Director March 29, 2002 - --------------------------- John J. Collins
Director March 29, 2002 - --------------------------- Mark D. Schindel
S-1
Exhibit Index
Exhibit No Description - --------------------------------------------------------------------------------
(e) 3.1.1 Article of Incorporation of Numatics, as amended
(a) 3.1.2 Bylaws of Numatics
(a) 3.2.1 Articles of Incorporation of Numation, Inc., as amended
(a) 3.3.2 Bylaws of Numation, Inc., as amended
(a) 3.2.1 Articles of Incorporation of Numatech, Inc., as amended
(a) 3.3.2 Bylaws of Numatech, Inc., as amended
(a) 3.4.1 Articles of Incorporation of Micro-Filtration, Inc. as amended
(a) 3.4.2 Bylaws of Micro-Filtration, Inc., as amended
(a) 3.5.1 Articles of Incorporation of Ultra Air Products, Inc. as amended
(a) 3.5.2 Bylaws of Ultra Air Products, Inc., as amended
(a) 3.6.1 Articles of Incorporation of Microsmith, Inc., as amended
(a) 3.6.2 Bylaws of Microsmith, Inc., as amended
(a) 3.7.1 Articles of Incorporation of I.A.E. Incorporated
(a) 3.7.2 Bylaws of I.A.E. Incorporated
(a) 4.1.1 Indenture, dated as March 23, 1998, among Numatics, the Guarantors identified there, and First Trust National Association, as trustee
(a) 4.1.2 Form of Series B Notes (including related Subsidiary Guarantees by the Guarantors indentified in Indenture)
(c) 4.1.3 Supplemental Indenture, dated as of January 25, 1999, by which Empire Air Systems, Inc. became a Guarantor
(f) 4.2.1 Loan and Security Agreement dated as of November 28, 2001 between LaSalle Business Credit, Inc., as the lender and collateral agent, and Numatics, Incorporated, Micro-Filtration, Inc., Numation, Inc., Numatech, Inc., Ultra Air Products, Inc., Microsmith, Inc., and Empire Air Systems, Inc., as the borrowers (exhibits and schedules omitted)
(f) 4.2.2 Joint and Several Revolving Note dated as of November 28, 2001 from each of the borrowers under the Loan and Security Agreement to LaSalle Business Credit, Inc.
(f) 4.3.1 Credit Agreement dated as of November 28, 2001 between Numatics Ltd. and LaSalle Business Credit, a division of ABN AMRO Canada (exhibits and schedules omitted)
(f) 4.3.2 Revolving Promissory Note dated as of November 28, 2001 from Numatics Ltd. to LaSalle Business Credit, a division of ABN AMRO Bank Canada
(f) 4.4.1 Note Purchase Agreement dated November 28, 2001 among Numatics, Incorporated, Numatics GmbH, Numatics Ltd., Micro-Filtration, Inc., Numation, Inc., Numatech, Inc., Ultra Air Products, Inc., Microsmith, Inc., and Empire Air Systems, Inc., American Capital Strategies, Ltd., and American Capital Financial Services, Inc., as agent (exhibits and schedules omitted)
4.5.1 First Amendment to Loan and Security Agreement dated March 25, 2002 among Numatics, Incorporated, Micro-Filtration, Inc., Numation, Inc., Numatech, Inc., Ultra Air Products, Inc., Microsmith, Inc., Empire Air Systems, Inc., and LaSalle Business Credit, Inc.
4.5.2 First Amendment to Note Purchase Agreement dated March 29, 2002 among Numatics, Incorporated, Numatics, GmbH, Numatics Ltd., and American Capital Financial Services, Inc.
(f) 4.4.2 Senior Secured Term A Note Due November 27, 2006 from Numatics, Incorporated to American Capital Strategies, Ltd.
(f) 4.4.3 Senior Secured Term B Note Due November 27, 2006 from Numatics, Incorporated to American Capital Strategies, Ltd.
(f) 4.4.4 Senior Secured Term A Note Due November 27, 2006 from Numatics Ltd. to American Capital Strategies, Ltd.
(f) 4.4.5 Senior Secured Term A Note Due November 27, 2006 from Numatics GmbH to American Capital Strategies, Ltd.
(a) 10.1.1 Securities Purchase Agreement, dated as of January 3, 1996, between Numatics and Harvard Private Capital Holdings
(a) 10.1.2 Numatics, Incorporated Tag-Along and Drag-Along Agreement, dated January 3, 1996, among Numatics, Harvard Private Capital Holdings, and shareholders of Numatics
(a) 10.1.3 Registration Agreement, dated as of January 3, 1996, between Numatics and Harvard Private Capital Holdings
(a) 10.1.4 Form of Guaranty Agreement between Harvard Private Capital Holdings and I.A.E. Incorporated, dated as of March 23, 1998 (Each of the other guarantors has executed an Amended and Restated Guaranty Agreement in substantially the same form.)
(a) 10.1.5 Agreement, dated as of March 23, 1998, between Numatics and Harvard Private Capital Holdings
(a) 10.2 Amended and Restated Stock Transfer Agreement, dated December 28, 1995, among Numatics, John H. Welker, individually and as trustee of the John H. Welker Trust u/a dtd December 28, 1995, David K. Dodds, Donald E. McGeachy, Henry Fleischer, individually and as trustee of the Henry Fleischer Trust u/a dtd March 10, 1993, Robert P. Robeson, John A. Acuff, Bruce W. Hoppe, David King, and Philip Robinson
(b) 10.2.1 First Amendment, dated June 30, 1998, to Amended and Restated Stock Transfer Agreement
(a) 10.3 Voting Agreement, dated as November 29, 1990, among Numatics (under its former name, Numatics Acquisition Corporation) and certain shareholders of Numatics
(a) 10.4 Employment Agreement, dated January 3, 1996, between Numatics and John H. Welker**
(a) 10.5 Numatics, Incorporated Amended and Restated Deferred Compensation Plan, adopted December 28, 1995, and related acknowledgements by Eligible Employees (as therein defined)**
(d) 10.6.1 Numatics, Incorporated Incentive Plan adopted June 29, 2000**
(d) 10.6.2 Form of Stock Transfer Agreement referred to in Incentive Plan**
21.1 List of subsidiaries of Numatics
99.1 Consolidated Financial Statements--Numatics, Incorporated--Years ended December 31, 2001, 2000 and 1999 with Report of Independent Auditors
(a) Incorporated by reference to exhibit to Registration Statement on Form S-4 filed on April 29, 1998 (File No. 333-51355)
(b) Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-4 filed on July 10, 1998 (File No. 333-51355)
(c) Incorporated by reference to exhibit to Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 333-51355)
(d) Incorporated by reference to exhibit to Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 333-51355)
(g) Incorporated by reference to exhibit to Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 333-51355)
(h) Incorporated by reference to exhibit to Form 8-K filed on December 3, 2001 (File No. 333-51355)
** Indicates contract or compensatory plan or arrangement with one or more Numatics executive officers and/or directors