ITEM 1. BUSINESS
GENERAL
Stanadyne Corporation ("Stanadyne" or the "Company"), formerly known as Stanadyne Automotive Corp., is a designer and manufacturer of highly engineered, precision manufactured engine components, including fuel injection equipment for diesel engines and hydraulic lash compensating devices primarily for gasoline engines (the latter commonly known as "hydraulic valve lifters"). With over 100 years of machining experience and over 50 years as a supplier of diesel fuel injection equipment and hydraulic lash devices, Stanadyne's core competencies in product design, precision machining, and the assembly and testing of complex components have earned the Company a reputation for innovative, high quality products. The Company possesses an extremely broad range of manufacturing technology and know-how and is capable of high-volume production runs, machining high-quality components within tolerances of 20 millionths of an inch on a cost effective basis.
The Company sells engine components to original equipment manufacturers ("OEMs") in a variety of applications, including automobiles, light duty trucks, agricultural and construction vehicles and equipment, industrial products and marine equipment. The Company also sells replacement units and parts through its aftermarket distribution network. The Company conducts its business through two principal operating segments: the Diesel Group, which accounted for 85% of the Company's 2001 net sales, and Precision Engine Products Corp. ("Precision Engine"), a wholly-owned subsidiary, which accounted for 15% of the Company's 2001 net sales. Additional segment information can be found in Notes 17 and 18 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.
The Company is a wholly-owned subsidiary of Stanadyne Automotive Holding Corp. ("Holdings"). The Company and Holdings were formed by American Industrial Partners Capital Fund II, L.P. ("AIP") upon the purchase of Stanadyne Automotive Corp. and Subsidiaries (the "Predecessor") from Metromedia Company (the "Sellers") on December 11, 1997 (the "Acquisition").
THE DIESEL GROUP
The Diesel Group is one of only four independent worldwide manufacturers selling to the geographic areas in which the Company competes. Net sales for the Diesel Group were $216.2 million, $248.4 million and $231.0 million for 2001, 2000 and 1999, respectively. Operating income for the Diesel Group was $15.0 million, $23.9 million and $17.7 million for 2001, 2000 and 1999, respectively. Total assets of the Diesel Group were $241.1 million, $257.4 million and $270.5 million at December 31, 2001, 2000 and 1999, respectively.
PRODUCTS
The Diesel Group produces fuel injection equipment for diesel engines of up to 250 horsepower, an engine range comprising approximately 90% of all diesel engines produced worldwide. The Diesel Group sells its fuel injection products to its customers on an individual component basis or by complete line. The primary focus of the Diesel Group is on the off highway agricultural and
industrial segment of the market. Fuel pumps and injectors, the Diesel Group's primary products, are the most highly engineered, precision manufactured components on a diesel engine and comprise the core components of a diesel engine's fuel system. Because fuel system components are so elemental to the proper functioning and optimal performance of a diesel engine, they are essentially custom engineered for a specific engine platform. As a result, the Company typically supplies these components on a sole source basis for the life of engine platforms. The Diesel Group also manufactures diesel fuel filters, fuel heaters and water separators, oil pumps and other precision manufactured components and distributes diesel fuel conditioners, stabilizers and diesel engine diagnostic equipment.
CUSTOMERS
The Diesel Group's primary customers are OEMs of diesel engines. The Diesel Group's four largest customers, Deere & Company ("Deere"), General Motors Corporation ("GM"), Perkins Engines Company Limited, and Ford Motor Company ("Ford), accounted for approximately $136.5 million, or approximately 63.1% of the Diesel Group's net sales. The Diesel Group had two customers that accounted for more than 10% of 2001 net sales: Deere accounted for 26.2% and GM accounted for 23.2% of the Diesel Group's 2001 net sales.
The Diesel Group supports the servicing of the engine and its own products through sales of aftermarket units and parts to the service organizations of its OEM customers and through its own global network of authorized distributors and dealers.
INDIA BUSINESS STATUS
On October 22, 2001, the Company formed a joint venture with Amalgamations Private Limited to form a new company in the state of Tamil Nadu, India. The joint venture is named Stanadyne Amalgamations Private Limited ("SAPL") and will manufacture diesel fuel injection equipment for the domestic and export markets starting in 2003. The Diesel Group holds a 51% controlling share of SAPL.
PLANT CLOSING
On September 9, 1998, the Company announced the closure of its manufacturing facility in Bari, Italy. The Bari plant was part of a wholly-owned subsidiary, Stanadyne, SpA ("SpA"), which is headquartered in Brescia, Italy. This action was taken because of continuing financial losses at Bari resulting from worldwide excess manufacturing capacity for the types of diesel fuel injectors produced there. The cost of closing the operation resulted in a charge to 1998 earnings of $4.2 million. The Company favorably concluded the major cost elements of the plant closure in the third quarter of 1999 and as a result recorded a $1.9 million savings, primarily as a result of lower severance costs, to the reserve established in 1998.
PRECISION ENGINE
Precision Engine is a major independent (non-captive) manufacturer of hydraulic valve lifters primarily for gasoline engines. Net sales for Precision Engine were $38.2 million, $44.0 million and $50.5 million for 2001, 2000 and 1999, respectively. Operating (loss) income for Precision Engine was $(5.9) million, $0.0 million and $4.2 million for 2001, 2000 and 1999, respectively.
Total assets of Precision Engine were $48.5 million, $46.0 million and $53.6 million at December 31, 2001, 2000 and 1999, respectively.
PRODUCTS
Precision Engine designs and manufactures four types of hydraulic valve lifters: roller rocker arm assemblies, lash adjusters, roller valve lifters and slipper valve lifters. These products convert the rotary motion of a camshaft into a reciprocating motion and allow for the adjustment of lash (clearance) as valves are opened and closed in the cylinder head of an engine. Roller rocker arms accounted for 63.1% of Precision Engine's 2001 net sales.
CUSTOMERS
Precision Engine's primary customers are OEMs. DaimlerChrysler Corp. ("DCX"), Ford and Tritec Motors LTDA. ("Tritec") accounted for 49.4%, 14.3% and 14.0%, respectively, of Precision Engine's 2001 net sales. Precision Engine also sells to several companies for distribution into the aftermarket.
BRAZIL BUSINESS STATUS
Precision Engine was selected in 1997 as the sole supplier of roller rocker arm assemblies for use on an engine to be manufactured in Brazil by Tritec, a Brazilian joint venture company formed by DCX and BMW AG. To support this new business opportunity, Precision Engine established a new subsidiary in Brazil, Precision Engine Products LTDA. ("PEPL"), on October 16, 1998. This limited liability company manufactures, assembles and tests roller rocker arm assemblies for supply to Tritec. Investment in PEPL began in the first quarter of 1999. Limited production at PEPL began in the fourth quarter of 2000, with a ramp up to mature production completed during 2001.
COMPETITION
Because of the technical expertise required to design and manufacture the Company's products to the tolerances required, the existence of longstanding supply relationships in the engine component business and the significant capital expenditures and lead time required to enter the business, there are a limited number of manufacturers selling to the global markets in which the Company operates. The Company competes on the basis of technological innovation, product quality, processing and manufacturing capabilities, service support and price.
The main competitors of the Diesel Group are Robert Bosch GmbH, Delphi Automotive Systems ("Delphi") and Denso (formerly Nippondenso of Japan). In 1999, several acquisitions occurred within the diesel fuel injection industry. Robert Bosch GmbH, the largest fuel injection manufacturer, acquired the controlling share of ownership in Zexel of Japan. Also, Delphi entered the diesel market through the purchase of Lucas Diesel Systems from TRW Inc.
The main competitors of Precision Engine are INA Walzlager Schaeffler KG, Eaton Corporation, Delphi and in the aftermarket, WA Thomas (formerly the Hylift division of SPX Corporation).
RAW MATERIALS AND COMPONENT PARTS
The Company's products are made largely of specially designed metal parts, most of which are designed, purchased, cast or stamped and machined by the Company to its own technical specifications. Metallic raw materials such as steel, aluminum, copper and brass are commodity items readily available from a number of suppliers. Certain parts, such as electronic components, are made to the Company's specifications. Other parts, such as fasteners, are purchased by the Company from outside suppliers as standardized parts or are made to the Company's specifications. Although from time to time the Company has experienced temporary supply shortages due to localized conditions, no such shortage has materially adversely affected the Company.
PATENTS AND TRADEMARKS
The Company relies upon patent, trademark and copyright protection as well as upon unpatented technological know-how and other trade secrets for certain products, components, processes and applications. However, the Company's operations are not dependent upon any single or related group of patents, copyrights or trademarks or their duration. The Company considers its proprietary information important, especially in the maintenance of its competitive position in the aftermarket business, and takes actions to protect its intellectual property rights.
EMPLOYEES
At December 31, 2001, the Company employed 2,043 persons of whom approximately 30% were salaried and 70% were hourly employees. All of the Company's employees are non-unionized with the exception of those in SpA. The Company believes its relations with its employees are good.
TECHNOLOGY, RESEARCH AND DEVELOPMENT
Engine manufacturers are required to continually improve engine performance and fuel economy. Accordingly, the Company's research and development investment is significant. In general, the Company funds its own research and development expenses, although during the pre-production program phase some of those expenses may be customer-funded. Research and development costs incurred for 2001, 2000 and 1999 were $11.6 million, $10.1 million and $9.1 million, respectively, of which $1.4 million, $0.9 million and $0.6 million, respectively, were reimbursed by customers. The Diesel Group accounts for over 95% of these amounts.
Once an OEM commits to purchasing a product from the Company, usually one to three years into the development or application process, the Company may need to allocate capital for the machinery, equipment and tooling necessary for engine program launch, ramp-up and product volume increases. Furthermore, given the significant existing capital investment in plant and equipment already made by the Company, the Company has on-going programs to maintain, upgrade and replace its investments. In 2001, 2000 and 1999, the Company spent $18.0 million, $9.5 million and $11.4 million, respectively, on capital investments.
FINANCIAL INFORMATION ABOUT INTERNATIONAL AND DOMESTIC OPERATIONS AND EXPORT SALES
The Company has manufacturing operations in the United States, Italy and Brazil. The products manufactured in the United States and Italy are sold within their respective domestic markets, as well as exported throughout the world. These products are sold to both OEM and aftermarket customers. The products manufactured in Brazil are sold only to an OEM customer in Brazil.
The sales to OEM and aftermarket customers during 2001, 2000 and 1999 were as follows:
Information regarding net sales to geographic areas, operating income (loss) from manufacturing facilities in geographic areas and assets by geographic areas for the years ended December 31, 2001, 2000 and 1999 appear below and in Note 18 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.
The Company's worldwide operations are subject to the risks normally associated with foreign operations, including but not limited to, the disruption of markets, changes in export or import laws, labor unrest, political instability, restrictions on transfers of funds, unexpected changes in regulatory environments, difficulty in obtaining distribution and support, and potentially adverse tax consequences. In addition, even though the Company generally matches, to the extent possible, related costs and revenues in a single currency, and generally includes exchange rate protections in its sales contracts, the U.S. dollar value of the Company's foreign sales varies with foreign currency
exchange rate fluctuations. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS
The Company's facilities are subject to federal, state and local environmental requirements, including those governing discharges to the air and water, the handling and disposal of industrial and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances. The Company operates under various environmental permits and approvals, the violation of which may subject the Company to fines and penalties. There are no known violations of environmental permits or approvals that may have a material adverse effect to the Company's financial position or results of operations. The Company's manufacturing operations involve the use of hazardous substances and, if a release of hazardous substances occurs or has occurred on or from the Company's facilities, the Company may be held liable and may be required to pay the cost of remedying the condition. The amount of any such liability could be material. Pursuant to the terms of the Acquisition, the Sellers have agreed to conduct and complete remediation of soil and groundwater contamination at the Company's Windsor, CT and Jacksonville, NC facilities. While many of these remediations are underway and the Sellers have agreed to complete these remediations and have indemnified the Company with respect to these matters and certain other environmental matters, there can be no assurance that the Sellers will have the ability to completely fulfill their obligations to indemnify the Company for such matters. If the Sellers are unable to fulfill their obligations, the Company will be responsible for such matters and the cost could be material. Estimates of the cost at the time of the Acquisition for the remediations to be completed by the Sellers at the Windsor, CT and Jacksonville, NC facilities were $1.7 million and $0.3 million, respectively. Additional information can be found in Note 16 of Notes to Consolidated Financial Statements contained in Item 8 of this Report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company, including financial statements, notes to financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. All of these forward-looking statements are based on estimates and assumptions made by the management of the Company which, although believed to be reasonable, are inherently uncertain. Therefore, undue reliance should not be placed upon such estimates and statements. No assurance can be given that any such estimates will be realized, and actual results may differ materially from those contemplated by such forward-looking statements. Factors that may cause such differences include: (1) increased competition; (2) increased costs; (3) loss or retirement of key members of management; (4) increases in the Company's cost of borrowing or inability or unavailability of additional debt or equity capital; (5) loss of material customer; (6) adverse state or federal legislation or regulation or adverse determinations in pending litigation; and (7) changes in general economic conditions and/or in the automobile, light duty trucks, agricultural and construction vehicles and equipment, industrial products and marine equipment markets in which the Company competes. Many of such factors are beyond the control of the Company and its management. The forward-looking statements contained in this report speak only as of the date on which such statements are made. The Company assumes no duty to update them reflect new, changing or unanticipated events or circumstances.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are located in Windsor, Connecticut. The Company believes that substantially all of its properties and equipment are in good condition, and that it has sufficient capacity to meet its current and projected manufacturing and distribution needs.
Below is a summary of the existing facilities:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal and regulatory proceedings generally incidental to its business. While the results of any litigation or regulatory issue contain an element of uncertainty, management believes that the outcome of any known, pending or threatened legal proceeding, or all of them combined, will not have a materially adverse effect on the Company's financial position or results of operations.
The Company is subject to potential environmental liability and various claims and legal actions, which are pending or may be asserted against the Company concerning environmental matters. Reserves for such liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. In management's opinion, the aforementioned claims will be resolved without materially adverse effects on the results of operations, financial position or cash flows of the Company. In conjunction with the Acquisition of the Company from the Sellers on December 10, 1997, the Sellers agreed to partially indemnify the Company and AIP relating to certain environmental matters. See "Environmental Matters" in Item 1 of this report.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 1, 2002, Holdings was the holder of record of all the shares of common stock, par value, $.01 per share (the "Common Stock"), of the Company. There is no established trading market for the Common Stock. The Company has never paid or declared a cash dividend on the Common Stock. Furthermore, the Company is restricted from paying dividends under the covenants of its revolving credit and term loan agreements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated historical financial and operating data of the Company and its subsidiaries for the years ended 2001, 2000, 1999 and 1998 and the 21 day period ended December 31, 1997 and of the Predecessor for the 344 day period ended December 10, 1997. All data prior to December 11, 1997 was taken from the consolidated financial statements of the Predecessor and represents the results of operations of the Predecessor through the date of the Acquisition. The selected consolidated financial data for the years ended December 31, 2001, 2000, 1999 and 1998 and the 21 day period ended December 31, 1997 were derived from the consolidated financial statements of the Company and represent the results of operations of the Company subsequent to the Acquisition. The data presented below should be read in conjunction with the consolidated financial statements and the related footnotes and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
(a) Net income in 1999 included $1.9 million of savings in selling, general and administrative expenses as a result of favorably concluding the major elements of plant closure costs. Net loss for 1998 includes plant closure costs of $4.2 million, of which approximately $0.8 million is included in cost of goods sold and the remaining $3.4 million is included in selling, general and administrative expenses.
(b) Net income for 2000 and 1999 includes an extraordinary gain of $1.0 million and $0.8 million, respectively, net of income taxes, for the early extinguishment of debt.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following table sets forth certain performance details for the periods shown. The amounts are presented in thousands of dollars and as a percentage of net sales.
COMPARISON OF RESULTS OF OPERATIONS
OVERVIEW
In 2001, weak global economy and the resulting negative impact on demand for the Company's products provided the backdrop for a 13% reduction in sales from the prior year and a net loss of $1.4 million. When compared to 2000, revenues by segment show Diesel Group and Precision Engine sales down by 13.0% and 13.2%, respectively, with all major product lines and businesses reporting lower results. Net losses were driven by a $6.0 million net loss in Precision Engine due primarily to lower customer demand for DaimlerChrysler ("DCX") vehicles equipped with the Company's products and $0.8 million in unrealized foreign exchange losses on operations in Brazil. The Company proactively made adjustments to the Company's cost structure throughout 2001, making workforce adjustments as needed and pursuing other cost reduction projects.
Despite the relatively poor business climate, the Company reported progress with several activities during 2001 including: the preparation for launch in early 2002 of production of non-proprietary products in the new Precision Components and Assembly ("PCA") product line; the near-completion of implementation activities for the early 2002 launch of the new Enterprise Resource Planning ("ERP") system; the completion of a long-term supply agreement with Deere; and the ramp-up to full production in the Brazilian subsidiary, PEPL.
2001 COMPARED TO 2000
Net Sales. Net sales decreased in 2001 from 2000 by $38.0 million or 13.0%. Lower sales in Diesel Group, down $32.1 million, or 13.0%, included an approximate $12 million year-to-year reduction in business associated with two OEM programs that ended during 2000: the GM 6.5l engine equipped with a DS fuel pump; and the Ford 2.5l Transit engine equipped with RSN injectors. The balance of the sales decline was due to lower demand from major agricultural and industrial customers. Precision Engine's sales in 2001 decreased by $5.8 million or 13.2% versus 2000. This dramatic downturn was due almost entirely to $10.2 million less sales in the US to DCX associated with reduced vehicle sales, partially offset by new sales in Brazil to Tritec of $5.4 million.
Gross Profit. Due primarily to the substantially lower sales volumes, gross profit decreased in 2001 from 2000 by $16.6 million or 26.3%. As a percentage of net sales, gross profit in total decreased to 18.2% from 21.5%. Results by segment show gross profit for the Diesel Group declining to 21.4% of net sales in 2001 from 23.0% in 2000, while Precision Engine reported a negative gross profit of 0.1% versus a positive result of 12.9% a year earlier. In addition to the impact of lower sales volumes in 2001, the Diesel Group gross profit was impacted by $1.0 million of start up costs associated with the new PCA product line. Gross profits for Precision Engine suffered in 2001 due to the combined impact of lower sales volumes, downward price pressure from DCX, and a shift in sales from higher to lower margin products.
Selling, General and Administrative Expense. SG&A expense decreased in 2001 from 2000 by $1.3 million or 4.1%. As a percentage of net sales, SG&A increased to 12.1% from 11.0%. The overall reduction included $1.0 million lower bonus and $0.5 million lower freight on sales expenses in 2001, offset by additional amounts of $1.1 million for ERP implementation and $0.8 million of unrealized foreign exchange losses on operations in Brazil. One time expenses incurred in 2000 included $0.6 million in PEPL startup costs and $0.7 million associated with an unsuccessful union organizing effort at the Windsor, Connecticut facility.
Amortization of Intangibles. Amortization of intangible assets totaled $5.4 million in 2001 and $5.7 million in 2000. Amortization of goodwill was $1.9 million in both 2001 and 2000.
Operating Income. Operating income decreased in 2001 from 2000 by $14.9 million or 62.0% and as a percentage of sales decreased to 3.6% from 8.2%. The decrease was due primarily to lower sales and the resulting impact on gross profits in both segments, only partially offset by lower SG&A expenses.
Net (Loss) Income. A net loss of $1.4 million in 2001 represented a deterioration of $9.2 million from the prior year net income of $7.8 million. The decrease in net income was driven by the $14.9 million reduction in operating income. A reduction in debt and lower borrowing rates in 2001 resulted in $1.5 million less net interest expense. Also, the lower earnings in 2001 translated into $5.1 million less income taxes. The Company's effective tax rate was (35.7)% and 44.4% in 2001 and 2000, respectively. The negative tax rate in 2001 was due to the effect of foreign and state taxes on net losses. Additional information can be found in Note 11 of the Notes to Consolidated Financial Statements contained in Item 8 of this Report.
2000 COMPARED TO 1999
Net Sales. Net sales increased in 2000 from 1999 by $10.9 million or 3.9%. Higher sales in Diesel Group, up $17.4 million, or 7.5%, related to increased demand for fuel pumps and filter products. Sales of fuel pump products increased $15.0 million, with $11.8 million of the increase traceable to GM where service demand remained strong following the end of OEM shipments in the third quarter for the 6.5l engine. Sales of filter products in 2000 were $10.0 million higher than 1999 due primarily to new applications introduced at Ford and New Holland as well as increased aftermarket demand for filter elements. Precision Engine's sales in 2000 decreased by $6.5 million or 12.8% versus 1999, with fourth quarter sales down $4.2 million or 34.5%. This dramatic downturn was due almost entirely to lower demand from DCX based on reduced car sales.
Gross Profit. Gross profit improved in 2000 from 1999 by $5.5 million or 9.6%. As a percentage of net sales, gross profit improved to 21.5% from 20.4%. Reflective of strong customer demand for fuel pumps and filter products, all of this increase came from the Diesel Group, where gross profit as a percentage of net sales was 23.0% in 2000, up from 20.8% in 1999. In addition to the higher earnings on increased sales volumes in the Diesel Group, gross profit benefited from cost reduction programs completed during 1999 and 2000. Lower sales volumes drove gross profits lower in Precision Engine during the year, with the result for 2000 at 12.9% of net sales down from 18.6% in 1999.
Selling, General and Administrative Expense. SG&A expense increased in 2000 from 1999 by $3.6 million or 12.4%. As a percentage of net sales, SG&A increased to 11.0% from 10.1%. Approximately $1.9 million of this change was due to the savings recorded in 1999 associated with the Diesel Group's successful conclusion of the closure of its Bari, Italy location. Other significant contributors to the overall increase included $0.6 million increase in PEPL startup costs in Precision Engine and $0.7 million associated with an unsuccessful union organizing effort by the UAW at the Windsor, Connecticut facility.
Amortization of Intangibles. Amortization of intangible assets totaled $5.7 million in 2000 and $5.9 million in 1999. Amortization of goodwill was $1.9 million in both 2000 and 1999.
Operating Income. Operating income increased in 2000 from 1999 by $2.1 million or 9.6%. As a percentage of sales, operating income increased to 8.2% from 7.8%. The increase was due to improved gross profits in the Diesel Group as noted above, partially offset by lower gross profits in Precision Engine and higher SG&A expenses in both segments.
Net Income. Net income increased to $7.8 million in 2000 from $5.9 million in 1999, an increase of $1.9 million or 31.8%. The increase in net income was due to a combination of a $2.1 million improvement in operating income, a $1.9 million reduction in net interest expense and an extraordinary gain of $0.2 million, net of taxes, associated with the early retirement of Senior Subordinated Notes ("Notes"). Net income was reduced by $1.7 million in additional income taxes based on higher earnings and $0.6 million in federal taxes associated with an examination of fiscal years 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company is highly leveraged as a result of the Acquisition and will continue to have a significant amount of indebtedness. As of December 31, 2001, the Company had $112.3 million of indebtedness. The Company's principal sources of liquidity are cash flow from operations supplemented by borrowings under its revolving credit facility. The Company occasionally has utilized capital leases and, for its Italian subsidiary, SpA, has overdraft facilities with local financial institutions. In addition, subject to the restrictions in the Company's lending agreements, additional senior or other indebtedness may be incurred from time to time to finance acquisitions, capital expenditures or other general corporate purposes.
Net cash flow provided by operating activities was $14.1 million, $35.1 million and $25.9 million in 2001, 2000 and 1999, respectively. Cash flows from operations in 2001 were $21.0 million less than 2000 due to: a $9.2 million year-to-year swing from net income to net losses; a $4.0 million increase in 2001 in funds required for working capital, noncurrent asset accounts and noncurrent liability accounts as compared to a $5.6 million decrease in the prior year; and a decrease in deferred taxes of $2.4 million. Accounts receivable balances increased by $4.8 million during 2001, as compared to a $7.7 million reduction in the prior year. These changes reflect the downturn in business levels in late 2000 and then some strengthening in late 2001. Operating cash flows in 2000 were enhanced by $4.2 million due to inventory reduction and reduced by $0.9 million of inventory growth in 2001 for the same reasons.
Capital expenditures were $18.0 million, $9.5 million and $11.4 million in 2001, 2000 and 1999, respectively. These amounts reflect cash outlays for the purchase of machinery and equipment and the maintenance of existing facilities. Management estimates that the Company has historically spent, and will continue to spend, approximately $5.0 to $6.0 million annually on maintenance of plant and equipment. The remaining non-maintenance capital expenditures represent cash outlays for equipment, machinery or plant expansion in order to support new engine platforms on which the Company intends to supply engine components, to effect cost reductions through process improvements, and to increase capacity to support increased production volumes on existing engine platforms. The Company's capital expenditures of $18.0 million in 2001 were higher than recent years because of $4.7 million expended for computer hardware and software to support the Company's ERP Program and $2.8 million expended for a product launch in the new Diesel Group PCA Program.
Cash flow from financing activities for 2001 resulted in a net reduction to cash of $10.6 million. Facing risk of non-compliance with certain financial covenants contained in the Credit Agreement, the Company concluded the Third Amendment to the Credit Agreement during the third quarter of 2001. This Amendment revised certain quarterly financial performance covenants and borrowing rates. Principal payments of long-term debt totaled $16.0 million during 2001, including a $10.0 million pre-payment associated with the Third Amendment to the Credit Agreement. As of December 31, 2001, there was $5.4 million in borrowings under the revolving credit facility and $0.5 million net borrowings of Stanadyne, SpA's overdraft facility. Scheduled payments of capital lease obligations totaled $0.5 million in 2001.
Management believes that cash flows from operations and availability of additional borrowings under the revolving credit facility will provide adequate funds for the Company's foreseeable working capital needs, planned capital expenditures and debt service obligations including long-term debt payments totaling $5.6 million in 2002. At December 31, 2001, the Company had $30 million in the revolving credit line available through December 11, 2003, of which $5.4 million was used for borrowings and $4.4 million was used for standby letters of credit, leaving $20.2 million available for borrowings. The Company's ability to fund its operations, make planned capital expenditures, make scheduled debt payments, refinance indebtedness and remain in compliance with all of the financial covenants under its debt agreements will depend on its future operating performance and cash flow, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond its control.
At December 31, 2001 and 2000, the Company did not establish a valuation allowance to offset any deferred tax assets. The Company has reported operating income on the consolidated statements of operations in 2001 and 2000. Based on projections for future taxable income over the periods during which the deferred tax assets are deductible, and the expectation that a significant portion of these deferred tax assets are to be realized by offsetting them against temporary items, it is management's belief that it is more likely than not that all deferred tax assets will be fully realized.
CRITICAL ACCOUNTING POLICIES
We prepare the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include: product warranty reserves, inventory reserves for excess or obsolescence, and pension and postretirement benefit liabilities and are fully described in the notes to our consolidated financial statements.
NEW ACCOUNTING STANDARDS
In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and if the derivative is a qualifying hedge. The Company adopted SFAS No. 133 as amended by SFAS No. 138 "Accounting for Certain Derivatives and Certain Hedging Activities", on January 1, 2001, as required. The adoption of these standards had no significant impact on the Company's consolidated financial statements and related disclosures.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interest method is no longer allowed. The Company does not anticipate any material impact from the adoption of this standard. SFAS No. 142 requires that upon adoption, amortization of goodwill cease and instead, the carrying value of goodwill be evaluated for impairment on an annual basis by applying a fair value based test. Identifiable intangible assets will continue to be amortized over their useful lives and be reviewed for impairment in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", as amended by SFAS No. 144. The Company will adopt this new standard beginning on January 1, 2002. The Company anticipates that the adoption of this new standard will result in the discontinuation of goodwill amortization of approximately $1.9 million in 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS No 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company will adopt this new standard on January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its consolidated financial position and results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks which include changes in interest rates and changes in foreign currency exchange rates as measured against the U.S. dollar.
Interest Rate Risk. The carrying value of the Company's revolving credit line and Term Loans approximate fair value. The revolving credit line is priced daily and the Term Loans are primarily LIBOR borrowings and are re-priced approximately every month based on prevailing market rates. A 10% change in the interest rate on the revolving credit line and Term Loans would have increased or decreased the 2001 interest expense by $0.3 million. The Notes bear interest at a fixed rate of 10 1/4% and, therefore, are not sensitive to interest rate fluctuation. The fair value of the Notes based on quoted market prices at December 31, 2001 was approximately $60.9 million.
Foreign Currency Risk. The Company has subsidiaries in Italy and Brazil and branch offices in France and England, thereby creating exposures to changes in foreign currency exchange rates. Changes in exchange rates may positively or negatively affect the Company's sales, gross margins, and retained earnings. However, historically, these locations have contributed less than 15% of the Company's net sales and retained earnings, with most of these sales attributable to the Italian subsidiary. The Company also sells its products from the United States to foreign customers for payment in foreign currencies as well as dollars. Foreign currency exchange losses totaled $0.8 million and $0.3 million for 2001 and 2000, respectively. A majority of the increase in 2001 is related to the Company's operations in Brazil. The Company does not hedge against foreign currency risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors Stanadyne Corporation
We have audited the accompanying consolidated balance sheets of Stanadyne Corporation and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stanadyne Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Hartford, Connecticut February 11, 2002
STANADYNE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
See notes to consolidated financial statements.
STANADYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
STANADYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (DOLLARS IN THOUSANDS EXCEPT SHARES)
See notes to consolidated financial statements.
STANADYNE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS:
During 1999 the Company entered into capital leases for new equipment resulting in capital lease obligations of $30.
See notes to consolidated financial statements.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Stanadyne Corporation (the "Company"), formerly known as Stanadyne Automotive Corp., a wholly-owned subsidiary of Stanadyne Automotive Holding Corp. ("Holdings"), is a producer of diesel fuel injection equipment which is sold worldwide to agricultural, industrial and automotive diesel engine manufacturers and to the diesel engine aftermarket. The Company's wholly owned subsidiary, Precision Engine Products Corp. ("Precision Engine"), is a supplier of roller-rocker arms, hydraulic valve lifters and lash adjusters to automotive engine manufacturers and the independent automotive aftermarket. A majority of the outstanding equity of Holdings is owned by American Industrial Partners Capital Fund II, L.P. ("AIP").
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all of the Company's wholly-owned subsidiaries: Precision Engine, Stanadyne, SpA ("SpA"), Precision Engine Products LTDA ("PEPL") and Stanadyne Automotive Foreign Sales Corp. ("FSC"). Intercompany balances have been eliminated in consolidation. The financial statements of SpA and PEPL are consolidated on a fiscal year basis ending November 30.
On October 22, 2001, the Company formed a joint venture with Amalgamations Private Limited to form a new company in the state of Tamil Nadu, India. The joint venture is named Stanadyne Amalgamations Private Limited ("SAPL") and will manufacture diesel fuel injection equipment for the domestic and export markets starting in 2003. In 2002, the Diesel Group will consolidate SAPL, of which it holds a 51% controlling share.
Cash and Cash Equivalents. The Company considers cash on hand and short-term investments with an original maturity of three months or less to be "cash and cash equivalents" for financial statement purposes.
Inventories. Inventories are stated at the lower of cost or market. The principal components of costs included in inventories are materials, labor, subcontract cost and overhead. The Company uses the last-in/first-out ("LIFO") method of valuing its inventory, except for the inventories of SpA and PEPL, which are valued using the first-in/first-out ("FIFO") method. At December 31, 2001 and 2000, inventories valued at LIFO represented 87% and 88% of total inventories, respectively.
Property, Plant and Equipment. Property, plant and equipment, including significant improvements thereto, are recorded at cost. Equipment under capital leases is stated at the net present value of minimum lease payments. Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of the respective assets which are within the following ranges:
Intangibles and Other Assets. Intangible assets consist primarily of goodwill, technological know-how, trademarks, patents and deferred debt issuance costs. Intangible assets are amortized using the straight-line method over their estimated useful lives of 3 to 40 years.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Accounting for the Impairment of Long-Lived Assets. The Company assesses impairment of long-lived assets such as property, plant and equipment and intangible assets whenever changes or events indicate that the carrying value may not be recoverable. Such long-lived assets are written down to fair value if the sum of the expected future undiscounted cash flows is less than the carrying amount.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company will adopt this new standard on January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material impact on its consolidated financial position and results of operations.
Fair Value of Financial Instruments. SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of fair value information for certain assets and liabilities, whether or not recorded in the balance sheet, for which it is practicable to estimate that value. The Company has the following financial instruments: cash and cash equivalents, receivables, accounts payable, accrued liabilities and long-term debt. The Company considers the carrying amount of these items, excluding long-term debt, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. Refer to Note 8 for fair value disclosures of long-term debt.
Product Warranty. The Company provides an accrual for the estimated future warranty costs of its products. These estimates are based upon statistical analyses of historical experience of product returns and the related cost.
Postretirement Benefits. For the defined benefit pension plans, the Company amortizes unrecognized gains and losses exceeding 10% of the accumulated benefit obligation over the average remaining service period of the plan participants as this period approximates the benefit period. This amortization method of postretirement benefit obligations distributes gains and losses over the benefit period of the participants thereby minimizing any volatility caused by actuarial gains and losses.
Income Taxes. Income taxes are accounted for in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the tax basis of assets and liabilities and their financial reporting amounts.
Foreign Currency Translation. The Company's policy is to translate balance sheet accounts using the exchange rate at the balance sheet date and statement of operations accounts using the average monthly exchange rate for the month in which the transactions are recognized. The resulting translation adjustment is recorded as accumulated other comprehensive income (loss) in the consolidated balance sheets. Worldwide foreign currency transaction losses of $849, $336 and $145 are included in the consolidated statements of operations for 2001, 2000 and 1999, respectively.
Revenue Recognition. Sales and related costs of sales are recorded when products are shipped to customers. The Company enters into long-term contracts with certain customers for the supply of parts during the contract period. Some of these contracts have provisions which allow the Company to negotiate with its customers if targeted volumes, as defined in each contract, are not achieved. Those negotiations may result in payments which are recognized as revenue when the amount of such payment is agreed upon by the Company and the customer and when collection is deemed probable.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONCLUDED)
Research and Development. Research and development ("R&D") costs incurred for 2001, 2000 and 1999 were $11,571, $10,135 and $9,075, respectively, of which $1,427, $911 and $596, respectively, were reimbursed by customers. The net expenses of $10,144, $9,224 and $8,479 in 2001, 2000 and 1999, respectively, are included in the consolidated statements of operations.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Interest Rate Cap Agreement. The Company utilized an interest rate cap agreement (the "Cap") to limit the impact of increases in interest rates on its variable rate debt. The Cap required a premium payment of $7 to the counterparty based on the agreement's notional amount and cap interest rate. The premium was expensed in the Company's 1998 consolidated financial statements. The Cap entitled the Company to receive from the counterparty the amounts by which the selected market interest rates exceeded the Cap interest rate stated in the agreement. The Cap expired December 30, 1999 (see Note 8).
Accounting for Derivative Instruments and Hedging Activities. In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Gains and losses resulting from changes in the values of those derivatives are to be recognized immediately or deferred depending on the use of the derivative and if the derivative is a qualifying hedge. The Company has adopted SFAS No. 133, as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities", on January 1, 2001, as required. The adoption of these standards had no significant impact on the Company's consolidated financial statements and related disclosures.
Business Combinations and Goodwill and Other Intangible Assets. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interest method is no longer allowed. The Company does not anticipate any material impact from the adoption of this standard. SFAS No. 142 requires that upon adoption, amortization of goodwill cease and instead, the carrying value of goodwill be evaluated for impairment on an annual basis by applying a fair value based test. The Company is required to complete the initial step of a transitional impairment test within six months of adoption. Identifiable intangible assets will continue to be amortized over their useful lives and be reviewed for impairment in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", as amended by SFAS No 144. The Company will adopt this new standard beginning on January 1, 2002. The Company anticipates that the adoption of this new standard will result in the discontinuation of goodwill amortization of approximately $1,900 in 2002.
Reclassifications. Certain amounts have been reclassified in the 2000 and 1999 consolidated financial statements to conform to the 2001 presentation.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(2) INVENTORIES
Inventories at December 31 consisted of:
The LIFO reserve at December 31, 2001 and 2000 was $1,953 and $1,759, respectively.
In 2001, inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with cost of 2001 purchases. The effect of this liquidation increased net income by $34.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment including equipment under capital leases at December 31 consisted of:
Depreciation expense including amortization of assets acquired under capital leases was $15,685, $15,530 and $14,904 for 2001, 2000 and 1999, respectively. The net book value of assets acquired under remaining capital leases was $235 and $1,603 at December 31, 2001 and 2000, respectively.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(4) INTANGIBLE AND OTHER ASSETS
Major components of intangible and other assets at December 31 consisted of:
Amortization expense was $5,350, $5,747 and $5,900 for 2001, 2000 and 1999, respectively.
(5) LEASES
The Company is obligated under certain noncancelable operating leases. Rent expense for 2001, 2000 and 1999 was $1,927, $1,959 and $1,698, respectively.
Future minimum lease payments under noncancelable operating leases with initial or remaining lease terms in excess of one year and future minimum capital lease payments as of December 31, 2001 were as follows:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(6) ACCRUED LIABILITIES
Accrued liabilities at December 31 consisted of:
(7) OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities at December 31 consisted of:
(8) LONG-TERM DEBT
Long-term debt at December 31 consisted of:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(8) LONG-TERM DEBT - (CONTINUED)
At December 31, 2001 and 2000, the Company had $30,000 in revolving credit lines (the "Revolving Credit Lines") of which $5,400 was borrowed at December 31, 2001. In addition, at December 31, 2001 and 2000, $4,407 and $3,410, respectively, was used for standby letters of credit leaving $20,193 and $26,590, respectively, available for borrowings. Any amounts outstanding are payable on December 11, 2003. The interest rate on the borrowings of the Revolving Credit Line, was 6.5% at December 31, 2001. The Company also pays a commitment fee based on the percentage of the unused portion of the Revolving Credit Lines. The percentage used to calculate the commitment fee is .5% based on certain financial ratios.
At December 31, 2001 and 2000, the Company had $30,434 and $46,379, respectively, in term loans (the "Term Loans") outstanding at various interest rates ranging from 4.63% and 6.75%. The remaining $13,025 Term A loans outstanding at December 31, 2001 are payable in quarterly installments of $1,357 from March 31, 2002 through December 31, 2002; $1,899 from March 31, 2003 through September 30, 2003; and $1,900 on December 11, 2003. The remaining $17,409 Term B loans outstanding at December 31, 2001 are payable in quarterly installments of $45 from March 31, 2002 through September 30, 2004 with a final balloon payment of $16,914 on December 11, 2004. The Term Loans are primarily LIBOR borrowings and are repriced approximately every month based on prevailing market rates.
Payment of the Revolving Credit Lines and Term Loans (collectively, the "Credit Agreement") is an obligation of Stanadyne Corporation (the "Parent") and is guaranteed by Precision Engine (the "Subsidiary Guarantor"). The Credit Agreement is secured by substantially all of the assets of the Parent and Subsidiary Guarantor and by a pledge of substantially all the issued and outstanding capital stock of the Parent and the Subsidiary Guarantor and 65% of the capital stock of SpA. In addition, the Credit Agreement is subject to financial and other covenants, including limits on indebtedness, liens and capital expenditures, and restricts dividends or other distributions to stockholders.
The Company had $75,950 of Senior Subordinated Notes (the "Notes") at an interest rate of 10.25% outstanding at December 31, 2001 and 2000. Between January 25, 2000 and February 2, 2000, the Company retired $14,050 in Notes at a discounted price of $11,503. As a result of the early retirement of the Notes, the Company realized a $1,585 gain which was recorded net of tax and the write off of unamortized debt issuance cost of $962. The transaction was recorded as an extraordinary item in 2000. On October 5, 1999 the Company retired $10,000 in Notes at a discount price of $8,750. The resulting $1,250 gain on this transaction was recorded as a net of tax extraordinary item in 1999. The Notes are due on December 15, 2007. Payment of the Notes is guaranteed by the Subsidiary Guarantor. In addition, the Notes are subject to covenants including limitations on indebtedness, liens, and dividends or other distributions to stockholders.
At December 31, 2001 and 2000, the weighted average interest rate on the Company's short-term borrowings was 5.1% and 5.2%, respectively.
The fair values of the Company's Term Loans and short-term borrowings approximate their recorded values at December 31, 2001 based on similar borrowing agreements offered by other major institutional banks. The fair value of the Notes based on quoted market prices at December 31, 2001 was approximately $60,851.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(8) LONG-TERM DEBT - (CONCLUDED)
The aggregate maturities of long-term debt outstanding at December 31, 2001 were:
For 2001, 2000 and 1999, interest paid was $10,401, $12,170 and $14,098, respectively.
(9) PENSIONS
The Company has a noncontributory defined benefit pension plan which covers substantially all of the domestic hourly and salaried employees except for Tallahassee hourly employees. Benefits under the pension plan are based on years of service and compensation levels during employment for salaried employees and years of service for hourly employees. It is the Company's policy to fund the pension plan based on the minimum permissible contribution as determined by the plan's actuaries. Plan assets are invested primarily in a diversified portfolio of equity and fixed income securities. The Company also sponsors an unfunded defined benefit supplemental executive retirement plan.
The following table sets forth the change in benefit obligation, change in plan assets and funded status of the pension plans and amounts recognized in the Company's consolidated balance sheets as of December 31:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(9) PENSIONS - (CONTINUED)
The components of the net periodic pension costs were as follows:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(9) PENSIONS - (CONCLUDED)
Actuarial assumptions used in accounting for the pension plans were:
No compensation increase rate is applicable for the hourly plans, as they are flat pay for each year of service (regardless of compensation earned). Effective July 1, 2000 and 1999 the unit benefit for hourly participants and the minimum benefit for salaried participants were increased by two dollars and one dollar, respectively, per month for each year of service. Staff reductions in the first half of 1999 resulted in a curtailment gain of $336.
In accordance with Italian Civil Code, the Company provides employees of SpA a leaving indemnity payable upon termination of employment. The amount of this leaving indemnity is determined by the employee's category, length of service, and overall remuneration earned during service. Amounts included as part of other noncurrent liabilities at December 31, 2001 and 2000 were $4,201 and $4,014, respectively. Leaving indemnity expense was $334, $538 and $634 for 2001, 2000 and 1999, respectively.
(10) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE
The Company and its domestic subsidiaries currently make available certain health care and life insurance benefits for retired employees. Full-time employees of the Company (except non-grandfathered employees at the Tallahassee and Elmhurst locations) may become eligible for those benefits when they reach retirement, provided they attain age 57 with a minimum of 10 consecutive years of service immediately preceding retirement, if such programs are still in effect.
Employees who retired prior to January 1, 1987 are eligible for a Basic/Major Medical Plan and, in certain cases, prescription drug benefits for a basic monthly contribution by the retiree. Benefit levels vary depending upon the retiree's benefit plan eligibility. The Company's health benefit cost commitment for employees who retire between January 1, 1987 and December 31, 1997 is limited to the 1997 cost level. Furthermore, the Company's cost commitment for employees who were hired prior to 1997 and retire after 1997 will be one hundred dollars per month per eligible participant prior to becoming Medicare eligible and fifty dollars per month when Medicare eligible. Employees hired after 1996 are required to pay the full cost of postretirement medical coverage. Employees who retire before 1998 are eligible for Company provided life insurance benefits. Employees who retire after 1997 are allowed to purchase life insurance through the Company at full cost.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(10) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE - (CONTINUED)
Unrecognized gains and losses exceeding 10% of the accumulated postretirement benefit obligation are amortized over the average remaining service period of the plan participants.
The following table presents the plan's change in benefit obligation, change in plan assets and funded status reconciled with amounts recognized in the Company's consolidated balance sheets as of December 31:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(10) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE - (CONTINUED)
Net periodic postretirement benefit costs included the following components:
For measurement purposes, the following medical and dental cost trend rates were assumed in determining the accumulated benefit obligation:
Medical Cost Trend Rates
- Medical prior to age 65 7.5% and 7.0% in 2002 and 2003, (Indemnity Plan) respectively, ultimately, 4.5% in 2004 and thereafter.
- Medical prior to age 65 (HMOs); 7.5% and 7.0% in 2002 and 2003, medical age 65 and older respectively, ultimately, 4.5% in 2004 and thereafter.
Dental Cost Trend Rate
- Dental costs 4.5% in 2002 and thereafter.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(10) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE - (CONCLUDED)
The effect of a 1% change in health care cost trend rates would have the following impact on the accumulated postretirement benefit obligation and the net annualized postretirement benefit costs:
(11) INCOME TAXES
Income taxes provision (benefit) consisted of:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(11) INCOME TAXES - (CONTINUED)
The income taxes for 2000 and 1999 in the table above includes $634 and $500, respectively, which offsets the extraordinary gain related to the early retirement of debt.
Total income taxes differed from the amounts computed by applying the U.S. Federal income tax rate of 35% for 2001, 35% for 2000 and 34% for 1999 to income before income taxes as follows:
U.S. federal, state and foreign net income taxes paid amounted to $2,251, $5,395 and $2,623 for 2001, 2000 and 1999, respectively.
(Loss) income before taxes from domestic operations amounted to $(1,288), $8,451 and $2,191 for 2001, 2000 and 1999, respectively. Income before taxes from foreign operations amounted to $251, $5,422 and $7,343 for 2001, 2000 and 1999, respectively.
As a result of losses in current and previous years, the Company has unused net operating loss carryforwards for state income tax purposes of approximately $1,479 at December 31, 2001, which, if not used to offset future state taxable income, will begin to expire in 2009. The Company also has unused foreign net operating losses of $7,101 at December 31, 2001 which will begin to expire in 2002.
The Company has been subject to the U.S. Alternative Minimum Tax ("AMT") and, therefore, has a cumulative AMT credit carryforward of $2,131 as of December 31, 2001. This carryforward has an unlimited life and may be used to offset federal income taxes in excess of AMT in future periods.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(11) INCOME TAXES - (CONCLUDED)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are presented as follows:
At December 31, 2001, the Company did not establish a valuation allowance to offset any deferred tax assets. Based on projections for future taxable income and the expectation that a significant portion of these deferred tax assets are to be realized by offsetting them against temporary items, it is management's belief that it is more likely than not that all deferred tax assets will be fully realized.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(12) PLANT CLOSURE COSTS
On September 9, 1998, the Company announced the planned closure of the manufacturing facility in Bari, Italy. The Bari Plant is a part of the wholly owned subsidiary, Stanadyne Automotive, SpA. This closure was completed during the second quarter of 1999. The estimated cost of closing the operation resulted in a charge to fourth quarter 1998 earnings for $4,215. Inventory writedowns to lower of cost or market totaled $787 and were recorded in cost of goods sold in the 1998 consolidated statement of operations. Employee termination costs and other plant closure expenses totaled $3,428 and were charged to operating income in the 1998 consolidated statement of operations. Accrued liabilities at December 31, 1998, included $6,457 to reflect the anticipated sum of plant closure costs and leaving indemnity scheduled for payment in 1999.
The Company favorably concluded the major cost elements of the plant closure in the third quarter of 1999 and as a result recorded a $1,930 savings, primarily as a result of lower severance costs, to the reserve established in 1998 which is reflected in the 1999 consolidated statement of operations.
(13) 401(k) PLAN
Substantially all of the Company's domestic employees are eligible to participate in 401(k) savings plans. The 401(k) savings plans provide such employees with the opportunity to save for retirement on a tax deferred basis. The Company contributes 50% of the employee's contribution per year up to a limit, as defined in the plan documents. The Company made contributions of $369, $396 and $396 during 2001, 2000 and 1999, respectively.
(14) RELATED PARTY TRANSACTIONS
During 2001, 2000 and 1999 the Company incurred management fees of $1,100 from AIP for management services provided. These charges are included in selling, general and administrative expenses.
The Company has an amount due from Stanadyne Automotive Holding Corp. of $4,216 and $4,061 as of December 31, 2001 and 2000, respectively.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(15) SIGNIFICANT CUSTOMERS
Sales to customers and their affiliates, which represented approximately 10% or more of consolidated total sales, were as follows:
Accounts receivable balances with these customers and their affiliates were $16,226 and $15,878 at December 31, 2001 and 2000, respectively.
(16) COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal and regulatory proceedings generally incidental to its business. While the results of any litigation or regulatory issue contain an element of uncertainty, management believes that the outcome of any known, pending or threatened legal proceeding, or all of them combined, will not have a material adverse effect on the Company's consolidated financial position or results of operations.
The Company is subject to potential environmental liability and various claims and legal actions which are pending or may be asserted against the Company concerning environmental matters. In conjunction with the acquisition of the Company from Metromedia Company ("Metromedia") on December 11, 1997, Metromedia agreed to partially indemnify the Company and AIP for certain environmental matters.
The effect of this indemnification is to limit environmental exposure of known sites. However, there are limitations to this indemnification. Estimates of the cost as of the date of the acquisition for the remediations to be completed by Metromedia at the Windsor, Connecticut and Jacksonville, North Carolina facilities were $1,700 and $300, respectively. Estimates of future costs of environmental matters are inevitably imprecise due to numerous uncertainties, including the enactment of new laws and regulations, the development and application of new technologies, the identification of new sites for which the Company may have remediation responsibility and the apportionment and collectibility of remediation costs among responsible parties. The Company establishes reserves for these environmental matters when a loss is probable and reasonably estimable and has accrued its best estimate, $1,052 and $1,182, with respect to these matters at December 31, 2001 and 2000, respectively. It is reasonably possible that the final resolution of some of these matters may require the Company to make expenditures, in excess of established reserves, over an extended period of time and in a range of amounts that cannot be reasonably estimated. However, management does not believe that the costs associated with resolution of these or any other environmental matters will have a material adverse effect on the Company's consolidated financial position or results of operations.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(17) SEGMENTS
The Company has two reportable segments, the Diesel Systems Group (the "Diesel Group") and Precision Engine. The Diesel Group manufactures diesel fuel injection equipment including fuel pumps, injectors and filtration systems. This segment accounted for approximately 85%, 85% and 82% of the Company's revenues for 2001, 2000 and 1999, respectively. Precision Engine manufactures roller-rocker arms, hydraulic valve lifters and lash adjusters for gasoline engines. Revenues for Precision Engine accounted for 15%, 15% and 18% of total revenues for 2001, 2000 and 1999, respectively. The Company's reportable segments are strategic business units that offer similar products (engine parts) to customers in related industries (agricultural, industrial and automotive engine manufacturers). The Company considers the Diesel Group and Precision Engine to be two distinct segments because the operating results of each are compiled, reviewed and managed separately. In addition, the products and services of each segment have an end use (gasoline versus diesel engines) which entails different engineering and marketing efforts. There were no intersegment sales between the Diesel Group and Precision Engine for any of the periods presented below.
The following summarizes key information used by the Company in evaluating the performance of each segment:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(17) SEGMENTS - (CONCLUDED)
(18) FOREIGN AND GEOGRAPHIC INFORMATION
The Company has manufacturing operations in the United States, Italy and Brazil. The following is a summary of information by area:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(18) FOREIGN AND GEOGRAPHIC INFORMATION - (CONCLUDED)
(19) VALUATION AND QUALIFYING ACCOUNTS
The components of significant valuation and qualifying accounts were as follows:
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(20) SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS
The Notes issued by the Company are guaranteed jointly, fully, severally and unconditionally by the Subsidiary Guarantor on a subordinated basis and are not guaranteed by SpA, SAPL, PEPL and FSC (the "Non-Guarantors").
Supplemental combining condensed balance sheets as of December 31, 2001 and 2000 and the supplemental combined condensed statements of operations and cash flows for 2001, 2000 and 1999 for the Parent, Subsidiary Guarantor and Non-Guarantor Subsidiaries are presented below. Separate complete financial statements of the Guarantor are not presented because management has determined that they are not material to investors.
(a) Amount represents the elimination of investments in subsidiaries. (b) Reclassify Non-Guarantor deferred tax asset to deferred tax liability. (c) Amount represents the elimination of inventory for out of period transfers.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(20) SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(a) Amount represents the elimination of investments in subsidiaries. (b) Reclassify Non-Guarantor deferred tax asset to deferred tax liability. (c) Amount represents the elimination of inventory for out of period transfers.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(20) SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(a) To eliminate intercompany sales and cost of sales.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(20) SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(a) To eliminate intercompany sales and cost of sales.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARES)
(20) SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(a) To eliminate intercompany sales and cost of sales.
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(20) SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(20) SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
STANADYNE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(20) SUPPLEMENTAL COMBINED CONDENSED FINANCIAL STATEMENTS - (CONCLUDED)
******
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 following table sets forth the name, age as of December 31, 2001 and position with the Company of each person who is a member of the Board of Directors or an executive officer of the Company. All directors serve for the term for which they are elected or until their successors are duly elected and qualified or until death, retirement, resignation or removal. All directors of the Company are also directors of Holdings.
Mr. Gurley joined Stanadyne's Diesel Systems Division in 1984. In 1989, Mr. Gurley became Executive Vice President, Marketing, Engineering and Operations and was elected as a director of Stanadyne Corporation. In 1995, he became President and Chief Executive Officer of the Company.
Mr. Langin joined Stanadyne's Diesel Systems Division in 1981. In 1989, Mr. Langin became Controller, Stanadyne Corporation and on February 7, 2001 became Vice President and Chief Financial Officer.
Mr. Buonomo joined Stanadyne in 1997 as Vice President, Quality and Reliability. Prior to joining Stanadyne, he served as Vice President, Corporate Quality with C. Cowles & Company and Vice President, Quality & Reliability with Veeder-Root Company.
Mr. Janik joined Stanadyne in 1970. In 1992, Mr. Janik was appointed Vice President, Power Products Division and in 1998 became Vice President and General Manager, Power Products and Fuel Injectors.
Mr. Kelly joined Stanadyne in 1982. Effective with the formation of Stanadyne Corporation in 1988, Mr. Kelly was appointed to Vice President of Engineering and Marketing for Diesel Systems Division and in 1998 became Vice President and General Manager, Fuel Pumps.
Ms. McCarthy joined Stanadyne in October 2000 as Vice President, Human Resources. Prior to joining Stanadyne, she served as Vice President of Human Resources with CTG Resources, Inc. since 1995.
Mr. Murray joined Stanadyne on January 1, 2001 as Vice President, Precision Components and Assembly. Prior to joining Stanadyne, he worked as an independent consultant from 1999 to 2000. During 1999 he served as Vice President of Sales for API Motion. Mr. Murray also served with FAG Bearings Corporation as Executive Vice President, Sales and Marketing from 1997 to 1998 and General Manager from 1991 to 1996 and with Pope Spindle Corporation as President from 1996 to 1997.
Mr. O'Day joined Stanadyne's Precision Engine Products Corp. in April 2000 and became Vice President and General Manager, Precision Engine Products Corp. in October 2000. Prior to joining Stanadyne, he served with International Fuel Cells as Vice President, Business Development from 1999 to 2000. Mr. O'Day also was employed with various business units of United Technologies Automotive as Vice President, General Motors Business Unit from 1997 to 1999, Vice President, Quality and Enterprise Productivity from 1996 to 1997 and Director, Sales/Marketing and Manufacturing Planning from 1995 to 1996.
Mr. Bingham co-founded AIP with Theodore C. Rogers in 1988 and, with Mr. Rogers, is responsible for the overall management of the firm. Mr. Bingham was a Managing Director of Shearson Lehman Brothers from 1984 to 1987. Prior to joining Shearson Lehman Brothers, Mr. Bingham was a Director of the Corporate Finance Department, a member of the board, and head of Mergers and Acquisitions at Lehman Brothers Kuhn Loeb Inc. Prior thereto, he directed investment-banking operations at Kuhn Loeb & Company where he was a partner and member of the board and executive committee. Mr. Bingham also serves as a director of Bucyrus International, Great Lakes Carbon Corporation, MBA Polymers, Sanluis Developments, L.L.C., and Dearfield Associates. He was elected to the Board of Directors of the Company in December 1997.
Mr. Diekroeger is a founder and managing director of Golden Gate Capital, a San Francisco based private equity firm. Prior to joining Golden Gate Capital in 2000, he was a managing director and partner with AIP from 1996 to 2000, where he sourced, executed and served as a director for several investments and buyouts. He was elected to the Board of Directors of the Company in December 1997.
Mr. Ferguson joined the New York office of AIP in 2001 and serves as a Managing Director of the firm. Mr. Ferguson was previously a principal of Saratoga Partners, a private equity investment firm where he had been employed from 1997 to 2001. He was elected to the Board of Directors of the Company in September 2001. Additionally, he currently serves or has served as a director of several private companies.
Mr. Marvin joined the San Francisco office of AIP in 1997 and serves as a Managing Director of the firm. Mr. Marvin worked in the Mergers and Acquisitions department of Goldman Sachs & Co. where he had been employed from 1994 to 1997. He was elected to the Board of Directors of the Company in January 2001. Additionally, he serves as a director of Bucyrus International, Consoltex Inc., Great Lakes Carbon Corporation and Sweetheart Holdings Inc.
Mr. Rogers became Chairman of the Board effective February 7, 2001. Mr. Rogers co-founded AIP with W. Richard Bingham in 1988 and, with Mr. Bingham, is responsible for the overall management of the firm. Mr. Rogers is former President, Chairman, Chief Executive Officer and Chief Operating Officer of NL Industries, a petroleum service and chemical company. Mr. Rogers currently serves as a non-executive Chairman of the Board and Director of Great Lakes Carbon Corporation. Additionally, he serves as a director of Bucyrus International, Central Industrial Supply Company, Consoltex Inc., RBX Group, Steel Heddle Group and Derby International, Incorporated. He was elected to the Board of Directors of the Company in December 1997.
Directors do not receive compensation for their services as directors, with the exception of Mr. Diekroeger who receives $125,000 per year. Directors of the Company are entitled to reimbursement of their reasonable out-of-pocket expenses in connection with their travel to and attendance at meetings of the Board of Directors or committees thereof.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The compensation of executive officers of the Company is determined by the Board of Directors of the Company. The following table sets forth information concerning the five most highly compensated officers of the Company (the "Named Executive Officers") for services rendered in fiscal 2001, 2000 and 1999.
SUMMARY COMPENSATION TABLE
(1) None of the Named Executive Officers received personal benefits or other annual compensation in excess of the lesser of $50,000 or 10% of the combined salary and bonus in each respective year.
(2) All Other Compensation included the employer match under the Company's 401(k) savings plan for each Named Executive Officer of $300 per year. The remainder of the balance is the premium paid for executive life insurance, with the exception that Mr. Murray was reimbursed $94,992 for moving expenses.
(3) Options are for shares of common stock in Holdings.
EMPLOYMENT AGREEMENTS
The Company has entered into identical employment agreements with Messrs. Gurley and Kelly. Pursuant to these agreements, Messrs. Gurley and Kelly served in their noted capacities during 2001 at current base salaries of $371,000 and $242,500, respectively. These salaries are reviewed at least annually and shall be increased to be consistent with increases in base salary awarded in the ordinary course of business to other key executives.
Each employment agreement is renewed automatically for a term of one year on the anniversary of the effective date, unless notice is given by the Company no later than thirty days before the end of the current term. If the Company does not renew the agreement within the three-year period following a change of control, the change of control provisions will continue to apply and the executive may be entitled to certain payments under the agreement in the event of termination.
The Company may terminate the executive for cause, as defined in the agreement, as well as for death and disability. Moreover, the executive may terminate the agreement for "Good Reason," which includes, among other circumstances, when the executive is assigned duties inconsistent with, or is subject to any other action by the Company that results in a diminution of, his position, authority, duties or responsibilities. Upon the termination of the employment agreement by the executive upon Good Reason, the Company shall pay to the executive within thirty days of the date of termination (i) his base salary through the date of termination, as well as any outstanding bonus payments; (ii) the previous year's bonus payment prorated for the fiscal year of the termination; (iii) an amount equal to the executive's base salary; (iv) any deferred compensation; and (v) any other amount due the executive under any other separation or severance pay plan of the Company.
Upon any termination within three years of a change of control, as defined in the agreements, the executive is entitled to certain payments, unless the termination is because of the death or retirement of the executive, by the Company for cause or disability, or by the executive for other than Good Reason. Such payments shall include (i) the executive's base salary through the date of termination, as well as any outstanding bonus payments; (ii) the previous year's bonus payment prorated for the fiscal year of termination; (iii) an amount equal to three times the executive's current base salary, plus three times the average amount paid to the executive in bonus payments over the prior three years; (iv) any deferred compensation; and (v) certain payments with respect to the executive's automobile. The executive shall be entitled to continued participation under the welfare benefit plans of the Company for one year following the date of termination. Payments under (iii) of this paragraph shall be payable in three equal installments: the first on the date of termination; the second on the first anniversary of the date of termination; and the third on the second anniversary of the date of termination.
Messrs. Langin, Janik and Murray are at-will employees.
STOCK OPTION PLAN
The Board of Directors of Holdings adopted the Management Stock Option Plan (the "Stock Plan") as of June 5, 1998. The Stock Plan provides for the grant of stock options to certain management employees of Holdings and its subsidiary, the Company, for the purchase of shares of Holdings, which options are non-qualified for federal income tax purposes. Subject to the requirements and limitations of the Stock Plan, the President and Chief Executive Officer of Holdings shall have the authority to select the participants in the Stock Plan. The Board of Directors of Holdings, or a committee designated by the Board of Holdings, shall have the sole and complete responsibility and authority to, among other duties, approve grants of options under the Stock Plan.
OPTION GRANTS
There were no stock options granted to the Named Executive Officers during the year ended December 31, 2001.
STOCK OPTION EXERCISES
There were no stock options exercised by the Named Executive Officers during the twelve months ended December 31, 2001. For the number of shares underlying exercisable options held by the Named Executive Officers at December 31, 2001, see the table in Item 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is authorized by its Certificate of Incorporation to issue 10,000 shares of common stock, par value $.01 per share ("Company Common Stock"). Holdings owns all of the issued and outstanding 1,000 shares of Company Common Stock. Holdings is authorized by its Certificate of Incorporation to issue 1,200,000 shares of common stock, par value $.01 per share ("Holdings Common Stock") of which 993,986 shares were outstanding on December 31, 2001. AIP and management of the Company own substantially all of Holdings Common Stock. Holdings has adopted the Stock Plan, which provides for the grant to certain key employees and/or directors of the Company of stock options that are non-qualified options for federal income tax purposes.
As of December 31, 2001, there were 19 holders of record of shares of Holdings Common Stock. The following table sets forth certain information regarding beneficial ownership of Holdings Common Stock as of December 31, 2001, assuming the exercise of stock options exercisable within 60 days of such date, by (i) each person who is known by Holdings to be the beneficial owner of more than 5% of Holdings Common Stock, (ii) each of the Company's directors and the named executive officers in the Summary Compensation Table and (iii) all directors and executive officers as a group. To the knowledge of the Company, each stockholder has sole voting and investment power as to the shares of Holdings Common Stock shown unless otherwise noted. Except as indicated below, the address for each such person is c/o Stanadyne Corporation, 92 Deerfield Road, Windsor, CT 06095.
* Represents less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the Securities and Exchange Commission. In computing the number of shares of Holdings Common Stock beneficially owned by a person and the percentage of beneficial ownership of that person, shares of Holdings Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. The persons named in this table have sole voting and investment power with respect to all shares of Holdings Common Stock shown as beneficially owned by them, subject to community property laws where applicable.
(2) The address of such entity or person is One Maritime Plaza, Suite 2525, San Francisco, California 94111.
(3) Represents an aggregate of 13,671 shares of Holdings Common Stock held by directors and executive officers which are issuable upon exercise of options exercisable within 60 days of the date December 31, 2001.
(4) The address of such person is 551 Fifth Avenue, Suite 3800, New York, New York 10176.
(5) The address of such person is One Embarcadero, 33rd Floor, San Francisco, CA 94111
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACQUISITION ARRANGEMENTS
In connection with the Acquisition, Holdings, AIP and other stockholders of Holdings entered into a stockholders agreement (the "Stockholders Agreement") pursuant to which such persons were granted certain registration rights and participation rights. Pursuant to the Stockholders Agreement, AIP has the right to elect the directors of Holdings. The directors of the Company are the same as the directors of Holdings.
MANAGEMENT SERVICES AGREEMENT
In accordance with a management services agreement, the Company is required to pay AIP an annual fee of $1.1 million for providing general management, financial and other corporate advisory services to the Company, payable quarterly in advance on each January 1, April 1, July 1 and October 1 during the term of the management services agreement. AIP also will be reimbursed for out-of-pocket expenses. The management fees are subordinated in right of payment to the Notes.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
See "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
2. Financial Statement Schedules:
The Company is not required by the applicable accounting regulations of the Securities and Exchange Commission to provide all financial statement schedules. The Financial Statements and the Notes thereto contain what information is required and what is not required has been omitted.
3. Exhibits:
(1) Incorporated by reference to Registration Statement Form S-4, File No. 333-45823, filed on February 6, 1998 and amended on March 25, 1998, April 24, 1998 and May 11, 1998.
(2) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed May 14, 1998.
(3) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed November 12, 1998.
(4) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-K filed March 19, 1999.
(5) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed November 12, 1999.
(6) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-K filed March 2, 2000.
(7) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed May 9, 2000.
(8) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed August 14, 2001.
(9) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed November 13, 2001.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Stanadyne Corporation has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Stanadyne Corporation --------------------- (Registrant)
Date: March 28, 2002 By: /s/ William D. Gurley -------------- --------------------------------------- William D. Gurley President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following person on behalf of Stanadyne Corporation and in the capacities and on the dates indicated.
Date: March 28, 2002 By: /s/ William D. Gurley -------------- --------------------------------------- William D. Gurley President, Chief Executive Officer and Director
Date: March 28, 2002 By: /s/ Stephen S. Langin -------------- --------------------------------------- Stephen S. Langin Vice President, Chief Financial Officer and Secretary
Date: March 28, 2002 By: /s/ W. Richard Bingham -------------- --------------------------------------- W. Richard Bingham Director
Date: March 28, 2002 By: /s/ Kenneth J. Diekroeger -------------- --------------------------------------- Kenneth J. Diekroeger Director
Date: March 28, 2002 By: /s/ Theodore C. Rogers -------------- --------------------------------------- Theodore C. Rogers Chairman of the Board and Director
Date: March 28, 2002 By: /s/ Kim A. Marvin -------------- --------------------------------------- Kim A Marvin Director
Date: March 28, 2002 By: /s/ Kirk R. Ferguson -------------- --------------------------------------- Kirk R. Ferguson Director
EXHIBIT INDEX
(1) Incorporated by reference to Registration Statement Form S-4, File No. 333-45823, filed on February 6, 1998 and amended on March 25, 1998, April 24, 1998 and May 11, 1998.
(2) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed May 14, 1998.
(3) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed November 12, 1998.
(4) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-K filed March 19, 1999.
(5) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed November 12, 1999.
(6) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-K filed March 2, 2000.
(7) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed May 9, 2000.
(8) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed August 14, 2001.
(9) Incorporated by reference to corresponding exhibit filed as an exhibit to Form 10-Q filed November 13, 2001.