-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PnDRkDkHw6BWsz4vC4aIm8S9lFlgv6OMEatQmFRvIypYj7qPQc7SArwG8BUa19XZ /w58qRGv1xsDX5fhqnWB+Q== 0000912057-96-004959.txt : 19960325 0000912057-96-004959.hdr.sgml : 19960325 ACCESSION NUMBER: 0000912057-96-004959 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED PRODUCTS CORP /DE/ CENTRAL INDEX KEY: 0000003941 STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [3523] IRS NUMBER: 380292230 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05530 FILM NUMBER: 96537367 BUSINESS ADDRESS: STREET 1: 10 S RIVERSIDE PLZ STREET 2: SUITE 1600 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3124541020 10-K405 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) - ------- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) - ------- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-5530
ALLIED PRODUCTS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 38-0292230 --------- ----------- (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10 SOUTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606 -------------------------------------------- ----- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 454-1020 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered --------------------- ------------------------------------------ COMMON STOCK--$.01 PAR VALUE NEW YORK AND PACIFIC
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _X_ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ As of February 29, 1996, 9,364,844 shares of common stock were outstanding, and the aggregate market value of the shares of common stock (based upon the closing price on the New York Stock Exchange) held by nonaffiliates of the Company was approximately $195,807,000. Determination of common stock ownership by affiliates was made solely for the purpose of responding to this requirement, and the Registrant is not bound by this determination for any other purpose. The Company's definitive Proxy Statement (which will be filed at a later date) for the Annual Meeting of Stockholders scheduled to be held May 23, 1996 and Annual Report to security holders for the year ended December 31, 1995 are incorporated by reference in Part III and Part IV herein. The Exhibit Index is located on page 40. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Allied Products Corporation (Company) was organized under Delaware law in 1967 as the successor to a Michigan corporation which was formed in 1928. Its principal executive offices are at 10 South Riverside Plaza, Chicago, Illinois 60606 and its telephone number is (312) 454-1020. The Company's operations involve a single industry segment, the manufacturing and sale of agricultural and industrial machinery and other products. The operations of the Company were realigned into one business segment in 1993 reflecting the sale or closure of several operating divisions. This restructuring of the Company, which began in 1991, was completed in 1994 with the sale of the Cooper division. Reference is made to Note 3 of Notes to Consolidated Financial Statements for a more complete description of these closures and dispositions. Approximately 11%, 2% and 8% of the Company's net sales from continuing operations in 1995, 1994 and 1993, respectively, were exported. PRODUCT LINES FARM IMPLEMENTS PRODUCTS. The Bush Hog division offers a comprehensive line of farm implements including rotary cutters, tractor mounted loaders, hay mowers, peanut combines, tillers and cultivators. These products are marketed under two well established brand names, Bush Hog and Lilliston. Bush Hog rotary cutters are used to shred stalks after the crop has been harvested, to mow pasture, for land maintenance and for governmental right-of-way mowing. The use season for rotary cutters extends from early spring to late fall, and even longer in warmer climates. Bush Hog has a major market share (38%) of rotary cutters sold in North America. Front end loaders are used by farmers and ranchers for material handling, and cultivators are used for weed control after crops have been planted. Lilliston peanut combines are used in harvesting peanuts, and command approximately 32% of the market. The use season for peanut combines is from late summer to late fall. Several other implements are sold under the Bush Hog name, including disc mowers, rotary tillers, post hole diggers, flail mowers and rear mounted tractor blades. These tools offer a variety of applications, and are sold to farmers, ranchers, landscape contractors, large estate owners and municipalities. Implements tend to have a shorter life than tractors and self-propelled grain combines, and purchases of implements are less likely to be deferred in times of economic uncertainty, somewhat dampening cyclical swings in demand. Parts accounted for almost one sixth of Bush Hog's total revenue in 1995. In order to maintain and expand its market position, Bush Hog continually updates and improves its product offerings. This is done through a combination of internal development and external acquisition of technology. MARKETING. Bush Hog implements are marketed through approximately 2,650 farm equipment dealers which play the primary role in sales of farm equipment. In general, they are independent, local businessmen who have an established local clientele developed over the years and represent more than 35% of the total farm equipment dealerships in the United States and Canada. The Bush Hog and Lilliston brand names are particularly strong in the southeastern and southwestern states. Marketing and sales activities in Canada and the United States are carried out by 58 commissioned manufacturers' representatives or representative organizations. They operate as independent contractors and, for the most part, are exclusive. Commissions are payable when receivables are collected rather than when sales are made. To even out the seasonal variations in its production cycles, Bush Hog provides incentives for off-season purchases, including extended payment terms to dealers in the form of floor plan financing. Bush Hog retains a security interest in this floor plan equipment. Under certain state and provincial statutes, a dealer may return floor plan equipment to a manufacturer upon termination of the dealership. Bush Hog services its network of dealers through two manufacturing facilities and eight service parts distribution centers strategically located in the United States and Canada. COMPETITION. Competition for farm equipment includes the major line manufacturers of tractors and several hundred companies producing one or more models of shortline implements. Price, quality, service and availability are all factors in brand selection. Bush Hog's objective is to be a low cost producer of high quality products. To do this it must continue to modernize its facilities to improve efficiency. 2 INDUSTRY. The agricultural equipment industry in North America is a mature industry engaged in producing replacement equipment for a declining number of farmers. It is dominated by a small number of major line manufacturers, which market a full range of farm machinery, including tractors, grain combines and various implements through their own dealer organizations and account for approximately 60% of the dollar volume of industry shipments. The remaining 40% of the market is shared by approximately 700 companies that generally concentrate their production on shortline implements such as plows, harrows, cultivators, livestock equipment, grain handling equipment or hay equipment. During the 1980's, the farm economy was in decline and this led to a deterioration in farmers' financial condition. Capital expenditures by farmers reached a low in 1986. Since then, commodity exports have improved due to changes in governmental programs and foreign exchange rates. Individual farmers have reduced their debt load and are much less leveraged after several years of good earnings. Higher worldwide demand for agricultural commodities, coupled with lower than expected 1995 harvest yields, have resulted in substantially higher commodity prices. According to recent estimates by the United States Department of Agriculture, world grain inventories are at historically low levels, and exports are projected to increase again in 1996. Net farm income in 1995 was less than in 1994 due to lower yields and a decline in beef cattle prices. Beef cattle prices will remain low due to excessive inventories, and little improvement is expected in 1996. Overall, net farm income is projected to increase in 1996, as additional acres will be planted due to changes in government programs. METAL FORMING PRESSES PRODUCTS. The Verson division manufactures a broad line of both medium and large technologically advanced mechanical and hydraulic metal forming presses. These products are used in the manufacture of components for the automotive, appliance, office equipment, farm equipment, ordnance, aerospace and general metal working industries. A transfer press is a specialized mechanical press that combines a series of operations by transferring a work piece from one station to another inside of a single press. Each station in the press has a separate die that is individually adjustable. This process allows all operations, from blank to finished product, to take place in one press, resulting in increased output and reduced labor expense. Prices vary by type and size. Size categories for transfer presses range from "A" (largest) to "D" (smallest). An "A" transfer press is generally 13 to 15 feet wide, 80 to 90 feet long and stands four stories tall. By comparison, a "B" transfer press is approximately 10 feet wide, 60 feet long and four stories tall. The difference between these machines is the component part size they can stamp. An "A" transfer press may sell for in excess of $25 million. Approximately 15% of Verson's revenue is generated by customer special services. Items included in the special services area are: repair parts, complete remanufacturing capability for used presses, and contract machining and manufacturing. In addition to the fabrication and machining of components, Verson provides complete tooling and engineering services necessary for turnkey systems. Verson also designs and supplies tools for metal forming, including metal stamping and cold extrusion. MARKETING. Verson's Marketing Group is headed by a Vice President of Marketing and Sales, with responsibility for all Verson products and services. Three Sales Managers, reporting to the Vice President, are responsible for press sales, tooling sales, and press rebuilding and contract services, respectively. Verson's major customers are the U.S. automobile manufacturers (both U.S. and Japanese owned) and first and second tier automotive parts producing companies, which, on average, account for the largest part of Verson's annual revenue. Verson's other major market served is the appliance industry and customers include all major brand names. Verson is the technology leader, having designed the world's first transfer press in 1939, the world's first electronic feed in 1981 and, most recently, a cross bar feed which significantly improves production. COMPETITION. There are only a few companies world-wide that supply large transfer press systems similar to those provided by Verson. Verson is now the only American owned company competing in this upper end segment. Principal competition comes from German and Japanese manufacturers. Press manufacturers compete on the basis of technology, capability, reliability and price. The larger presses are huge pieces of machinery standing more than three stories tall and weighing up to 2,000 tons. Consequently, the barriers to entry for new competitors are very difficult to overcome due to required capital. INDUSTRY. Domestic automobile manufacturers are seeking to become more cost-effective by requiring quality parts, implementing Just-In-Time concepts, obtaining price reductions from suppliers, as well as redesigning cost out of automobiles, and restructuring and automating their manufacturing processes. Demand 3 from the appliance industry remains strong as the major manufacturers seek to increase capacity, reduce costs and gear up to produce water conserving clothes washers. The Verson division of Allied Products is in a strong position to capitalize on major retooling and modernization programs as they come on stream. The second wave of this demand is being felt now with major suppliers to the automakers converting to new technology. Demand from the appliance industry continues to grow, more than offsetting declines in aerospace and ordnance. In response to these market factors and an unprecedented incoming order rate in 1994, the Verson division completed a 40,000 square foot expansion of its assembly facilities. This addition has significantly expanded the division's capacity for manufacturing large transfer presses. THERMOPLASTIC RESINS PRODUCTS AND SERVICES. The Coz division provides a complete line of thermoplastic resins and related services to the plastic molding and extrusion industry. Coz offers a full line of materials supply, including specialty thermoplastic compounds and compounding services, color and additive concentrates, the reprocessing of scrap thermoplastic resins, and the brokering of prime and secondary materials. Coz purchases unmodified thermoplastic resins from major basic resin suppliers and combines or alloys these resins with various additives to achieve certain desired properties such as color, heat resistance, fire retardancy, etc. The resins Coz purchases are generally in the form of small plastic pellets as are the finished products supplied by Coz to its customers. Coz's brokerage operation provides its customers with prime and off-specification materials at competitive prices in large or small quantities as required. On-site inventories facilitate short delivery cycles. As an additional service to its customers, Coz also reprocesses scrap generated in molding or extrusion activities, thereby economically turning scrap into useful materials. MARKETING. All sales are handled on a direct basis by salaried employees who receive a significant part of their compensation from commissions. The sales staff is strongly supported by technical personnel, both in product development and in customer start-ups, applications, or training. Plant-to-plant visits and technical conferences are commonplace. The bulk of Coz's sales activity is in the northeastern United States. COMPETITION. Coz's competition comes from several different levels in the plastics industry, including basic resin producers, plastic distributors, brokers, concentrate suppliers and independent thermoplastic compounders. Coz differentiates itself from its competition by covering all aspects of plastics material supply, including compounding, color and additives, concentrates, toll processing customers' materials, reprocessing scrap materials, and brokering both prime and off-spec materials. Over its 35-year business life, Coz has developed significant technical capabilities supported by excellent laboratory and production equipment. As a result, Coz is positioned as a high-end co-developer for special customer applications. INDUSTRY. The thermoplastic compounding industry sales approximate $5 billion and are experiencing real growth at a rate of about 5 per cent annually. Independent compounders such as Coz are numerous and generally focus on a relatively small geographic area. Industry consolidation is occurring as some larger companies have been attracted to the growth opportunities in thermoplastic compounding. SALES BACKLOG Sales backlog as of December 31, 1995 was $173,361,000 compared to $176,403,000 at December 31, 1994. Over 90% of the backlog orders will be filled prior to the end of 1996. EMPLOYEES Allied Products currently employs approximately 1,600 individuals. Approximately 29% of Allied Products' employees are represented by unions. RAW MATERIALS AND SOURCES OF SUPPLY The principal raw material used by the farm implement and metal press operations include steel and other metals and purchased components. The thermoplastic division uses thermoplastics resins and other chemicals. During 1995, the materials needed by Allied Products generally have been available from a variety of sources in adequate quantities and at prevailing market prices. No one supplier is responsible for supplying more than 10% of the principal raw materials used by Allied Products. PATENTS, TRADEMARKS AND LICENSES Allied Products owns the federally registered trademarks "Bush Hog" and "Lilliston" used on its agricultural equipment products and "Verson" on its metal forming presses, all of which it considers material to its business. While Allied Products believes that the other 4 trademarks used by each of its operations are important, none of the patents, licenses, franchises or such other trademarks are considered material to the operation of its business. MAJOR CUSTOMERS Net sales from continuing operations to the three major U.S. automobile manufacturers accounted for approximately 29% of total consolidated sales from continuing operations in 1995. Approximately 14% and 25% of Allied Products' consolidated net sales from continuing operations in 1994 and 1993, respectively, were derived from sales to the major U.S. automobile manufacturers. With the exception of the three major automobile manufacturers, no material part of Allied Products' business is dependent upon a single customer. SEASONALITY Retail sales of and cash collected for farm equipment tend to occur during or just preceding the use seasons previously described. Sales and cash receipts for the other divisions are not affected by seasonality. ENVIRONMENTAL FACTORS Reference is made to Note 10 of Notes to Consolidated Financial Statements regarding environmental factors and matters. 5 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names and ages of the Company's Executive Officers, together with all positions and offices held with the Company by such officers as of February 29, 1996.
NAME POSITION WITH ALLIED PRODUCTS AGE - --------------------------------------------- ----------------------------------------------------------------- --- Richard A. Drexler........................... Chairman, President and Chief Executive Officer 48 Kenneth B. Light............................. Executive Vice President, Chief Financial and Administrative Officer 63 Martin A. German............................. Senior Vice President 59 Bobby M. Middlebrooks........................ Senior Vice President 60 David B. Corwine............................. Vice President, General Counsel and Secretary 58 Robert J. Fleck.............................. Vice President-Accounting and Chief Accounting Officer 48 Patrick J. Riley............................. Vice President and Treasurer 60
No family relationships exist among the executive officers. Each executive officer, except Mr. German, has been employed by Allied Products for over 10 years. Pursuant to Allied Products' By-laws, each officer is elected annually by the Board of Directors. Mr. Drexler, who became Chairman in 1993, has been President and a Director of Allied Products since 1982, has been Chief Executive Officer since 1986 and was Acting Chief Financial Officer from 1991 to 1992, Chief Financial Officer from 1989 to 1990 and Chief Operating Officer from 1981 to 1986. He was also Chief Financial Officer from 1977 to 1987. Prior to becoming President, Mr. Drexler served as Executive Vice President, Senior Vice President of Administration, Vice President of Administration, Staff Vice President-Development, and Director of Planning. Mr. Light, who became Chief Financial Officer in 1995, has been Executive Vice President and Chief Administrative Officer since 1982 and has also served as Secretary from 1972 to 1995. From 1980 to 1982, he was Senior Vice President-Administration, from 1976 to 1980 he was Vice President-General Counsel and prior to that he was General Counsel and Director of the Corporate Law Department. He became a Director of Allied Products in 1993. Mr. German was elected Senior Vice President in 1991 and was Vice President from 1989 to 1991. Since joining Allied Products in 1986, he has been President of the Verson Allsteel Press division. Prior to joining Allied Products, he was Vice President and General Manager of the Turning Division of Warner & Swasey Company. Mr. Middlebrooks has been Senior Vice President since 1985 and was Vice President of Allied Products from 1984 to 1985 in charge of the former Agricultural Equipment Group. Prior to that, he was President-Bush Hog Implements Division. He joined Bush Hog in 1955. Mr. Corwine was elected Vice President, General Counsel and Secretary in 1995. From 1980 to 1995, he was General Counsel and Assistant Secretary, and prior to that he was Director of the Corporate Law Department and Assistant Secretary. Prior to joining Allied Products in 1979, he was General Attorney for Santa Fe Industries, Inc. Mr. Fleck has been Vice President-Accounting since 1985 and Chief Accounting Officer since 1986. From 1983 to 1985 he was Staff Vice President-Accounting and prior to that he served as Corporate Controller and in various other accounting positions for Allied Products. Prior to joining Allied Products in 1974, he was an internal auditor with Marquette Cement Company, a national cement manufacturing company. Mr. Riley has been Vice President & Treasurer since 1993. Prior to that he has been Treasurer of Allied Products since 1976. Prior to that he was Assistant Treasurer and Director of Cash Management of Allied Products since 1969. 6 ITEM 2. PROPERTIES Allied Products owns or leases four manufacturing facilities in three states for the production of its various products and maintains warehouse facilities in various locations throughout the United States and Canada. Management is of the opinion that all facilities are of sound construction, in good operating condition and are adequately equipped for carrying on the business of the Company. Operations at the Bush Hog division are conducted in Selma, Alabama in two owned (one of which is mortgaged) facilities containing approximately 700,000 square feet in total. The division also maintains several leased facilities in various states and Canada which are used as warehouses and parts depots. Operations at the Verson division are conducted in Chicago, Illinois in an owned facility containing approximately 400,000 square feet. Operations at the Coz division are conducted in Northbridge, Massachusetts in a leased facility containing approximately 231,000 square feet. ITEM 3. LEGAL PROCEEDINGS Reference is made to Note 10 of Notes to Consolidated Financial Statements with respect to the Company's involvement in legal proceedings as a defending party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The Company's common stock is listed on the New York and Pacific Stock Exchanges. The price range of the common stock on the New York Stock Exchange is as follows:
- ----------------------------------------------------------------------------------------------------- BEGINNING END OF 1995 OF YEAR YEAR 1995 QTR HIGH LOW DIVIDEND - ----------------------------------------------------------------------------------------------------- Common $14 3/8 $24 1 $17 1/8 $13 3/8 $-- - ----------------------------------------------------------------------------------------------------- 2 19 7/8 16 3/4 .025 - ----------------------------------------------------------------------------------------------------- 3 23 1/4 18 3/4 .025 - ----------------------------------------------------------------------------------------------------- 4 24 1/8 20 1/8 .025 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- BEGINNING END OF 1994 OF YEAR YEAR 1994 QTR HIGH LOW DIVIDEND - ----------------------------------------------------------------------------------------------------- Common $12 1/2 $14 3/8 1 $17 3/8 $12 5/8 $-- - ----------------------------------------------------------------------------------------------------- 2 15 12 1/4 -- - ----------------------------------------------------------------------------------------------------- 3 14 7/8 12 1/2 -- - ----------------------------------------------------------------------------------------------------- 4 15 1/8 12 -- - -----------------------------------------------------------------------------------------------------
As of February 12, 1996, the approximate number of holders of record of the Company's common stock ($.01 par value) was 2,400. The Company paid no dividends from 1982 until 1995. Restrictions from paying dividends were removed in 1995. Subsequent to the end of 1995, the Company increased its quarterly dividend from $.025 per share to $.05 per share. ITEM 6. SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991 ------------ ------------ ------------ ---------------- ------------ Net sales from continuing operations (A).......... $260,861,000 $215,529,000 $217,988,000 $195,341,000 $159,023,000 Income (loss) from continuing operations (A)...... $ 33,989,000 $ 19,687,000 $ 5,951,000 $ 1,774,000(B) $ (4,500,000) Earnings (loss) per common share from continuing operations (A).................................. $3.48 $1.96 $.43 $(.08)(B) $(1.12) Total assets...................................... $166,743,000 $150,555,000 $192,040,000 $284,612,000 $326,702,000 Long-term debt (including capitalized leases and redeemable preferred stock)..................... $ 315,000 $ 12,130,000 $ 23,522,000 $117,833,000 $ 37,799,000 Cash dividend declared per common share........... $.075 $-- $-- $-- $--
- ------------------------ (A) Restated prior to 1993 to reflect the effects of discontinued operations. (B) Excludes a charge of $1,739,000 ($.21 per common share) relating to the transition effect of adopting SFAS No. 106--Employers' Accounting for Postretirement Benefits Other Than Pensions on an immediate recognition basis.
8 ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OPERATING RESULTS Reference is made to Note 3 of Notes to Consolidated Financial Statements regarding the sale/shutdown and restructuring of operations prior to the end of 1994. During 1993, the Company sold the Smith Energy Services and White-New Idea Farm Equipment divisions for cash. The Company also closed down and liquidated the R/B Die & Prototype, International Agro, Kewanee Farm Equipment and Charles City Foundry and Machining operations during 1993. During 1994, the Company sold the business and certain assets of the Cooper division. The Company has included the results of these operations and, in the years prior to 1994, an allocation of financing costs, administrative and interest expenses and related restructuring cost provisions under the caption "Discontinued operations (net of tax)--Income from operations" in the accompanying Consolidated Statements of Income. 1995 COMPARED TO 1994 Net sales from continuing operations in 1995 increased 21% to $260,861,000 compared to net sales from continuing operations of $215,529,000 in 1994. Income before taxes from continuing operations was $18,330,000 in 1995 compared to $20,564,000 in 1994. Excluding the effects of a $7,699,000 reserve for a long- term receivable in 1995 (see Note 10 of Notes to Consolidated Financial Statements), income before taxes from continuing operations would have been $26,029,000, an increase of over 26% from the prior year. Net income in 1995 was $33,989,000 compared to net income of $14,333,000 reported in 1994. Excluding the effects of the above mentioned reserve and the income statement effect from a reduction in the valuation allowance associated with the Company's net deferred tax asset (see Note 4 of Notes to Consolidated Financial Statements), net income would have been $25,040,000 in 1995. Net sales at the Bush Hog division decreased by approximately 2% in 1995 compared to 1994. The majority of the decrease was associated with the disc mower and peanut combine product lines. During 1995, portions of the Midwest were affected by spring floods, resulting in lower crop plantings. In the southern portion of the country, extreme drought and insect infestation affected the cotton, corn and peanut crop. Cattle prices dropped during 1995 affecting the sales of larger cutters at the Bush Hog division. Cattle ranchers use these large cutters for grazing pasture maintenance. Decreases in sales noted above were partially offset by the effects of new products introduced in the current year. Gross profits and gross profit margins decreased in 1995 compared to 1994. The decreases were primarily related to the effects of decreased labor efficiencies and the mix of products sold. New product sales in the current year were generally not manufactured by the Bush Hog division but were purchased from outside sources under OEM (original equipment manufacturing) agreements, resulting in lower gross profit margins. Lower sales volume noted above also resulted in lower gross profits. At the Verson division, net sales increased by almost 60% in 1995 compared to the net sales level of 1994. During 1995, production began on an order for three "A" size transfer presses. The total value of the order was in excess of $85,000,000. Production and shipment of these presses will be completed in 1996. Revenues and profits are recognized on a percentage of completion basis for press production at the Verson division. Production on other press orders as well as parts sales also increased in 1995. Although profit margins decreased in 1995, gross profits increased, principally the result of increased production (sales) volume noted above. Gross profit margins decreased slightly in relation to press sales due to a mix of presses manufactured in 1995 compared to 1994. Margins on parts sales also decreased in 1995. Some parts business was subcontracted out in 1995 due to manufacturing requirements associated with the "A" presses. Warranty provisions increased in 1995 due to the increase in sales volume. Provisions for warranty in 1994 included the reversal of excess provisions in the prior year. Net sales at the Coz division increased 11% in 1995 compared to net sales of the prior year. The majority of the increase was associated with increased sale prices in the current year. During 1994 and the first half of 1995, the price of basic raw materials increased significantly. Sales prices were adjusted to partially offset the effect of these cost increases. In the last half of 1995, raw material prices decreased. Gross profits increased slightly in 1995 compared to 1994, principally from the effects of increased sales as noted above. Gross profit margins decreased slightly in the current year due to the mix of products sold and the difficulty in passing on material cost increases to customers. Manufacturing costs increased in 1995 due to a slight increase in employment levels and normal cost increases in labor, rent and supplies. Selling and administrative expenses were $34,452,000 (13.2% of net sales from continuing operations) in 1995 compared to $31,072,000 (14.4% of net sales from continuing operations) in 1994. In terms of actual dollars, selling expenses increased slightly in 1995. Increased costs at the Verson division associated 9 with increased sales efforts were partially offset by decreased costs at the Bush Hog division related to changes within the commission structure at this operation. The increases in administrative expenses relate primarily to provisions ($932,000) for the new Target Benefit pension plan (effective January 1, 1995) and expenses totaling approximately $1,500,000 related to the termination/retirement of certain individuals. Normal cost increases (salaries, rent, utilities, insurance, etc.) also impacted both selling and administrative costs in 1995. The decrease in interest expense ($1,052,000 in 1995 compared to $1,859,000 in 1994) was directly related to reduced borrowing levels in the current year. In March 1994, the Company terminated certain financing arrangements and replaced them with a Revolving Credit Agreement. This agreement was amended in the first quarter of 1995 providing for reduced interest rates. Borrowing levels have been reduced due to the improved internal cash flow of the Company from its continuing operations. Other expense was $7,483,000 in 1995 compared to other expense of $1,198,000 in 1994. Reference is made to Note 12 of Notes to Consolidated Financial Statements for an analysis of other (income) expense in 1995 and 1994. Reference is made to Note 4 of Notes to Consolidated Financial Statements for an explanation of the current and deferred provision (credit) for income taxes in 1995 and 1994. 1994 COMPARED TO 1993 Net sales from continuing operations in 1994 were $215,529,000 compared to net sales from continuing operations of $217,988,000 for the prior year. Income from continuing operations in 1994 was $19,687,000 compared to income from continuing operations of $5,951,000 reported in 1993. Net income in 1994 was $14,333,000 compared to net income of $15,284,000 reported in 1993. Net sales at the Bush Hog division increased by over 11% in 1994 compared to 1993. The most significant increases in net sales occurred within the loader and disc mower product lines in 1994. In general, the agricultural equipment industry experienced improvement over the prior year due to a number of factors. The year of 1994 was a record year for corn, soybean and cotton production. Planted acreage also increased in 1994 over 1993 levels. The most significant increase in net sales at the Bush Hog division was within the loader product line. The overall market for the front end loaders increased this past year. The division manufactures adaptor kits so that loaders can be mounted on more than 1200 different tractor models. Disc mower and parts sales also increased in 1994. These increases were partially offset by decreased rotary cutter sales. This decrease was primarily related to the effects of lower cattle prices. Gross profits and gross profit margins improved in 1994 at the Bush Hog division. Approximately 60% of the increase in gross profits was directly related to the increased sales volume as discussed above. The effects of sales price increases during 1994 resulted in improved margins and increased gross profits. On an overall basis, manufacturing variances increased slightly in 1994. Increases in direct manufacturing inefficiencies (resulting from increased facility utilization and late receipt of purchased components) were mostly offset by the effects of manufacturing cost reductions and decreased warranty claims in 1994. At the Verson division, net sales decreased by approximately 17% in 1994 compared to 1993. In late 1991, the division had received a large press order. During 1993, production was completed on this order. Orders for production in 1994 to replace the work completed did not materialize in sufficient amounts. During the last half of 1994 and the early part of 1995, the division received a significant number of new press orders, including orders for three "A" size transfer presses with a sales value of over $85,000,000. While gross profits remained approximately equal to those of the prior year, gross profit margins improved in 1994. The increase was the result of several factors, including improved margins on parts sales (prices were increased in the early part of 1994), improved mix of products sold and lower warranty expenses. Net sales at the Coz division increased by approximately 6% in 1994 compared to 1993. Processed compounds represent the largest product line increase due to expansion of the customer base and increased selling prices. Gross profits at the Coz division increased, due primarily to the effect of increased selling prices and, to a lesser extent, the mix of products sold. Partially offsetting this increase was the effect of increased material costs in 1994. Prices of certain raw materials increased significantly during the past year. Selling prices were increased to offset these cost increases. Prices continued to escalate in the early part of 1995. Shipping costs also increased in 1994 due to the effects of increased sales volume and increased shipping container costs. Utility expenses increased in 1994 due to additional space being leased for offices with the old office space now being utilized for manufacturing purposes. Gross profit margins of the Coz division remained constant in 1994 compared to 1993. 10 Selling and administrative expenses decreased to $31,072,000 (14.4% of net sales from continuing operations) from $31,427,000 (also 14.4% of net sales from continuing operations) in 1993. On an overall basis, selling expenses increased in 1994 compared to 1993. The most significant increase was related to commissions, primarily at the Bush Hog division where sales increased in 1994. The Coz division increased the employment level of its sales force in 1994 resulting in increased costs. These increases were offset by lower commission expenses at the Verson division as this operation is phasing out the use of commissioned brokers in the sale of presses. The increase in selling expenses was more than offset by lower administrative expenses, primarily in the areas of professional fees and insurance costs. Office related costs were also reduced with the relocation of the Corporate Office during 1994. Staffing levels were reduced from 1993 levels. These decreases were partially offset by a provision of $450,000 as a supplemental contribution to the SMART pension plan, a $400,000 provision for the new Executive Retirement Plan and other normal increases experienced in operations throughout the Company. The decrease in interest expenses ($1,859,000 for 1994 compared to $6,376,000 in 1993 after an allocation to discontinued operations) was directly related to a significantly reduced borrowing level and the effects of lower average interest rates associated with outstanding debt in 1994. Other expense in 1994 was $1,198,000 compared to $4,614,000 in 1993. Reference is made to Note 12 of Notes to Consolidated Financial Statements for an analysis of other (income) expense in 1994 and 1993. Loss from discontinued operations totaled $5,354,000 in 1994. Approximately half of the loss was related to the operating results of the Cooper division which was sold at the end of the second quarter following the termination of a proposed sale earlier in the year. Other significant items included environmental related issues (see Note 10 of Notes to Consolidated Financial Statements) and insurance costs associated with discontinued operations, and the final settlement of the disposition of the White-New Idea operation (see Note 3 of Notes to Consolidated Financial Statements). FINANCIAL CONDITION 1995 Working capital at December 31, 1995 was $54,947,000 and the current ratio was 1.84 to 1.0. Net accounts receivable decreased by approximately $2,000,000 in 1995. The majority of the decrease was related to the Verson division. Receivables at this division are a function of shipments (revenues recognized on a percentage of completion basis are accumulated in inventory). Press shipments in the last few months of 1995 decreased compared to the end of the prior year. This decrease was partially offset by the effects of increased receivables at the Bush Hog division. The increase reflects decreased retail sales of large cutters and peanut combines due to market conditions described earlier. On a consolidated basis, inventory levels increased by approximately $4,000,000 in 1995. The entire increase was related to the Verson division where production continues on an order for three "A" size transfer presses discussed earlier. A portion of the increase in accumulated costs of presses in progress has been offset by increased customer deposits and progress payments related to the contracts in process. Inventories at the Bush Hog and Coz divisions decreased in 1995. Major fixed asset additions in 1995 include building additions at the Verson division (primarily to expand the press assembly area) and a new paint system at the Bush Hog division. Other fixed asset additions at all divisions were for equipment to improve productivity and quality in the products manufactured. Funds to finance these additions include current operating cash flow and borrowings (subsequently repaid) under the Revolving Credit Agreement. During 1995, the Company sold for cash certain idle facilities and other operating and nonoperating assets which resulted in gains of approximately $2,000,000. The decrease in notes receivable due after one year was related to a reserve of $7,699,000 established in 1995 for the remaining unreserved amount due the Company from the sale of an operation in 1991. See Note 10 of Notes to Consolidated Financial Statements. The deferred tax asset results from the reversal of the valuation allowance associated with certain net operating loss carryforwards, tax credits and timing differences in 1995. The recent earnings history of the Company and prospects for the future makes it more likely than not that the Company will utilize the benefits arising from the items noted above. See Note 4 of Notes to Consolidated Financial Statements. Borrowings under the Revolving Credit Agreement at the end of 1995 were primarily related to the "A" size transfer presses in production at the Verson division and the normal seasonal needs at the Bush Hog division associated with inventory build schedules prior to the spring selling season. During 1995, the Company retired all outstanding Series B and C preferred shares through the use of internally generated funds. 11 1994 Working capital at December 31, 1994 was $33,531,000 and the current ratio was 1.53 to 1.0. Net accounts receivable increased by almost $2,000,000 in 1994. The majority of the increase was related to the Bush Hog division where sales increased in 1994 as noted above. Coz division receivables also increased at the end of 1994. This increase was associated primarily with strong sales in the fourth quarter of 1994. Receivables at the end of 1994 also included a short-term secured note taken by the Company as part of the proceeds from the sale of the Cooper division. This note was paid in full subsequent to the end of 1994. These increases were partially offset by the effects of lower press shipments at the Verson division in 1994 and the effects of the disposition of the Cooper division. On a consolidated basis, inventories increased by approximately $3,700,000 at the end of 1994 compared to the end of 1993. The majority of the increase was related to the Bush Hog division. Production was increased in the fourth quarter of 1994 to avoid capacity limitations in the first half of 1995. Coz inventory levels also increased due to increased orders and the effects of increased material prices. These increases were offset partially by the effects of the sale of the Cooper division and lower net inventory levels at the Verson division due to the effects of increased customer deposits for jobs in progress. Fixed asset additions of $7,072,000 were financed primarily through internally generated funds. The increase in payables and borrowings under the Revolving Credit Agreement at the end of 1994 reflects the effects of increased production at all operating divisions of the Company. Reference is made to Note 2 of Notes to Consolidated Financial Statements for an analysis of accrued expenses. LIQUIDITY AND CAPITAL RESOURCES At the end of 1995, the Company's sales backlog was in excess of $173,000,000. The majority of the amount is related to the Verson division and is represented principally by orders for new presses. Accumulated production costs are not invoiced until shipment. In order to fund the cost of production, the Verson division receives deposits from customers at the time the press order is accepted. Many press orders also require periodic progress payments from the customer during the production process, which minimizes the Company's cash requirements during the manufacturing cycle. At the Bush Hog division, cash collections associated with machine sales generally are dependant upon the retail sale of the product by the dealer. Extended payment terms are offered in the form of floor plan financing which is customary within the agricultural equipment industry. With the exception of the cattle industry, the overall farm economy is sound. It is anticipated that farm cash income will be up slightly in 1995 and will increase in 1996 due to higher crop prices, increased demand and more acres being planted. Debate on a new farm bill continues in Congress. As discussed earlier, the Company completed major fixed asset additions during 1995. These additions were financed through the use of internally generated funds and borrowings under the Revolving Credit Agreement. The Company currently has no major commitments for fixed asset additions. As noted above, the Company reversed its previous valuation allowance associated with certain net operating loss carryforwards, tax credits and timing differences. In years subsequent to 1995, the Company will be recording a tax provision based principally upon the Federal statutory rate in effect and anticipates no reductions in future tax provisions from additional tax credits at this time. However, the Company projects that future Federal income tax payments will be based upon the Alternative Minimum Tax rate as the Company continues to utilize its substantial tax loss carryforwards for tax reporting purposes. Reference is made to Note 10 of Notes to Consolidated Financial Statements for a current discussion on outstanding environmental and legal issues and other contingent liabilities. As of December 31, 1995, the Company had cash and cash equivalents of $744,000 and additional funds of $23,800,000 available under its Revolving Credit Agreement. The Company believes that its expected operating cash flow and funds available under its Revolving Credit Agreement are adequate to finance its operations and capital expenditures in the near future. During 1995 the Company has been in compliance with all provisions of loan agreements in effect. Subsequent to the end of 1995, the Company issued 211,500 new common shares to certain officers of the Company for the exercise of stock options previously issued. The Company repurchased these shares from the officers for treasury stock purposes. The Company's Board of Directors also authorized the purchase by the Company of up to an additional 250,000 shares of the Company's common stock from time to time on the open market, subject to prevailing market conditions. On February 2, 1996, the Company announced an increase in the quarterly dividend from $.025 per share 12 to $.05 per share, effective with the first quarter dividend payable on March 31, 1996 to shareholders of record on February 23, 1996. IMPACT FROM NOT YET EFFECTIVE RULES In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123--Accounting for Stock Based Compensation. Under the provisions of this statement, the fair value of stock options issued may be determined by using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. The statement also provides for valuation of nonvested stock (usually referred to as restricted stock) and employee stock purchase plans. Valuation for stock issued under these various plans using the fair value based method described above may result in compensation costs to the issuer at the grant date and is recognized over the service period, which is usually the vesting period. Reporting compensation for these plans under this statement is optional. Companies choosing not to value stock options or similar equity instruments under the fair value based method must provide pro forma disclosure amounts that reflect the difference between compensation cost included in net income and the related cost measured by the fair value based method defined in SFAS No. 123, including tax effects, if any, that would have been recognized in the income statement if the fair value based method had been used. Adoption of this statement is required for transactions entered into in years that begin after December 15, 1995. The Company is in the process of reviewing the effects of this statement and has not decided whether or not to adopt the preferable fair value based method of accounting for stock-based compensation as it relates to the issuance of stock options. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Allied Products Corporation We have audited the consolidated balance sheets of Allied Products Corporation and consolidated subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' investment and cash flows for each of the three years in the period ended December 31, 1995. We have also audited the financial statement schedule listed in Part IV of Form 10-K, Item 14(a)2 for each of the three years in the period ended December 31, 1995. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Allied Products Corporation and consolidated subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L. L. P. Chicago, Illinois February 2, 1996 14 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1995 1994 1993 ---------------- ---------------- ---------------- Net sales from continuing operations........................ $ 260,861,000 $ 215,529,000 $ 217,988,000 Cost of products sold....................................... 199,544,000 160,836,000 169,184,000 ---------------- ---------------- ---------------- Gross profit.............................................. $ 61,317,000 $ 54,693,000 $ 48,804,000 ---------------- ---------------- ---------------- Other costs and expenses: Selling and administrative expenses....................... $ 34,452,000 $ 31,072,000 $ 31,427,000 Interest expense.......................................... 1,052,000 1,859,000 6,376,000 Other (income) expense, net............................... 7,483,000 1,198,000 4,614,000 ---------------- ---------------- ---------------- $ 42,987,000 $ 34,129,000 $ 42,417,000 ---------------- ---------------- ---------------- Income before taxes from continuing operations before extraordinary charge....................................... $ 18,330,000 $ 20,564,000 $ 6,387,000 Provision (credit) for income taxes: Current................................................... 989,000 877,000 436,000 Deferred.................................................. (16,648,000) -- -- ---------------- ---------------- ---------------- Income from continuing operations before extraordinary charge..................................................... $ 33,989,000 $ 19,687,000 $ 5,951,000 ---------------- ---------------- ---------------- Discontinued operations (net of tax): Income from operations.................................... $ -- $ -- $ 5,847,000 Gain (loss) on disposition of discontinued operations and other costs.............................................. -- (5,354,000) 5,538,000 ---------------- ---------------- ---------------- Income (loss) from discontinued operations................ $ -- $ (5,354,000) $ 11,385,000 ---------------- ---------------- ---------------- Income before extraordinary charge.......................... $ 33,989,000 $ 14,333,000 $ 17,336,000 Extraordinary loss on early extinguishment of debt, less applicable income tax benefit.............................. -- -- (2,052,000) ---------------- ---------------- ---------------- Net income.................................................. $ 33,989,000 $ 14,333,000 $ 15,284,000 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Net income applicable to common stock....................... $ 32,789,000 $ 12,440,000 $ 13,211,000 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Earnings (loss) per common share: Primary -- Continuing operations..................................... $3.48 $1.96 $0.43 Discontinued operations................................... -- (0.59) 1.27 Extraordinary loss........................................ -- -- (0.23) ----- ----- ----- Income per common share................................... $3.48 $1.37 $1.47 ----- ----- ----- ----- ----- ----- Fully diluted -- Continuing operations..................................... $3.45 $1.96 $0.43 Discontinued operations................................... -- (0.59) 1.27 Extraordinary loss........................................ -- -- (0.23) ----- ----- ----- Income per common share................................... $3.45 $1.37 $1.47 ----- ----- ----- ----- ----- ----- Weighted average shares outstanding: Primary................................................... 9,414,000 9,102,000 8,999,000 --------- --------- --------- --------- --------- --------- Full diluted.............................................. 9,494,000 9,102,000 8,999,000 --------- --------- --------- --------- --------- ---------
The accompanying notes to consolidated financial statements are an integral part of these statements. 15 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------------------- 1995 1994 ---------------- ---------------- Current Assets: Cash and cash equivalents................................................ $ 744,000 $ 1,654,000 ---------------- ---------------- Notes and accounts receivable, less allowances of $948,000 and $1,521,000, respectively................................................ $ 44,293,000 $ 46,267,000 ---------------- ---------------- Inventories: Raw materials.......................................................... $ 12,037,000 $ 11,556,000 Work in process........................................................ 20,438,000 16,437,000 Finished goods......................................................... 19,931,000 20,462,000 ---------------- ---------------- $ 52,406,000 $ 48,455,000 ---------------- ---------------- Deferred tax asset....................................................... $ 22,538,000 $ -- ---------------- ---------------- Prepaid expenses......................................................... $ 323,000 $ 456,000 ---------------- ---------------- Total current assets................................................. $ 120,304,000 $ 96,832,000 ---------------- ---------------- Plant and Equipment, at cost: Land..................................................................... $ 2,172,000 $ 2,311,000 Buildings and improvements............................................... 36,269,000 34,252,000 Machinery and equipment.................................................. 47,078,000 40,126,000 ---------------- ---------------- $ 85,519,000 $ 76,689,000 Less--Accumulated depreciation and amortization.......................... 47,083,000 46,128,000 ---------------- ---------------- $ 38,436,000 $ 30,561,000 ---------------- ---------------- Other Assets: Notes receivable, due after one year, less allowance of $7,699,000 at December 31, 1995....................................................... $ 40,000 $ 7,658,000 Deferred tax asset....................................................... 4,823,000 -- Deferred charges (goodwill), net of amortization......................... 1,845,000 14,626,000 Other.................................................................... 1,295,000 878,000 ---------------- ---------------- $ 8,003,000 $ 23,162,000 ---------------- ---------------- $ 166,743,000 $ 150,555,000 ---------------- ---------------- ---------------- ----------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 16 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' INVESTMENT
DECEMBER 31, ---------------------------------- 1995 1994 ---------------- ---------------- Current Liabilities: Revolving credit agreement............................................... $ 11,200,000 $ 10,300,000 Current portion of long-term debt........................................ 621,000 689,000 Accounts payable......................................................... 21,152,000 20,475,000 Accrued expenses......................................................... 32,384,000 31,837,000 ---------------- ---------------- Total current liabilities............................................ $ 65,357,000 $ 63,301,000 ---------------- ---------------- Long-term debt, less current portion shown above........................... $ 315,000 $ 630,000 ---------------- ---------------- Other long-term liabilities................................................ $ 2,806,000 $ 2,622,000 ---------------- ---------------- Redeemable preferred stock: $10.81 Series C Cumulative Preferred Stock; stated value $100 per share, authorized 150,000 shares; issued and outstanding, none and 115,000 shares at December 31, 1995 and 1994, respectively.............................................................. $ -- $ 11,500,000 ---------------- ---------------- Commitments and Contingencies Shareholders' Investment: Preferred stock: Series B Variable Rate Cumulative Preferred Stock, stated value $50 per share; authorized 350,000 shares; issued and outstanding, none and 146,800 shares at December 31, 1995 and 1994, respectively............ $ -- $ 7,340,000 Undesignated--authorized 1,500,000 shares at December 31, 1995 and 1994; none issued..................................................... -- -- Common stock, par value $.01 per share; authorized 25,000,000 shares; issued 9,138,344 and 9,103,344 shares at December 31, 1995 and 1994, respectively............................................................ 91,000 91,000 Additional paid-in capital............................................... 93,143,000 92,146,000 Retained earnings (deficit).............................................. 5,031,000 (27,075,000) ---------------- ---------------- $ 98,265,000 $ 72,502,000 ---------------- ---------------- $ 166,743,000 $ 150,555,000 ---------------- ---------------- ---------------- ----------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 17 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1995 1994 1993 ---------------- -------------- ---------------- Cash Flows from Operating Activities: Net income............................................................. $ 33,989,000 $ 14,333,000 $ 15,284,000 Adjustments to reconcile net income to net cash provided from operating activities: Income on disposition of discontinued operations..................... -- (50,000) (5,538,000) Gains on sales of operating and non-operating assets................. (2,000,000) (214,000) (497,000) Extraordinary loss on early extinguishment of debt................... -- -- 2,052,000 Effect of provision for restructuring costs.......................... -- -- 700,000 Depreciation and amortization........................................ 5,033,000 5,159,000 7,402,000 Amortization of deferred charges and (credits), net.................. 2,068,000 2,067,000 (216,000) Deferred tax credit.................................................. (16,648,000) -- -- Provision for collectability of long-term receivable................. 7,699,000 -- -- Changes in noncash assets and liabilities, net of effects of assets/businesses sold and noncash transactions: (Increase) decrease in accounts receivable......................... 99,000 (100,000) 29,581,000 (Increase) decrease in inventories................................. (3,951,000) (5,596,000) 22,034,000 Decrease in prepaid expenses....................................... 133,000 1,459,000 784,000 Decrease in notes receivable, due after one year................... 423,000 807,000 997,000 Increase (decrease) in accounts payable and accrued expenses....... 1,349,000 (8,490,000) (5,219,000) Other, net........................................................... 802,000 (431,000) 390,000 ---------------- -------------- ---------------- Net cash provided from operating activities............................ $ 28,996,000 $ 8,944,000 $ 67,754,000 ---------------- -------------- ---------------- Cash Flows from Investing Activities: Additions to plant and equipment....................................... $ (14,378,000) $ (6,957,000) $ (7,741,000) Proceeds from sales of plant and equipment............................. 3,611,000 2,452,000 8,311,000 Proceeds from sales of assets/businesses............................... -- 343,000 62,834,000 ---------------- -------------- ---------------- Net cash provided from (used for) investing activities................. $ (10,767,000) $ (4,162,000) $ 63,404,000 ---------------- -------------- ---------------- Cash Flows from Financing Activities: Proceeds from issuances of long-term debt.............................. $ -- $ -- $ 33,348,000 Borrowings under the revolving loan agreements......................... -- 29,246,000 145,081,000 Payments under the revolving loan agreements........................... -- (48,508,000) (129,777,000) Borrowings under revolving credit agreement............................ 110,300,000 52,100,000 -- Payments under revolving credit agreement.............................. (109,400,000) (41,800,000) -- Payments of short and long-term debt................................... (827,000) (33,881,000) (139,769,000) Payments of preferred stock redemptions................................ (17,997,000) (3,100,000) (66,000) Dividends paid......................................................... (1,883,000) (1,893,000) (1,716,000) Stock option transactions.............................................. 668,000 292,000 711,000 ---------------- -------------- ---------------- Net cash used for financing activities................................. $ (19,139,000) $ (47,544,000) $ (92,188,000) ---------------- -------------- ---------------- Net increase (decrease) in cash and cash equivalents..................... $ (910,000) $ (42,762,000) $ 38,970,000 Cash and cash equivalents at beginning of year........................... 1,654,000 44,416,000 5,446,000 ---------------- -------------- ---------------- Cash and cash equivalents at end of year................................. $ 744,000 $ 1,654,000 $ 44,416,000 ---------------- -------------- ---------------- ---------------- -------------- ----------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 18 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1994 1993 ----------- ------------- -------------- Supplemental Information: (A) Noncash investing and financing activities: 1. Assets acquired through the assumption of debt............ $ 444,000 $ 115,000 $ 387,000 ----------- ------------- -------------- ----------- ------------- -------------- 2. Series B Preferred stock dividends paid/payable through the issuance of common stock............................ $ -- $ -- $ 398,000 ----------- ------------- -------------- ----------- ------------- -------------- 3. Series B Preferred stock redemptions ($3,200,000) and dividends ($666,000) paid through the issuance of subordinated debt, net of $722,000 cash paid............ $ -- $ -- $ 3,144,000 ----------- ------------- -------------- ----------- ------------- -------------- 4. Series C Preferred stock dividends paid/payable through the issuance of common stock............................ $ -- $ -- $ 405,000 ----------- ------------- -------------- ----------- ------------- -------------- 5. Series C Preferred stock redemptions ($2,100,000) and dividends ($1,527,000) paid through the issuance of subordinated debt, net of $1,060,000 cash paid.......... $ -- $ -- $ 2,567,000 ----------- ------------- -------------- ----------- ------------- -------------- 6. Interest expense paid through the issuance of sub- ordinated debt.......................................... $ -- $ -- $ 161,000 ----------- ------------- -------------- ----------- ------------- -------------- 7. Debt assumed by purchasers of businesses sold............. $ -- $ -- $ 760,000 ----------- ------------- -------------- ----------- ------------- -------------- 8. Proceeds (primarily notes receivable) received from the sales of discontinued operations........................ $ -- $ 2,011,000 $ 100,000 ----------- ------------- -------------- ----------- ------------- -------------- (B) Interest paid during year................................. $ 939,000 $ 2,657,000 $ 10,311,000 ----------- ------------- -------------- ----------- ------------- -------------- (C) Income/franchise taxes paid during year, net of refunds................................................. $ 471,000 $ 522,000 $ 812,000 ----------- ------------- -------------- ----------- ------------- --------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 19 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT PREFERRED AND COMMON STOCK
SERIES B PREFERRED ($50 COMMON ($.01 STATED VALUE PAR VALUE PER SHARE) PER SHARE) --------------- --------------- Balance at December 31, 1992................................................. $ 12,240,000 $ 86,000 Redemption of 64,000 Series B preferred shares through the issuance of subordinated notes and cash............................................... (3,200,000) -- Issuance of 127,296 common shares for payment of Series B preferred dividends................................................................. -- 1,000 Issuance of 202,688 common shares for payment of Series C preferred dividends................................................................. -- 2,000 Issuance of 133,515 common shares in connection with the exercises of stock options................................................................... -- 2,000 --------------- --------------- Balance at December 31, 1993................................................. $ 9,040,000 $ 91,000 Redemption of 34,000 Series B preferred shares............................. (1,700,000) -- Issuance of 14,734 common shares in connection with the exercises of stock options................................................................... -- -- --------------- --------------- Balance at December 31, 1994................................................. $ 7,340,000 $ 91,000 Redemption of 146,800 Series B preferred shares............................ (7,340,000) -- Issuance of 35,000 common shares in connection with the exercises of stock options................................................................... -- -- --------------- --------------- Balance at December 31, 1995................................................. $ -- $ 91,000 --------------- --------------- --------------- ---------------
The accompanying notes to consolidated financial statements are an integral part of these statements. 20 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT ADDITIONAL PAID-IN CAPITAL AND RETAINED EARNINGS (DEFICIT)
ADDITIONAL RETAINED PAID-IN EARNINGS CAPITAL (DEFICIT) -------------- --------------- Balance at December 31, 1992.................................................................. $ 90,930,000 $ (52,121,000) Net income for the year..................................................................... -- 15,284,000 Preferred dividends paid/declared: Series B paid through the issuance of 127,296 common shares (variable based on prime rate--$1.625 per share).................................................................. 397,000 -- Series B paid through the issuance of subordinated notes and cash (variable based on prime rate--$3.00 per share)................................................................... -- (666,000) Series B declared payable in January 1994--$.75 per share................................. -- (136,000) Series C paid through the issuance of 202,688 common shares--$2.7025 per share............ 403,000 -- Series C paid through the issuance of subordinated notes and cash--$10.81 per share....... -- (1,527,000) Series C declared payable in January 1994--$2.7025 per share.............................. -- (349,000) Excess of proceeds received over cost of common shares purchased and reissued in connection with the exercise of stock options to purchase 17,710 common shares........................ 22,000 -- Issuance of 133,515 common shares in connection with exercises of stock options............. 643,000 -- -------------- --------------- Balance at December 31, 1993.................................................................. $ 92,395,000 $ (39,515,000) Net income for the year..................................................................... -- 14,333,000 Preferred dividends declared and paid: Series B (variable based on prime rate--$3.375 per share)................................. -- (574,000) Series C--$10.81 per share................................................................ -- (1,319,000) Excess of cost ($843,000) over fair market value of 59,979 common shares purchased and reissued in connection with the Company's incentive stock plan............................. (375,000) -- Issuance of 14,734 common shares in connection with the exercises of stock options.......... 126,000 -- -------------- --------------- Balance at December 31, 1994.................................................................. $ 92,146,000 $ (27,075,000) Net income for the year..................................................................... -- 33,989,000 Preferred dividends declared and paid: Series B (variable based on prime rate--$1.825 per share)................................. -- (268,000) Series C--$8.1075 per share............................................................... -- (932,000) Common dividends declared and paid--$.075 per share......................................... -- (683,000) Issuance of 35,000 common shares in connection with the exercise of stock options........... 205,000 -- Excess of cost ($589,000) over fair market value of 41,961 common shares purchased and reissued in connection with the Company's contribution to the Employee Stock Plan.......... (30,000) -- Excess of cost ($614,000) over fair market value of 42,500 common shares purchased and reissued in connection with the Company's incentive stock plan............................. (151,000) -- Excess of stated value over cost ($5,516,000) in connection with the early retirement of the Series B preferred stock................................................................... 973,000 -- -------------- --------------- Balance at December 31, 1995.................................................................. $ 93,143,000 $ 5,031,000 -------------- --------------- -------------- ---------------
The accompanying notes to consolidated financial statements are an integral part of these statements 21 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION-- The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany items and transactions have been eliminated. NATURE OF OPERATIONS-- Allied Products Corporation manufactures agricultural equipment and large metal stamping presses, and supplies thermoplastic compounds and additives. All manufacturing operations are within the United States. Agricultural equipment manufactured by the Bush Hog division is primarily sold through dealerships in the United States with some limited export sales to Canada. Metal stamping presses produced by the Verson division are sold directly to the end users which include automobile manufacturers, first and second tier automotive parts producing companies and the appliance industry. Automobile manufacturers and automotive parts producing companies account for approximately 80% of the Verson division's revenues. Press sales generally are concentrated in the United States and Mexico. The Coz division provides a complete line of thermoplastic resins and related services to the plastic molding and extrusion industry. Sales are concentrated in the northeastern portion of the United States. USE OF ESTIMATES-- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the 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. REVENUE RECOGNITION-- Sales of agricultural equipment and service parts at the Bush Hog division are recorded when they are shipped to independent dealers in accordance with industry practices. Provisions for sales incentives and other sales related expenses are made at the time of the sale. Revenues and profits are recognized on a percentage of completion basis for major contracts at the Verson division. ACCOUNTS RECEIVABLE-- Agricultural equipment current accounts receivables are net of provisions for sales incentive programs and returns and allowances. Extended payment terms (up to one year) are offered to dealers in the form of floor plan financing which is customary within the industry. Agricultural equipment receivables (with the exception of receivables associated with service parts and original equipment manufacturing-OEM-arrangements) are generally not collected until the dealer sells the related piece of equipment to a retail customer. The Company maintains a security interest in the equipment related to such receivables to minimize the risk of loss. INVENTORIES-- The basis of all of the Company's inventories is determined by using the lower of FIFO cost or market method. Included in work in process inventory are accumulated costs ($15,983,000 at December 31, 1995 and $11,055,000 at December 31, 1994) associated with contracts under which the Company recognizes revenue on a percentage of completion basis. These balances include unbilled actual production costs incurred plus a measure of profit recognized in relation to the sales recorded, less customer payments ($55,381,000 at December 31, 1995 and $11,672,000 at December 31, 1994) associated with the work in process inventory. A significant portion of the work in process inventory will be completed, shipped and invoiced prior to the end of the following year. 22 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) PLANT AND EQUIPMENT-- Expenditures for the maintenance and repair of plant and equipment are charged to expense as incurred. Expenditures for major replacement or betterment are capitalized. The cost and related accumulated depreciation of plant and equipment replaced, retired or otherwise disposed of is removed from the accounts and any gain or loss is reflected in earnings. DEPRECIATION-- Depreciation of the original cost of plant and equipment is charged to expense over the estimated useful lives of such assets calculated under the straight-line method. Estimated useful lives are 20 to 40 years for buildings and improvements and 3 to 12 years for machinery and equipment. DEFERRED CHARGES (GOODWILL)-- Deferred charges (goodwill) associated with the 1986 acquisition of Verson (approximately $13,113,000) are amortized on a straight line basis over a period of 20 years. The Company assesses at each balance sheet date whether there has been a permanent impairment in the value of goodwill. Such assessment includes obsolescence, demand, new technology, competition and other pertinent economic factors and trends that may have an impact on the value of remaining useful life of goodwill. EARNINGS (LOSS) PER COMMON SHARE-- Earnings per common share is based on the average number of common shares outstanding (9,126,000, 9,102,000 and 8,999,000 for the years ended December 31, 1995, 1994 and 1993, respectively) after decreasing net income for preferred dividend requirements ($1,200,000, $1,893,000 and $2,073,000 for the years ended December 31, 1995, 1994 and 1993, respectively). For 1995, the average number of common shares outstanding was increased by the dilutive effect of outstanding stock options (288,000 shares as it relates to weighted average shares outstanding--primary and 368,000 shares as it relates to weighted average shares outstanding--fully diluted). The assumed exercise of stock options would not result in a material dilution for the years ended December 31, 1994 and 1993. INCOME TAXES-- Income taxes are accounted for under the asset and liability method in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 109 (SFAS 109)--Accounting for Income Taxes. See Note 4. STATEMENT OF CASH FLOWS-- For purposes of the Consolidated Statements of Cash Flows, the Company considers investments with original maturities of three months or less to be cash equivalents. FINANCIAL INSTRUMENTS-- The fair value of cash and cash equivalents is assumed to approximate the carrying value of these assets due to the short maturity of these instruments. The fair value of the Company's debt, current and long-term, is estimated to approximate the carrying value of these liabilities based upon borrowing rates currently available to the Company for borrowings with similar terms. The fair value of the Series B and C Preferred Stocks at December 31, 1994 is estimated to approximate the carrying value of these securities based upon the redemption features within the Certificate of Designation on each series of preferred stock. RECENTLY ISSUED ACCOUNTING STANDARD-- In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123--Accounting for Stock Based Compensation. Under the provisions of this statement, the fair value of stock options issued may be determined by using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. The statement also provides for 23 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) valuation of nonvested stock (usually referred to as restricted stock) and employee stock purchase plans. Valuation for stock issued under these various plans using the fair value based method described above may result in compensation costs to the issuer at the grant date and is recognized over the service period, which is usually the vesting period. Reporting compensation for these plans under this statement is optional. Companies choosing not to value stock options or similar equity instruments under the fair value based method must provide pro forma disclosure amounts that reflect the difference between compensation cost included in net income and the related cost measured by the fair value based method defined in SFAS No. 123, including tax effects, if any, that would have been recognized in the income statement if the fair value based method had been used. Adoption of this statement is required for transactions entered into in years that begin after December 15, 1995. The Company is in the process of reviewing the effects of this statement and has not decided whether or not to adopt the preferable fair value based method of accounting for stock-based compensation as it relates to the issuance of stock options. RECLASSIFICATIONS-- Certain amounts in the 1994 and 1993 consolidated financial statements and related notes have been reclassified to conform with the 1995 presentation. 2. ACCRUED EXPENSES: The Company's accrued expenses consist of the following:
DECEMBER 31, ------------------------------ 1995 1994 -------------- -------------- Salaries and wages.......................................................... $ 5,542,000 $ 4,678,000 Warranty.................................................................... 9,077,000 5,817,000 Self insurance accruals..................................................... 4,411,000 6,522,000 Restructuring and other costs, primarily related to discontinued operations................................................................. 1,494,000 3,373,000 Pensions, including retirees' health........................................ 5,901,000 4,985,000 Taxes, other than income taxes.............................................. 738,000 1,288,000 Environmental matters....................................................... 3,019,000 3,045,000 Other....................................................................... 2,202,000 2,129,000 -------------- -------------- $ 32,384,000 $ 31,837,000 -------------- -------------- -------------- --------------
3. DISCONTINUED OPERATIONS: During 1992, the Company announced the closing of manufacturing operations at the Kewanee Farm Equipment division and the Charles City machining and foundry division. Production was discontinued at these operations during 1993. During 1993, the Company discontinued manufacturing operations at the R/B Die and Prototype division. All machinery and equipment associated with these operations were sold for cash during 1993. Also during 1993, the Company sold for cash the majority of the assets of the Smith Energy Services division. The resulting gains (approximately $1,400,000) from these asset dispositions were credited to the restructuring reserve as discussed below. The Company's International Agro division also was closed during 1993. At the end of 1993, the Company sold for cash substantially all of the assets and liabilities of the White-New Idea Farm Equipment division. In connection with the sale of the White-New Idea division, the purchaser is required to purchase the real estate located in Coldwater, Ohio pending a favorable review of environmental matters. The Company is in the process of completing an evaluation of the status of environmental conditions at this location--see Note 10. During 1995, the Company and the purchaser of the White-New Idea division agreed to a five-year lease of the Coldwater, Ohio facility while the Company completes the evaluation. Sale of the facility to the purchaser of the White-New Idea division will occur after completion of the evaluation and after resolution of any issues raised by the evaluation. 24 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1995 and 1994, the Company provided additional amounts (based upon an independent review) for the environmental clean up of this facility. The Company also sold in 1994 the business and certain assets of the Cooper division for cash and a collateralized short-term note. In 1994, discontinued operations include operating losses at the Cooper division related to the delayed sale of this business and additional provisions primarily related to environmental issues and a dispute resolution on a business sold in 1993, net of an income tax benefit allocation of $211,000. During 1993, the Company also included an allocation of financing costs and administrative and interest expense (the latter based upon these operations' proportionate share of consolidated invested capital) and related restructuring cost provisions (as discussed below) under this same caption. Summarized operating results of discontinued operations for the year ended December 31, 1993 are as follows: Net sales............................................................ $ 152,592,000 ------------- ------------- Operating income..................................................... $ 11,851,000 Provision for restructuring costs.................................... (700,000) Finance costs, administrative and interest expense allocation........ (5,304,000) ------------- Income from operations............................................... $ 5,847,000 ------------- -------------
RESTRUCTURING COSTS-- Prior to 1993, the Company provided $14,000,000 for the impact of an operational restructuring plan designed to reduce operating losses by closing, consolidating or scaling back certain operations. During 1993, an additional $700,000 was provided for restructuring costs. The restructuring of operations called for several significant changes within various operations of the Company. The changes included the closing of manufacturing operations at the Kewanee Farm Equipment division, the phase out of the operation at the Charles City, Iowa machining and foundry division (production was completed in the third quarter of 1993), the phase out of the manufacturing operations at the R/B Die and Prototype division (production was completed in the second quarter of 1993) and the sale of the Smith Energy Services division. The provision for restructuring these operations included non-recurring, non-operating costs subsequent to the completion of production, including severance and other employee benefits, costs associated with the relocation of machinery and equipment from Charles City to other facilities, costs associated with preparation for the auctions and other facility related costs. In addition, the Company phased out its centralized Management Information Services operation at the Corporate Office in 1993. The reserve for restructuring included a provision for severance and other employee related expenses and the estimated costs of the termination of lease agreements for the MIS facility and hardware/software. Net charges to the restructuring reserve in 1995, 1994 and 1993 were $1,879,000, $3,931,000 and $9,515,000, respectively. As of December 31, 1995, the accompanying consolidated balance sheet includes real estate with a net book value of $2,833,000, which is held for sale, including $1,979,000 related to real estate under lease to the purchaser of the White-New Idea division as discussed above. 25 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. INCOME TAXES: Provision (credit) for income taxes in 1995, 1994 and 1993 consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1994 1993 --------------- ----------- ----------- Federal--current................................................ $ 756,000 $ 422,000 $ 514,000 Federal--deferred............................................... (16,648,000) -- -- State--current.................................................. 233,000 244,000 232,000 --------------- ----------- ----------- Total provision (credit)...................................... $ (15,659,000) $ 666,000 $ 746,000 --------------- ----------- ----------- --------------- ----------- -----------
Allocation of the provision (credit) for income taxes in the 1995, 1994 and 1993 Consolidated Statements of Income include the following:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1994 1993 --------------- ------------ ----------- Continuing operations........................................... $ (15,659,000) $ 877,000 $ 436,000 Discontinued operations--income from operations................. -- -- 182,000 Discontinued operations--gain (loss) on disposition of discontinued operations and other costs........................ -- (211,000) 200,000 Extraordinary loss on early extinguishment of debt.............. -- -- (72,000) --------------- ------------ ----------- Total provision (credit)...................................... $ (15,659,000) $ 666,000 $ 746,000 --------------- ------------ ----------- --------------- ------------ -----------
The provision (credit) for income taxes in 1995, 1994 and 1993 differs from amounts computed by applying the statutory rate to pre-tax income as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995 1994 1993 --------------- -------------- -------------- Income tax at statutory rate................................ $ 6,416,000 $ 5,250,000 $ 5,450,000 Utilization of net operating loss carryforwards............. (5,997,000) (5,547,000) (4,972,000) State income tax, net of federal tax benefit................ 151,000 159,000 153,000 Permanent book over tax, net of tax over book, differences on acquired assets......................................... 910,000 910,000 108,000 Stock option transactions................................... (296,000) (137,000) -- Adjustment to deferred tax asset valuation allowance........ (16,648,000) -- -- Other, net.................................................. (195,000) 31,000 7,000 --------------- -------------- -------------- Total provision (credit).................................. $ (15,659,000) $ 666,000 $ 746,000 --------------- -------------- -------------- --------------- -------------- --------------
26 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The significant components of deferred tax assets and liabilities were as follows:
DECEMBER 31, ------------------------------- 1995 1994 -------------- --------------- Deferred tax assets: Net operating loss and tax credits carryforwards......................... $ 6,887,000 $ 40,742,000 Self-insurance accruals.................................................. 1,894,000 2,941,000 Inventories.............................................................. 1,899,000 2,636,000 Receivables.............................................................. 3,026,000 593,000 Sale/leaseback transaction............................................... 1,493,000 3,730,000 Restructuring reserve.................................................... 523,000 1,316,000 Employee benefits, including pensions.................................... 4,239,000 4,150,000 Warranty................................................................. 3,177,000 2,269,000 Sales allowances......................................................... 2,079,000 2,000,000 Environmental matters.................................................... 1,056,000 1,120,000 Other.................................................................... 1,456,000 307,000 -------------- --------------- Total deferred tax asset............................................... $ 27,729,000 $ 61,804,000 -------------- --------------- Deferred tax liabilities: Depreciation............................................................. $ 327,000 $ 3,510,000 Other.................................................................... 41,000 -- -------------- --------------- Total deferred tax liabilities......................................... $ 368,000 $ 3,510,000 -------------- --------------- Net deferred tax asset before valuation allowance...................... $ 27,361,000 $ 58,294,000 Valuation allowance.................................................... -- (58,294,000) -------------- --------------- Net deferred tax asset................................................. $ 27,361,000 $ -- -------------- --------------- -------------- ---------------
During 1995, the Company evaluated its net operating loss carryforwards and other deferred tax assets in relation to its earnings history over the past few years and the estimated projected future earnings over the next few years. As a result of this review, the Company recorded a deferred tax asset ($27,361,000) which represents a reversal of the valuation allowance noted above. The related credit to income taxes was reduced by $10,713,000 representing the elimination of goodwill associated with certain acquisitions which included net operating loss carryforwards. In addition to the above noted tax asset, the Company has available net operating loss carryforwards of up to $166,019,000 (of which $85,304,000 results from various acquisitions) which expire between 1997 and 2008, and investment tax credit carryforwards of $2,258,000 (which expire between 1996 and 2004) including up to $329,000 resulting from acquisitions. In years subsequent to 1995, the Company will be recording a tax provision based upon the Federal statutory rate in effect and anticipates no reductions in future tax provisions from additional tax credits at this time. However, the Company projects that future Federal income tax payments will be based upon the Alternative Minimum Tax rate as substantial tax loss carryforwards still exist for tax reporting purposes. Tax returns for the years subsequent to 1991 are potentially subject to audit by the Internal Revenue Service. 27 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. FINANCIAL ARRANGEMENTS: The Company's debt consists of the following:
DECEMBER 31, -------------------------- 1995 1994 ----------- ------------- Capitalized lease obligations, at interest rates from 7.5% to 12% (weighted average of 10.1%), due in varying amounts through 2002 (Note 6)................ $ 882,000 $ 1,215,000 Notes/mortgages payable......................................................... 54,000 104,000 ----------- ------------- $ 936,000 $ 1,319,000 Less current portion............................................................ 621,000 689,000 ----------- ------------- $ 315,000 $ 630,000 ----------- ------------- ----------- -------------
Scheduled maturities of the noncurrent portion of long-term debt at December 31, 1995 are due as follows: 1997................................................ $ 139,000 1998................................................ 80,000 1999................................................ 51,000 2000................................................ 24,000 2001-2005........................................... 21,000 --------- $ 315,000 --------- ---------
In March 1994, the Company terminated previous financing agreements through the completion of a new Revolving Credit Agreement. The termination of these agreements resulted in the payment of termination fees and the write-off of unamortized loan costs related to these agreements. These amounts, net of a tax benefit of $72,000, have been included in the accompanying Consolidated Statement of Income for 1993 under the caption "Extraordinary loss on early extinguishment of debt, less applicable income tax benefit." The new three-year Revolving Credit Agreement with two banks provides for up to $35,000,000 in working capital related loans (of which $11,200,000 and $10,300,000 has been borrowed at December 31, 1995 and 1994, respectively) and up to $15,000,000 in standby letters of credit required for the Company's self-insurance programs and for other commercial purposes, of which approximately $13,000,000 is outstanding at December 31, 1995 and 1994. Interest is at prime rate or at other alternate variable rates as provided within the agreement. This facility was collateralized principally by the Company's receivables and inventories; however, all collateral was released as the Company attained certain financial results for the first nine months of 1994. The weighted average interest rate on borrowings outstanding at December 31, 1995 and 1994 was 7.8% and 8.5%, respectively. Under the Revolving Credit Agreement, the Company must meet certain periodic financial tests, including minimum net worth, minimum operating income, ratio of funded debt to operating income, and ratio of operating income to interest expense. During 1995, the Company entered into an amendment of the Revolving Credit Agreement. Under the terms of the amendment, interest rates have been reduced. In addition, the amendment provided for an increase in permitted capital expenditures for 1995 and allowed the Company to accelerate preferred stock redemptions, pay dividends on Common Stock, repurchase Common Stock and permit limited acquisitions. 28 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. LEASES: CAPITAL LEASES-- The Company conducts a portion of its business in leased facilities, one of which is leased from a municipal agency under an Industrial Revenue Bond arrangement. The Company also leases various types of manufacturing, office and transportation equipment. Capital leases included in Plant and Equipment in the accompanying balance sheets are as follows:
DECEMBER 31, ---------------------------- 1995 1994 ------------- ------------- Land............................................... $ 396,000 $ 396,000 Buildings and improvements......................... 1,111,000 2,013,000 Machinery and equipment............................ 4,233,000 4,533,000 ------------- ------------- $ 5,740,000 $ 6,942,000 Less--Accumulated amortization..................... 3,378,000 4,353,000 ------------- ------------- $ 2,362,000 $ 2,589,000 ------------- ------------- ------------- -------------
See Note 5 for information as to future debt payments relating to the above leases. OPERATING LEASES-- Rent expense for operating leases, which is charged against income, was as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- Minimum rentals.................. $ 1,922,000 $ 2,165,000 $ 4,062,000 Contingent rentals............... 89,000 657,000 1,084,000 ------------- ------------- ------------- $ 2,011,000 $ 2,822,000 $ 5,146,000 ------------- ------------- ------------- ------------- ------------- -------------
Contingent rentals are composed primarily of truck fleet mileage charges for actual usage. Some leases contain renewal and purchase options. The leases generally provide that the Company pay taxes, maintenance, insurance and certain other operating expenses. At December 31, 1995, future minimum rental payment commitments under operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows:
MINIMUM SUBLEASE NET MINIMUM ANNUAL RENTAL RENTAL ANNUAL RENTAL PAYMENTS INCOME PAYMENTS ------------- ------------ ------------- Year ending December 31, 1996.................................. $ 1,692,000 $ (147,000) $ 1,545,000 1997.................................. 1,736,000 (147,000) 1,589,000 1998.................................. 1,624,000 (122,000) 1,502,000 1999.................................. 1,286,000 -- 1,286,000 2000.................................. 1,111,000 -- 1,111,000 Later................................. 1,209,000 -- 1,209,000 ------------- ------------ ------------- $ 8,658,000 $ (416,000) $ 8,242,000 ------------- ------------ ------------- ------------- ------------ -------------
29 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. PREFERRED STOCK: The Company has 2,000,000 shares of authorized preferred stock of which 350,000 shares are designated as Series B Variable Rate Cumulative Preferred Stock and 150,000 shares are designated as Series C Cumulative Preferred Stock. The remaining 1,500,000 shares of authorized preferred stock are undesignated and unissued at December 31, 1995. SERIES B-- The holder of the Series B Preferred Stock was entitled to receive cumulative quarterly dividends at variable rates, computed by multiplying $50 times 1/4 of the prime rate in effect on the first day of the quarter preceding the dividend date. At December 31, 1994, there were 146,800 shares of the Series B Preferred Stock outstanding. In addition to the scheduled redemption of 17,000 shares, the Company redeemed the remaining 129,800 shares at a discount of $973,000 during 1995. The discount was credited to Additional Paid-in Capital. SERIES C-- Holders of the Series C Cumulative Preferred Stock were entitled to receive cumulative quarterly dividends at the annual rate of $10.81 per share. At December 31, 1994, there were 115,000 shares of the Series C Cumulative Preferred Stock outstanding. In addition to the permitted redemption of 50,000 shares, the Company redeemed the remaining 65,000 shares at a premium of $130,000 during 1995. 8. COMMON STOCK AND OPTIONS: The Company has an incentive stock plan (the 1977 plan) which authorizes stock incentives for key employees in the form of stock awards, stock appreciation rights and stock options. Options under the 1977 plan, which are granted at fair market value at date of grant, are non-qualified options (not "incentive stock options" as defined by the Internal Revenue Code). Options currently outstanding under the 1977 plan become exercisable to the extent of 25% one year from date of grant and 25% in each of the next three years, and expire 10 years from the date of grant. There were no stock awards issued under this plan in 1995, 1994 or 1993. No stock appreciation rights have been granted to date under this plan. There are 145,799 options outstanding under this plan at December 31, 1995 and are included in the table below. Additional stock incentives will not be issued under this plan. In 1990, the Company's Board of Directors approved a new incentive stock plan, the 1990 Long Term Incentive Stock Plan (the 1990 plan) which authorizes stock incentives for key employees in the form of stock awards and stock options. The 1990 plan, as amended, authorizes the issuance of up to 1,000,000 shares of the Company's Common Stock. Options under the 1990 plan, which are granted at fair market value at date of grant, may be granted as either incentive stock options or non-statutory stock options. Options granted become exercisable to the extent of 50% one year from date of grant and the remaining 50% two years from date of grant. Since the inception of the 1990 plan, the Company has issued options to purchase 876,251 shares of the Company's Common Stock at prices between $1.50 and $14.25 per share. There are 546,551 options outstanding under this plan at December 31, 1995 and are included in the table below. At December 31, 1995, the Company has the capacity to issue an additional 215,749 stock incentives under the 1990 plan. In 1994, shareholders approved a new incentive plan, the 1993 Directors Incentive Plan (the 1993 plan) which authorizes the issuance of stock options to members of the Board of Directors who are not employees of the Company. Options under the 1993 plan, which are granted at fair market value at date of grant, are granted as non-statutory stock options. Options granted become exercisable to the extent of 50% one year from date of grant and the remaining 50% two years from date of grant. Since the inception of the 1993 plan, the Company has issued options to purchase 73,000 shares of the Company's Common Stock at prices between $12.50 and $19.375 per share. All options issued are 30 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) outstanding under this plan at December 31, 1995 and are included in the table below. At December 31, 1995, the Company has the capacity to issue an additional 47,000 stock options under the 1993 plan. Stock option transactions for 1994 and 1995 were as follows:
OPTIONS OUTSTANDING (SHARES) ---------------------------------------- AVERAGE OPTION NOT PRICE AT DATE OF EXERCISABLE EXERCISABLE TOTAL GRANT ------------ ------------ ------------ ---------------- Outstanding, December 31, 1993....................... 174,250 345,387 519,637 $ 9.45 Granted............................................ 318,500 -- 318,500 12.50 Became exercisable................................. (124,750) 124,750 -- 3.61 Exercised.......................................... -- (74,713) (74,713) 7.96 Expired............................................ -- (375) (375) 12.25 Terminated......................................... (7,000) (11,700) (18,700) 11.81 ------------ ------------ ------------ ------- Outstanding, December 31, 1994....................... 361,000 383,349 744,349 $ 10.85 Granted............................................ 127,001 -- 127,001 14.48 Became exercisable................................. (203,750) 203,750 -- 10.86 Exercised.......................................... -- (77,500) (77,500) 8.62 Expired............................................ -- -- -- -- Terminated......................................... (23,500) (5,000) (28,500) 13.84 ------------ ------------ ------------ ------- Outstanding, December 31, 1995....................... 260,751 504,599 765,350 $ 11.56 ------------ ------------ ------------ ------- ------------ ------------ ------------ -------
31 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On February 15, 1991, the Company declared a dividend distribution of one right ("Right") to purchase an additional share of the Company's Common Stock for $50 on each share of Common Stock outstanding. The Rights become exercisable 10 days after a person or group acquires, or tenders for, 20% or more of the Company's Common Stock. The Company is entitled to redeem the Rights at $.01 per Right at any time until 10 days after any person or group has acquired 20% of the Common Shares. If a person or group acquires 20% or more of the Company's Common Stock (other than pursuant to an acquisition from the Company or pursuant to a tender offer deemed fair by the Board of Directors), then each Right, other than Rights held by the acquiring person or group, entitles the holder to purchase for $50 that number of shares of the Company's Common Stock having a current market value of $100. If a person or group acquires 20% or more of the Company's Common Stock and prior to the person or group acquiring 50% of such outstanding stock, the Company may convert each outstanding Right, other than the Rights held by the acquiring person or group, into one new share of the Company's Common Stock. If a person or group acquiring more than 20% of the Company's Common Stock merges with the Company or engages in certain other transactions with the Company, each Right, other than Rights held by the acquiring person or group, entitles the holder to purchase shares of common stock of the acquiring person or group having a current market value of $100 for $50. The Rights attach to all of the Company's Common Stock outstanding as of February 15, 1991, or subsequently issued, and have a term of 10 years. The Rights also expire upon a merger or acquisition of the Company undertaken with the consent of the Company's Board of Directors. 9. RETIREMENT, PENSION AND POSTRETIREMENT HEALTH PLANS: The Company sponsors several defined benefit pension plans which cover certain union and office employees. Benefits under these plans generally are based on the employee's years of service and compensation during the years immediately preceding retirement. The Company's general funding policy is to contribute amounts deductible for Federal income tax purposes. Effective January 1, 1994, the Company instituted an unfunded deferred compensation defined benefit pension plan called the Executive Retirement Plan. The noncontributory plan is designed to provide supplemental retirement benefits to certain executive officers of the Company as determined by the Board of Directors. Retirement benefits will be reduced by benefits received under the Target Benefit Plan described below. Net periodic pension costs as they relate to defined benefit plans for continuing operations were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- Service cost............................................ $ 673,000 $ 652,000 $ 411,000 Interest cost........................................... 2,284,000 2,260,000 2,152,000 Actual loss (gain) on plan assets....................... (7,989,000) 327,000 (7,903,000) Net amortization and deferral........................... 6,038,000 (2,422,000) 6,090,000 Curtailment (income).................................... (64,000) -- -- -------------- -------------- -------------- Net periodic pension cost............................... $ 942,000 $ 817,000 $ 750,000 -------------- -------------- -------------- -------------- -------------- --------------
Although the actual return on plan assets is shown, the expected long-term rate of return used in determining the net periodic pension cost in all years was approximately 7.5%. The difference between the actual return and the expected return is included in the "Net amortization and deferral" in the above table. The actuarial present value of benefits was determined using a discount rate of approximately 7% in 1995 and 7.25% in 1994 and 1993. The rate of compensation increase used to measure the projected benefit obligation in two plans was approximately 5%. All other plans are based on current compensation levels. 32 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table sets forth the funded status of the Company's defined benefit pension plans:
DECEMBER 31, -------------------------------------------------------------- 1995 1994 ------------------------------ ------------------------------ ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS -------------- -------------- -------------- -------------- Plan assets at fair value....................... $ 36,455,000 $ -- $ 19,724,000 $ 10,971,000 -------------- -------------- -------------- -------------- Actuarial present value of benefit obligations: Vested benefits............................... $ 28,970,000 $ 604,000 $ 16,730,000 $ 12,522,000 Nonvested benefits............................ 1,555,000 51,000 819,000 776,000 -------------- -------------- -------------- -------------- Accumulated benefit obligation.................. $ 30,525,000 $ 655,000 $ 17,549,000 $ 13,298,000 Effect of projected future compensation increases...................................... 2,326,000 481,000 1,933,000 -- -------------- -------------- -------------- -------------- Projected benefit obligation.................... $ 32,851,000 $ 1,136,000 $ 19,482,000 $ 13,298,000 -------------- -------------- -------------- -------------- Plan assets in excess of (less than) projected benefit obligation............................. $ 3,604,000 $ (1,136,000) $ 242,000 $ (2,327,000) Unrecorded net (gain) loss from past experience different from that assumed and effect of changes in assumptions......................... (4,651,000) (52,000) 1,568,000 (300,000) Unrecorded prior service cost................... 249,000 538,000 1,000 700,000 Unrecognized net (asset) at date of initial application.................................... (1,900,000) -- (1,405,000) (968,000) -------------- -------------- -------------- -------------- Prepaid (accrued) pension costs................. $ (2,698,000) $ (650,000) $ 406,000 $ (2,895,000) -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
The plans' assets include common stocks, fixed income securities, short-term investments and cash. Common stock investments at December 31, 1995 and 1994 include approximately 314,000 shares of the Company's Common Stock. The Company also has a defined contribution retirement plan which covers certain employees. There are no prior service costs associated with this plan. The Company follows the policy of funding retirement contributions under this plan as accrued. Contributions to this plan for continuing operations were $206,000 in 1995, $255,000 in 1994 and $252,000 in 1993. The Company employees are also eligible to become participants in the Save Money and Reduce Taxes (SMART) plan. Under terms of the plan, the trustee is directed by each employee on how to invest the employee's deposit. Investment alternatives include a money market fund, two mutual funds and a fixed income fund. Effective January 1, 1993, the Company terminated its matching contribution to the SMART plan. As of December 31, 1995 and 1994, assets of the SMART plan include approximately 524,000 and 532,000 shares, respectively, of the Company's Common Stock. The Company has a noncontributory defined contribution plan (the Employee Stock Plan). All non-union employees not covered by pension plans are covered under the Employee Stock Plan. Company contributions were $450,000 in 1994. No contribution was made in 1995 and 1993. Effective January 1, 1995, the Company instituted a noncontributory defined contribution retirement plan called the Target Benefit Plan. All employees covered by the Employee Stock Plan are covered under the Target Benefit Plan. Under the terms of the Target Benefit Plan, the Company will make an actuarially determined annual contribution based upon each eligible employee's years of 33 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) service and earnings as defined. Employee investment alternatives include a money market fund, two mutual funds and a fixed income fund. Employees become vested in the Company contribution after five years of service. Provisions for the contribution to this plan in 1995 were $932,000. The Company provides medical benefits for retirees and their spouses at one operating division and certain other individuals related to several discontinued operations. Accruals for such costs are recognized in the financial statements over the service lives of these employees. Contributions are required of most retirees for medical coverage. The current obligation was determined by application of the terms of the related medical plans, including the effects of established maximums on covered costs, together with relevant actuarial assumptions and health-care cost trend rates projected at annual rates ranging ratably from 8.6% for retirees under age 65 (7.6% for retirees age 65 and older) in 1996 to 5.5% over 26 years. The effect of a 1% annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation by approximately $68,000. The annual service costs would not be materially affected. The following table provides information on the status of these plans:
DECEMBER 31, -------------------------- 1995 1994 ------------ ------------ Accumulated postretirement benefit obligation: Retirees and their dependents................................. $ (287,000) $ (266,000) Fully eligible active plan participants....................... (43,000) (26,000) Active employees not fully eligible........................... (464,000) (395,000) ------------ ------------ Accumulated postretirement benefit obligation................... $ (794,000) $ (687,000) Plan assets..................................................... -- -- Unrecognized prior service costs................................ 13,000 15,000 Unamortized net (gain) loss..................................... (139,000) (236,000) ------------ ------------ Accrued postretirement benefit costs............................ $ (920,000) $ (908,000) ------------ ------------ ------------ ------------
Net periodic postretirement benefit costs include the following:
YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ---------- --------- -------------- Service cost.......................................... $ 33,000 $ 31,000 $ 58,000 Interest cost......................................... 56,000 53,000 154,000 Amortization of unrecognized net (gain) loss.......... (18,000) (3,000) 11,000 Amortization of prior plan amendment.................. 1,000 1,000 -- Curtailment (gain).................................... -- -- (1,000,000) Settlement (gain)..................................... -- -- (5,000) ---------- --------- -------------- Net periodic postretirement benefit cost (benefit).... $ 72,000 $ 82,000 $ (782,000) ---------- --------- -------------- ---------- --------- --------------
Measurement of the accumulated postretirement benefit obligation was based on a discount rate of 7.0% in 1995, 8.0% in 1994 and 7.5% in 1993. During 1995, the Company made provisions totaling $1,543,000 for the termination/retirement of certain individuals. During 1993, the Company provided $1,261,000 (included in "Other (income) expense, net"--see Note 12) for deferred compensation related to the retirement of certain executive officers of the Company. 34 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. ENVIRONMENTAL, LEGAL AND CONTINGENT LIABILITIES: ENVIRONMENTAL MATTERS-- The Company's manufacturing plants generate both hazardous and nonhazardous wastes, the treatment, storage, transportation and disposal of which are subject to federal, state and local laws and regulations. The Company believes that its manufacturing plants are in substantial compliance with the various federal, state and local laws and regulations, and does not anticipate any material expenditures to remain in compliance. Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA), and other statutes, the United States Environmental Protection Agency (EPA) and the states have the authority to impose liability on waste generators, site owners and operators, and others regardless of fault or the legality of the original disposal activity. Accordingly, the Company has been named as a potentially responsible party (PRP), or may otherwise face potential liability for environmental remediation or cleanup, in connection with the sites described below that are in various stages of investigation or remediation. At one site, the Company is one of seven PRP's because of its apparent absentee ownership of four parcels of land from 1967 to 1969 which may have held part or all of one or more settling ponds operated by a tenant business. The Company has already paid $85,000 as its share of a settlement of an EPA demand for $415,000 in past response costs, and the EPA has sought payment from the PRP's of an additional $572,000 in response costs. The EPA has ordered the Company and one other PRP to undertake the design and construction of the remediation project. All PRP's have agreed to undertake the design and construction of the remediation project pursuant to a financial participation agreement. The EPA estimates the present value of the cost to implement its selected cleanup method to be approximately $1,869,000. The Company has accrued its estimated share of the remaining cleanup cost which is not considered significant. The Company has also filed a claim against its insurers. Pursuant to a consent decree entered into in November 1991 with the EPA, the Company has agreed to close and remediate a landfill leased by the Company and formerly used for the disposal of spent foundry sands. Prior to 1993, the Company provided for remediation costs associated with this landfill. During 1995, remedial action required by the consent decree was completed, and the EPA approved the Remedial Action Report submitted by the Company. The Company's remaining obligations under the consent decree include periodic inspections, monitoring and maintenance as needed. The Company has also been named as a PRP, along with numerous parties, at various hazardous waste sites undergoing cleanup or investigation for cleanup. The Company believes that at each of these sites, it has been improperly named or will be considered to be a "de minimis" party. The Company is a defendant in an action where a private party seeks recovery of costs associated with an environmental cleanup at a site formerly owned by the Company. At this site, which the Company or one of its subsidiaries owned from 1968 until 1976, the plaintiff and current owner seeks to recover in excess of $1,500,000 from the Company and other defendants. The estimated present value of a remediation plan proposed by the state environmental agency is approximately $1,900,000. The Company has denied liability and asserted a counter-claim against plaintiff and cross-claims against the co-defendants. The Company is in the process of investigating or has determined the need to perform environmental remediation or clean up at certain manufacturing sites formerly operated and still owned by the Company. At the sites where the Company has determined that some remediation or cleanup will be required, the Company has provided for the estimated cost for such remediation or cleanup. One site, located in Coldwater, Ohio, is under contract to be sold to the purchaser of the White-New Idea business. That sale is contingent on completion of an environmental study (now in progress), remediation, if any, determined by the Company's independent consultant to be necessary, and 35 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the issuance of a covenant not to sue and related no further action letters by the State of Ohio under the Ohio Voluntary Action Program. Following the completion of the sale of the White-New Idea business in 1993, an independent consultant retained by the Company indicated cleanup costs at the site could range from $500,000 to $5,300,000. The Company provided in 1994 and 1993 for amounts equal to the lower value of this range. The Company is discussing financial contribution with the prior owner of the facility for any cleanup costs as a significant portion of the environmental conditions under review existed prior to the Company's ownership of the facility. During 1995, 1994 and 1993, the Company made provisions of approximately $921,000, $1,383,000 and $3,136,000, respectively, toward various environmental matters discussed above. At December 31, 1995, the Company has accruals, including those discussed above, of $3,079,000 (including amounts provided for within the restructuring reserve) for the estimated cost to resolve its potential liability with the above and other, less significant, matters. Additional liabilities are possible and the ultimate outcome of these matters may have an effect on the financial position or results of operations in a future period. However, the Company believes that the above accruals are adequate for the resolution of known environmental matters and the outcome of these matters is not expected to have a material adverse effect on the Company's financial position or its ongoing results of operations. OTHER-- In connection with the sale of the business and assets of the Littell division in 1991, the Company entered into a "License Agreement" pursuant to which the Company licensed certain technology to the purchaser for which the purchaser agreed to pay royalties totaling $8,063,000 plus interest, in minimum quarterly installments of $312,500 commencing in November 1992, with a final lump sum payment ($7,342,000) due May 22, 1996. The purchaser's payment obligation is secured by the technology licensed and is guaranteed by the purchaser's parent. The Company initially recorded this agreement as a long-term note receivable. In 1995, however, the Company established a reserve of $7,699,000 against the receivable, due to recently published adverse financial information about the purchaser and its parent which raises serious concerns about the collectability of the receivable. The license agreement contains a non-compete covenant by the Company as well as a covenant to refer to the purchaser relevant customer inquiries. The agreement provides that in the event of a violation of the covenant not to compete, the purchaser's royalty payments are reduced by approximately $8,000,000 and the purchaser is also entitled to actual damages. Through the end of the third quarter of 1994, the Company had received the required minimum quarterly payments, usually 30 days after the due date. During the fourth quarter of 1994, the purchaser withheld payment of the minimum quarterly payment beyond 30 days and asserted that the Company had violated the non-compete and non-referral covenants noted above. On March 10, 1995, an action was filed by the purchaser in the Circuit Court of Cook County, Illinois. At December 31, 1995, the amounts due the Company under this agreement, including accrued and unaccrued interest, is approximately $8,240,000. During 1995 as noted above, the Company has made provisions against the collectability of this receivable. After taking into consideration counsel's evaluation of the above facts, the Company is of the opinion that the outcome of this action would not have a significant adverse effect on the Company's consolidated financial statements. The Company is involved in a number of other legal proceedings as a defending party, including product liability claims for which additional liability is reasonably possible. It is the Company's policy to reserve on a non-discounted basis for all known product liability claims, with necessary reserves ($2,342,000 and $2,790,000 at December 31, 1995 and 1994, respectively) determined in consultation with independent insurance companies and legal counsel. Payment of these claims may take place over the next several years. Additional liabilities are possible and the ultimate outcome of these matters may have an effect on the financial position or results of operations in a future period. 36 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) However, after consideration of relevant data, including insurance coverage and accruals, management believes that the eventual outcome of these matters will not have a material adverse effect on the Company's financial position or its ongoing results of operations. At December 31, 1995, the Company was contingently liable for approximately $1,849,000 primarily relating to outstanding letters of credit. During 1994, the Company entered into agreements with certain executive officers of the Company which provide that, if within one year following a defined change in ownership or control of the Company there shall be an involuntary termination of such executive's employment, or if there shall be defined patterns of activity during such period by the Company causing such executive to resign, then, subject to prevailing tax laws and regulations, the executive shall be entitled to payments equal to approximately three years' compensation. 11. OPERATIONS BY INDUSTRY SEGMENT: The Company's operations involve a single industry segment as described in Note 1. Approximately 11%, 2% and 8% of the Company's net sales from continuing operations in 1995, 1994 and 1993, respectively, were exported principally to Canada and Mexico. Approximately 29%, 14% and 25% of the Company's net sales from continuing operations in 1995, 1994 and 1993, respectively, were derived from sales to the three major U.S. automobile manufacturers. 12. SUMMARY OF OTHER (INCOME) EXPENSE: Other (income) expense consists of the following:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- Interest income................................................... $ (437,000) $ (1,293,000) $ (1,832,000) Goodwill amortization............................................. 2,068,000 2,067,000 2,067,000 Loan cost expenses/amortization................................... 440,000 563,000 988,000 Environmental related expenses.................................... 1,110,000 410,000 1,486,000 Net gain on sales of operating and non-operating assets........... (2,000,000) (222,000) (462,000) Provision for collectability of long-term note receivable (Note 10).............................................................. 7,699,000 -- -- Deferred compensation (Note 9).................................... -- -- 1,261,000 Litigation settlements............................................ (1,125,000) -- 650,000 Other miscellaneous............................................... (272,000) (327,000) 456,000 -------------- -------------- -------------- $ 7,483,000 $ 1,198,000 $ 4,614,000 -------------- -------------- -------------- -------------- -------------- --------------
13. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS: Operating results in the fourth quarter of 1995 include the effects of the following adjustments: A. A credit of $16,648,000 to the provision for income taxes resulting from a reduction in the valuation allowance associated with the Company's net deferred tax asset--see Note 4. B. A charge of $7,699,000 related to a reserve for a long-term receivable due the Company from the 1991 sale of an operation--see Note 10. 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY See the Company's Proxy Statement incorporated by reference as part of this Part III, under the caption "Proposal 1: Election of Directors" for information with respect to the directors. In addition, see the information under the caption "Executive Officers of the Company" as part of Part I, Item 1 of this Report which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION See the Company's Proxy Statement incorporated by reference as part of Part III, Item 10 of this report, under the captions "Management Compensation" for information with respect to executive compensation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners. See the Company's Proxy Statement incorporated by reference as part of Part III, Item 10 of this report, under the captions "Outstanding Stock and Voting Rights", "Beneficial Owners" and "Principal Stockholders and Management Ownership" for information with respect to the ownership of certain beneficial owners of Common Stock of the Company. (b) Security Ownership of Management. See the Company's Proxy Statement incorporated by reference as part of Part III, Item 10 of this report, under the caption "Principal Stockholders and Management Ownership" for information with respect to the beneficial ownership by management of capital stock of the Company. (c) Changes in Control. There is no arrangement known to the Company, the operation of which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See the Company's Proxy Statement incorporated by reference as part of Part III, Item 10 of this report, under the captions "Proposal 1: Election of Directors" and "Management Compensation" for information with respect to certain relationships and related transactions with management. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS Included in Part II of this report: Report of Independent Accountants Consolidated statements of income for the years ended December 31, 1995, 1994 and 1993 Consolidated balance sheets as of December 31, 1995 and 1994 Consolidated statements of cash flows for the years ended December 31, 1995, 1994 and 1993 Consolidated statements of shareholders' investment for the years ended December 31, 1995, 1994 and 1993 Notes to consolidated financial statements (a) 2. FINANCIAL STATEMENT SCHEDULES Included in Part IV of this report: Schedule II--Valuation and qualifying accounts for the years ended December 31, 1995, 1994 and 1993 38 (a) 3. EXHIBITS The following exhibits are incorporated by reference as noted below: 3(a) The Registrant's Restated Certificate of Incorporation, as amended, is incorporated by reference to Exhibit 3 of the Company's 1988 Annual Report on Form 10-K (File No. 1-5530). 3(b) The Registrant's Amendments to Restated Certificate of Incorporation is incorporated by reference to Exhibit 3 of the Company's 1990 Annual Report on Form 10-K (File No. 1-5530). 3(c) The Registrant's By-Laws of the Company, as amended, are incorporated by reference to Exhibit 3 of the Company's 1989 Annual Report on Form 10-K (File No. 1-5530). 10(a) The Registrant's 1977 Incentive Stock Plan is incorporated by reference to Exhibit 10(a) of the Company's 1980 Annual Report on Form 10-K (File No. 1-5530). 10(b) The Registrant's SMART Plan is incorporated by reference to Exhibit 10(d) of the Company's 1984 Annual Report on Form 10-K (File No. 1-5530). 10(c) The Registrant's 1990 Long-Term Incentive Stock Plan is incorporated by reference to Exhibit 10 of the Company's 1991 Annual Report on Form 10-K (File No. 1-5530). 10(d) The Registrant's Agreement for the sale of the assets of the White-New Idea Farm Equipment Division of Allied Products Corporation is incorporated by reference to Exhibit(c)(2)(w)(I) of the Company's report on Form 8-K dated January 14, 1994 (File No. 1-5530). 10(e) The Registrant's Credit Agreement dated as of March 17, 1994 among Allied Products Corporation, the Banks Named Herein and Continental Bank N.A., individually and as agent is incorporated by reference to Exhibit 10(I) of the Company's report on Form 8-K dated April 8, 1994 (File No. 1-5530). 10(f) The Registrant's Allied Products Corporation Executive Retirement Plan dated April 4, 1994 is incorporated by reference to Exhibit 10(a) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(g) The Registrant's Executive Officer's Agreement in Event of Change in Control or Ownership of Allied Products Corporation dated April 1, 1994 is incorporated by reference to Exhibit 10(b) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(h) The Registrant's Second Amendment to Credit Agreement dated February 15, 1995 is incorporated by reference to Exhibit 10(c) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(i) The Registrant's Allied Products Corporation Retirement Plan dated as of December 31, 1993 is incorporated by reference to Exhibit 10(d) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(j) The Registrant's Bush Hog Segment of the Allied Products Corporation Combined Retirement Plan effective December 31, 1993 is incorporated by reference to Exhibit 10(e) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(k) The Registrant's Verson Segment of the Allied Products Corporation Combined Retirement Plan effective December 31, 1993 is incorporated by reference to Exhibit 10(f) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530). 10(l) The Registrant's Littell Segment of the Allied Products Corporation Combined Retirement Plan effective December 31, 1993 is incorporated by reference to Exhibit 10(g) of the Company's 1994 Annual Report on Form 10-K (File No. 1-5530).
39 The following exhibits are attached only to the copies of this report filed with the Securities and Exchange Commission:
EXHIBIT NO. NAME OF EXHIBIT - --------------- -------------------------------------------------------------------------------------- 10 Material Contract--Allied Products Corporation Target Benefit Plan. 11 Computation of Earnings per Share. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 24 Power of Attorney. 27 Financial Data Schedule.
Other financial statements, schedules and exhibits not included above have been omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Company during the fourth quarter of the year ended December 31, 1995. ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------- Allowance for doubtful accounts-- Current receivables: Balance at beginning of year.......... $ 1,521,000 $ 1,996,000 $ 2,914,000 Add (deduct)-- Provision charged to income......... 451,000 256,000 229,000 Receivables charged off as bad debts, net of recoveries........... (1,024,000) (731,000) (1,147,000) -------------- ------------- -------------- Balance at end of year................ $ 948,000 $ 1,521,000 $ 1,996,000 -------------- ------------- -------------- -------------- ------------- -------------- Long-term receivables: Balance at beginning of year.......... $ -- $ -- $ -- Add (deduct)-- Provision charged to income......... 7,699,000 -- -- Receivables charged off as bad debts, net of recoveries........... -- -- -- -------------- ------------- -------------- Balance at end of year................ $ 7,699,000 $ -- $ -- -------------- ------------- -------------- -------------- ------------- --------------
40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLIED PRODUCTS CORPORATION (Registrant) By: /s/ RICHARD A. DREXLER --------------------------------------- Richard A. Drexler, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER March 11, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. * /s/ [RICHARD A. DREXLER] ---------------------------------------------- Richard A. Drexler, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER; DIRECTOR * /s/ [KENNETH B. LIGHT] ---------------------------------------------- Kenneth B. Light, EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL AND ADMINISTRATIVE OFFICER; DIRECTOR * /s/ [ROBERT J. FLECK] ---------------------------------------------- Robert J. Fleck, VICE PRESIDENT--ACCOUNTING AND CHIEF ACCOUNTING OFFICER March 11, 1996 * /s/ [LLOYD DREXLER] ---------------------------------------------- Lloyd Drexler, DIRECTOR * /s/ [WILLIAM D. FISCHER] ---------------------------------------------- William D. Fischer, DIRECTOR * /s/ [STANLEY J. GOLDRING] ---------------------------------------------- Stanley J. Goldring, DIRECTOR * /s/ [JOHN E. JONES] ---------------------------------------------- John E. Jones, DIRECTOR * /s/ [JOHN W. PUTH] ---------------------------------------------- John W. Puth, DIRECTOR * /s/ [MITCHELL I. QUAIN] ---------------------------------------------- Mitchell I. Quain, DIRECTOR
41 * /s/ [S. S. SHERMAN] ---------------------------------------------- S. S. Sherman, DIRECTOR * By: /s/ [DAVID B. CORWINE] ------------------------------------------- David B. Corwine, ATTORNEY-IN-FACT
42 EX-10 2 EXHIBIT 10 EXHIBIT 10 ALLIED PRODUCTS CORPORATION TARGET BENEFIT PLAN EFFECTIVE JANUARY 1, 1995 CONTENTS PAGE PREAMBLE iv ARTICLE I DEFINITIONS 1 ARTICLE II ELIGIBILITY AND PARTICIPATION 2.01 Eligibility 10 2.02 Termination and Reemployment 11 ARTICLE III CONTRIBUTIONS 3.01 Employer Contributions 12 3.02 Participant Contributions 13 ARTICLE IV ALLOCATIONS, ACCOUNTING AND ADJUSTMENTS 4.01 Composition of Trust Fund 14 4.02 Allocation of Earnings to Accounts 14 4.03 Eligibility for Allocation of Employer Contributions 14 4.04 Maximum Annual Additions 15 4.05 Participation in Defined Benefit Plan 19 4.06 Allocation of Employer Contributions 20 4.07 Participant Election of Investment Funds 20 ARTICLE V VESTING 5.01 Employer Contribution Account 22 5.02 Termination of Employment 22 5.03 Disposition of Forfeitures 24 5.04 Effect of Periods of Severance 24 ARTICLE VI TIME AND METHOD OF PAYMENT 6.01 Manner of Payment 25 6.02 Optional Forms of Payment 25 6.03 Time of Payment 28 6.04 Payments to Beneficiaries 29 6.05 Distribution of Unallocated Contributions 33 6.06 Certain Retroactive Payments 33 6.07 Administrative Powers Relating to Payments 33 ii CONTENTS (continued) 6.08 Direct Rollovers 34 ARTICLE VII ROLLOVERS AND TRANSFERS 7.01 Rollovers and Transfers 36 ARTICLE VIII TOP-HEAVY PROVISIONS 8.01 Effective Date 37 8.02 Definitions 37 8.03 Special Code Section 415 Limitations 41 8.04 Minimum Allocation Requirements 42 8.05 Vesting Requirements 43 ARTICLE IX MANAGEMENT OF FUNDS 9.01 Appointment of Trustee 44 9.02 Assets of Trust 44 9.03 Reversion of Employer Contributions 44 ARTICLE X ADMINISTRATION OF PLAN 10.01 Plan Administrator 46 10.02 Rights, Powers and Duties of Plan Administrator 46 10.03 Committee 48 10.04 Exercise of Duties 49 10.05 Indemnification of Fiduciaries 49 10.06 Expenses 50 ARTICLE XI CLAIMS PROCEDURES 11.01 Claims Procedure 51 ARTICLE XII AMENDMENT AND TERMINATION 12.01 Termination 52 12.02 Right to Amend, Modify, Change or Revise Plan 53 iii CONTENTS (continued) 12.03 Merger and Consolidation of Plan; Transfer 54 of Plan Assets ARTICLE XIII MISCELLANEOUS 13.01 No Contract of Employment 55 13.02 Restrictions Upon Assignments and Creditors' Claims 55 13.03 Restriction of Claims Against Trust 55 13.04 Benefits Payable by Trust 56 13.05 Successor to Company 56 13.06 Applicable Law 56 13.07 Data 56 13.08 Internal Revenue Service Approval 57 EXHIBIT A Actuarial Assumptions and Factors iv ALLIED PRODUCTS CORPORATION TARGET BENEFIT PLAN PREAMBLE WHEREAS, Allied Products Corporation, a Delaware corporation (the "Company"), and certain of its affiliated corporations (collectively referred to as the "Participating Employers") desire to establish a target benefit money purchase pension plan for the exclusive benefit of their employees; NOW, THEREFORE, the Company hereby adopts the Allied Products Corporation Target Benefit Plan (the "Plan"), effective January 1, 1995, to read as follows: v ARTICLE I DEFINITIONS Whenever used herein with the initial letter capitalized, words and phrases shall have the meanings stated below unless a different meaning is plainly required by context. For purposes of construction of this Plan, the masculine term shall include the feminine and the singular shall include the plural in all cases in which they could thus be applied. ACCOUNT means the separate Account which is maintained for the benefit of each Participant. ACCOUNT BALANCE means, for each Participant, the total balance standing to his Account under the date of reference determined in accordance with valuation procedures described in Section 4.02. ACTUARIAL ASSUMPTIONS AND FACTORS means the actuarial assumptions and interest rate used in determining the Employer Contributions made to the Plan to provide the targeted monthly retirement benefit and which are set forth in Exhibit A. AFFILIATE means any corporation or other business entity which is included in a controlled group of corporations within which the Company is also included, as provided in Section 414(b) of the Code (as modified, for purposes of Sections 4.04 and 4.05 of the Plan, by Section 415(h) of the Code), or which is a trade or business under common control with the Company, as provided in Section 414(c) of the Code (as modified, for purposes of Sections 4.04 and 4.05 of the Plan, by Section 415(h) of the Code), or which constitutes a member of an affiliated service group within which the Company is also included, as provided in Section 414(m) of the Code, or which is required to be aggregated with the Company pursuant to regulations issued under Section 414(o) of the Code. ALTERNATE PAYEE means any spouse, former spouse, child or other dependent of a Participant who is recognized by a Domestic Relations Order as having a right to receive all or a portion of a Participant's benefits payable under the Plan. 1 ANNUITY STARTING DATE means the first day of the first period for which an amount is payable as an annuity or in any other form. APPROVED ABSENCE means a paid absence from work approved by the Participating Employer under uniform rules and conditions for all Employees, provided that the Participant retires or returns to employment with the Participating Employer or Affiliate within the period specified in the Approved Absence, and shall include a military leave. BENEFICIARY means the person or persons or other entity designated by a Participant to receive any benefits under the Plan which may be due upon the Participant's death. BOARD means the Board of Directors of the Company or the Executive Committee of the Board of Directors. CODE means the Internal Revenue Code of 1986, as amended from time to time. COMMITTEE means the Committee appointed pursuant to Article X to administer the Plan. COMPANY means Allied Products Corporation. COMPENSATION means, for all purposes of the Plan except Sections 4.04 and 4.05, the total amount of cash compensation paid to an Employee by the Participating Employer in a Plan Year for Federal income tax purposes, including base salary, overtime, bonuses, and commissions, and amounts of pay reduced in accordance with an arrangement established by the Participating Employer which qualifies under Section 125 or Section 401(k) of the Code, provided however, for highly compensated employees (as defined in Code Section 414(q)), the amount of commissions taken into account in any Plan Year shall be limited to fifty thousand dollars ($50,000). Compensation shall exclude all noncash remunerations (including but not limited to imputed income on group term life insurance, auto allowance, moving allowances and other amounts of imputed income). 2 Notwithstanding anything herein to the contrary, the annual Compensation of each Participant taken into account under the Plan shall not exceed the OBRA '93 annual compensation limit. The OBRA '93 annual compensation limit is one hundred fifty thousand dollars ($150,000), adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living-adjustment in effect for a calendar year applies to any period, not exceeding twelve (12) months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than twelve (12) months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is twelve (12). Any reference in this Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code relating to the treatment of certain family members shall apply, except that, in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age nineteen (19) before the close of the applicable Plan Year. If, as a result of the application of such rules, the adjusted one hundred fifty thousand dollars ($150,000) limitation is exceeded, then the limitation shall be prorated among the affected Participants in proportion to each such Participant's Compensation as determined under this provision prior to the application of this limitation. CREDITED SERVICE means, for Employees classified as full-time, the period of the Participant's employment considered for purposes of determining the vested portion of a Participant's Employer Contribution Account and in the determination of the amount of contributions payable to or on behalf of the Participant. A Participant shall accrue a year of Credited Service for each full year of employment beginning on his Employment Commencement Date and ending on his Severance from Service Date. For purposes of determining a Participant's vested portion of his Employer Contribution Account, if a Participant terminates his employment with the Company or is placed on an Approved Absence and is reemployed, he shall be credited with Credited Service as follows: (a) If he terminates by reason of retirement, resignation or dismissal and returns within twelve (12) months from his Severance from Service Date, he shall 3 receive credit for Credited Service as if he had not terminated his employment with the Participating Employer; and (b) If he is placed on an Approved Absence and both terminates his employment and returns to the employment of the Company prior to the first anniversary of the date his leave of absence commenced, then he shall receive credit for Credited Service as if he had not so terminated his employment. For purposes of determining the contributions to be made on a Participant's behalf pursuant to Section 3.01, Credited Service will be calculated in years and completed months. Notwithstanding the foregoing, Employees who are classified as part-time shall receive for each Plan Year a year or partial year of Credited Service in accordance with the following schedule: Percentages of a Hours of Service Year of Credited Service ---------------- ------------------------ 1,000 50 1,001 to 1,200 60 1,201 to 1,400 70 1,401 to 1,600 80 1,601 to 1,800 90 1,801 and above 100 DOMESTIC RELATIONS ORDER means any judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments or marital property rights to an Alternate Payee and is made pursuant to a state domestic relations law, including a community property law. 4 EFFECTIVE DATE means January 1, 1995. The Plan shall be effective with respect to any individual Participating Employer as of the date determined by the Company and the Participating Employer. EMPLOYEE means a person employed by the Company or any Affiliate. Employee shall not include an independent contractor, a nonresident alien or employees of the Bush Hog Division of the Company. EMPLOYER CONTRIBUTION ACCOUNT means the separate Account which shall be maintained by the Trustee for each Participant to reflect all Employer Contributions made on behalf of such Participant and any earnings thereon. EMPLOYER CONTRIBUTIONS means the amount the Participating Employer may contribute to the Trust on behalf of each Participant for each Plan Year, as set forth in Section 3.01 of the Plan. EMPLOYMENT COMMENCEMENT DATE means the day on which an Employee first completes an Hour of Service for a Participating Employer or an Affiliate. For employees of the Verson Division of the Company, the Employment Commencement date shall not be earlier than November 1, 1986. ENTRY DATE means the first day of the month coincident with or next following the date the employee satisfies the eligibility provisions of Section 2.01 of the Plan. FINAL AVERAGE COMPENSATION means the average annual Compensation received by the Participant during the five (5) completed calendar years of employment with the Participating Employer prior to the Participant's termination of employment. If a participant has fewer than five (5) years of employment, Final Average Compensation will be based on his total completed years of employment with the Participating Employer. FORFEITURE means the portion of a Participant's Employer Contribution Account to which he is not entitled, as determined under Section 5.02. 5 HOUR OF SERVICE means: (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Company, Participating Employer or an Affiliate. These hours shall be credited to the Employee for the computation period or periods in which the duties are performed; and (b) Each hour for which an Employee is paid, or entitled to payment, by the Participating Employer, the Company or an Affiliate on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or Approved Absence. No more than five hundred one (501) Hours of Service shall be credited under this paragraph (b) for any single continuous period (whether or not such period occurs in a single computation period). Hours of Service under this paragraph (b) shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations, which are incorporated herein by this reference; (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Participating Employer, the Company or an Affiliate. The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). These hours shall be credited to the Employee for the computation period or periods to which the award, agreement or payment pertains rather than the computation period in which the award, agreement or payment is made. (d) In the event that records are not kept which accurately reflect the number of hours worked, an Employee will be credited with forty-five (45) Hours of Service for each week for which he is paid or entitled to payment if paid on a weekly basis, or ninety (90) Hours of Service if paid on a semimonthly basis, or one hundred ninety (190) Hours of Service if paid on a monthly basis. 6 LIFE ANNUITY means an annuity for the life of the Participant which is the actuarial equivalent of the Participant's vested Account Balance. LIMITATION YEAR means the Plan Year. NORMAL RETIREMENT AGE means the date the Participant attains age sixty-five (65). PARTICIPANT means an Employee who fulfills the eligibility requirements as provided in Article II and who continues to qualify as a Participant. PARTICIPATING EMPLOYER means the Company and any Affiliate which adopts this Plan with the approval of the Company. PERIOD OF SEVERANCE means the period of time commencing on an Employee's Severance from Service Date and ending on the date that the Employee again performs an Hour of Service for the Participating Employer or Affiliate. In the case of an individual who is absent from work for maternity or paternity reasons, the twelve-consecutive month period beginning on the first anniversary of the first date of such absence shall not be included in the Period of Severance. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence: (1) by reason of the pregnancy of the individual, (2) by reason of the birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purpose of caring for such child for a period beginning immediately following such birth or placement. PERMANENT DISABILITY means the permanent incapacity of a Participant to perform the usual duties of employment for the Participating Employer by reason of physical or mental impairment, as determined by the Committee based upon a written opinion of a licensed physician who has been approved by the Committee. The Committee shall designate the date on which the Permanent Disability shall be considered to exist. The final decisions of the Committee with respect to Permanent Disability shall be conclusive for all purposes of the Plan. 7 PLAN means the Allied Products Corporation Target Benefit Plan. PLAN ADMINISTRATOR means the Company. PLAN YEAR means the twelve (12) month period which begins on January 1 and which ends on December 31. REEMPLOYMENT COMMENCEMENT DATE means the date on which an Employee first performs an Hour of Service for the Participating Employer or Affiliate after a Period of Severance of at least twelve (12) consecutive months. QUALIFIED DOMESTIC RELATIONS ORDER means any Domestic Relations Order that creates, recognizes or assigns to an Alternate Payee the right to receive all or a portion of a Participant's benefits payable hereunder and meets the requirements of Section 414(p) of the Code. QUALIFIED JOINT AND SURVIVOR ANNUITY means an annuity for the life of the Participant with a survivor annuity for the life of the Participant's surviving spouse equal to fifty percent (50%) of the amount of the annuity which is payable during the joint lives of the Participant and his surviving spouse. The Qualified Joint and Survivor Annuity shall be the actuarial equivalent of the Participant's vested Account Balance. QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY means an annuity for the life of the surviving spouse of the Participant which is the actuarial equivalent of the Participant's vested Account Balance. SEVERANCE FROM SERVICE DATE means the first to occur of: (a) A Participant's retirement; (b) The date the Participant ceases to perform services for the Participating Employers and Affiliates by reason of voluntary resignation or involuntary termination; 8 (c) The date of the Participant's death; (d) The first anniversary of the date a Participant is excused from the performance of services for the Participating Employer and Affiliates for any reason other than resignation, retirement or involuntary termination; or (e) The end of an Approved Absence. However, if the Employee's service terminates and he is thereafter employed by a Participating Employer or Affiliate before he completes a Period of Severance of at least twelve (12) consecutive months, such Period of Severance shall be disregarded for all purposes of the Plan. TRUST AGREEMENT or TRUST means, respectively, the trust agreement executed by the Company for the purposes of the Plan, as provided under Section 9.01, as amended from time to time, and the trust established thereunder. TRUST FUND means all cash, securities, real estate or any other property held by the Trustee pursuant to the terms of the Trust Agreement, together with income therefrom. TRUSTEE means the person, persons or entity appointed by the Company as provided under Section 9.01 of the Plan to act as Trustee of the Trust. VALUATION DATE means each March 31, June 30, September 30, and December 31 of each Plan Year. 9 ARTICLE II ELIGIBILITY AND PARTICIPATION 2.01 ELIGIBILITY Each Employee of a Participating Employer, who is classified as full- time, on the date prior to the Effective Date shall become a Participant on the Effective Date if still employed by the Participating Employer and still eligible for Plan participation. Each other Employee, of a Participating Employer, who is classified as full-time, shall become a Participant in the Plan on the Entry Date coincident with or next following his completion of twelve (12) months of employment and his attainment of age twenty-one (21). Each Employee of a Participating Employer, who is classified as part- time, shall become a Participant on the later of the Effective Date or the Entry Date coincident with or next following his completion of one thousand (1,000) Hours of Service during the twelve (12) month period beginning on the Participant's Date of Employment. If the Participant does not complete one thousand (1,000) Hours of Service during his first twelve (12) months of employment, he shall become a Participant on the Entry Date coincident with or next following his completion of (1,000) Hours of Service in any Plan Year and his attainment of age twenty-one (21). Notwithstanding the above, an Employee included in a unit of employees covered by a collective bargaining agreement with the Participating Employer where retirement benefits were the subject of good faith bargaining between employee representatives and the Participating Employer shall be eligible to participate in the Plan only if such collective bargaining agreement specifically provides for their participation herein. Leased employees, as defined under Section 414(n) of the Code, shall be excluded from participation in this Plan. 10 2.02 TERMINATION AND REEMPLOYMENT (a) A Participant who terminates employment and is reemployed by a Participating Employer shall be a Participant immediately upon his Reemployment Commencement Date. (b) An Employee who terminates employment prior to becoming a Participant and again is employed by a Participating Employer shall become a Participant in the Plan on the first Entry Date after he satisfies the requirements set forth in Section 2.01, based on his Employment Commencement Date. (c) An Employee who terminates employment prior to becoming a Participant and again is employed by a Participating Employer shall become a Participant in the Plan on the first Entry Date after he satisfies the requirements set forth in Section 2.01, based on his Reemployment Commencement Date. 11 ARTICLE III CONTRIBUTIONS 3.01 EMPLOYER CONTRIBUTIONS For each Plan Year, each Participating Employer shall contribute to the Trust Fund on behalf of each Participant employed by such Participating Employer eligible to share in the Employer Contribution for that Plan Year, as provided in Section 4.03, an amount, if any, necessary to provide each Participant with a targeted monthly retirement benefit commencing the first day of the month following Normal Retirement Age and payable in the form of a Life Annuity equal to one-twelfth (1/12th) of the following: 0.5% (Final Average Compensation) x (Years of Credited Service). The benefit described above shall be determined in accordance with the Actuarial Assumptions and Factors set forth in Exhibit A. For each Plan Year, the amount of the Employer Contribution on behalf of a Participant shall be equal to the Employer Contribution made on his behalf for the immediately preceding Plan Year, plus or minus (as the case may be) an adjustment to reflect any increase or decrease in the Participant's targeted benefit. The contribution for any Plan Year shall not exceed the maximum amount deductible by the Participating Employer for such Plan Year for Federal income tax purposes under Section 404 of the Code. Employer Contributions for a Plan Year shall be paid to the Trust not later than the time prescribed by law for the filing of the Participating Employer's Federal income tax return for the applicable year, including any extensions thereof. All Employer Contributions are specifically conditioned on their deductibility under Section 404 of the Code. 12 3.02 PARTICIPANT CONTRIBUTIONS Participants shall be neither required nor permitted to make contributions to the Plan. 13 ARTICLE IV ALLOCATIONS, ACCOUNTING AND ADJUSTMENTS 4.01 COMPOSITION OF TRUST FUND All amounts contributed to the Plan, as increased or decreased by income, expenditure, appreciation and depreciation, shall constitute a single fund known as the Trust Fund. A separate Employer Contribution Account shall be maintained for each Participant. 4.02 ALLOCATION OF EARNINGS TO ACCOUNTS As of each Valuation Date, prior to the allocation of contributions described in Section 3.01, there shall be allocated to the Accounts of all Participants by credit or deduction therefrom, as the case may be, of a portion of the increase or decrease in the value of the respective investment funds of the Trust Fund since the preceding Valuation Date attributable to interest, dividends, changes in market value, expenses and gains and losses realized from the sale of assets. Such allocation shall be made in the proportion that the opening balance of each such Account invested in such investment fund reduced by any distributions since the preceding Valuation Date bears to the total of the opening balances of all such Accounts invested in the investment fund, reduced by any distributions since the preceding Valuation Date. 4.03 ALLOCATION OF EMPLOYER CONTRIBUTIONS As of the last day of the Plan Year, after the allocation of earnings, the Employer Contributions by each Participating Employer for such Plan Year shall be allocated to the Employer Contribution Accounts of all Participants who are actively employed by such Participating Employer on the last day of such Plan Year. 14 Notwithstanding the above, Participants who have terminated at or after Normal Retirement Age, died or become Permanently Disabled during the Plan Year also shall be eligible to share in the Employer Contributions for such year. An eligible Participant shall share in Employer Contributions according to the allocation procedures in Section 4.06. 4.04 MAXIMUM ANNUAL ADDITIONS (a) The Employer Contributions allocated to any Participant's Employer Contribution Account in any Limitation Year shall not exceed the lesser of: (1) The greater of thirty thousand dollars ($30,000) or one-fourth (1/4) of the dollar limitation in effect under Section 415(b)(1)(A) of the Code; or (2) Twenty-five percent (25%) of the Participant's compensation for such Limitation Year. (b) If, as a result of a reasonable error in estimating a Participant's compensation or such other facts and circumstances to which Internal Revenue Service Regulation Section 1.415-6 would be applicable, the additions to a Participant's Account under Section 4.04(a) in any Limitation Year would be in excess of the maximum annual limits, amounts otherwise allocable to the Employer Contribution Account of such Participant for such Limitation Year shall be used to reduce Employer contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for that Participant if that Participant is covered by the Plan as of the end of the Limitation Year. If such Participant is not covered by the Plan as of the end of the Limitation Year, the excess amounts shall be held unallocated in a suspense account 15 for the Limitation Year and allocated and reallocated in the next Limitation Year to all of the remaining Participants in the Plan in accordance with the provisions of Section 4.03. In addition, the excess amounts shall be used to reduce Employer contributions for the next Limitation year (and succeeding Limitation Years, as necessary). Any such suspense account will not share in the allocation of earnings under Section 4.02. (c) For purposes of this Section 4.04, this Plan and any other qualified defined contribution plan maintained by the Company, a Participating Employer or an Affiliate shall be considered as a single defined contribution plan if a Participant is a participant in more than one (1) defined contribution plan. Amounts allocated to a Participant's individual medical benefit account, as defined in Section 415(l)(2) of the Code, which is part of a defined benefit plan maintained by the Company, a Participating Employer or an Affiliate shall be treated as annual additions to a defined contribution plan. Amounts derived from contributions paid or accrued which are attributable to post-retirement medical benefits allocated to the separate account of a Participant who is a key employee, as defined in Section 419A(d) of the Code, under a welfare benefit fund, as defined in Section 419(e) of the Code, maintained by the Company, a Participating Employer or an Affiliate, shall be treated as annual additions to a defined contribution plan. Notwithstanding the foregoing, the compensation limit described above shall not apply to any contribution for medical benefits (within the meaning of Section 419A(f)(2) of the Code) after separation from service which is otherwise treated as an annual addition under Section 415(l)(1) of the Code. (d) Solely for the purpose of applying the limitations of Sections 4.04 and 4.05, the compensation of a Participant includes: 16 (1) A Participant's wages, salaries, fees for professional services, and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Participating Employer or Affiliate to the extent that the amounts are includable in gross income (including, but not limited, to commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements, and expense allowances); (2) In the case of a Participant who is an employee within the meaning of Section 401(c)(1) of the Code and the regulations thereunder, the Participant's earned income (as described in Section 401(c)(2) of the Code and the regulations thereunder); (3) Amounts described in Sections 104(a)(3), 105(a), and 105(h) of the Code, but only to the extent these amounts are includable in the gross income of the Participant; (4) Amounts paid or reimbursed by the Participating Employer or Affiliate for moving expenses incurred by a Participant but only to the extent that these amounts are not deductible by the Participant under Section 217 of the Code; (5) The value of a nonqualified stock option granted to a Participant by the Participating Employer or Affiliate, but only to the extent that the value of the option is includable 17 in the gross income of the Participant for the taxable year in which granted; and (6) The amount includable in the gross income of a Participant upon making the election described in Section 83(b) of the Code. Solely for the purpose of applying the limitations of Sections 4.04 and 4.05, the compensation of a Participant excludes: (1) Contributions made by the Participating Employer or Affiliate to a plan of deferred compensation which are not included in the Participant's gross income for the taxable year in which contributed, contributions made by the Participating Employer or Affiliate under a simplified employee pension plan to the extent such contributions are excluded from the Participant's gross income, or any distributions from a plan of deferred compensation; (2) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Participant either becomes freely transferable or is no longer subject to substantial risk of forfeiture; (3) Amounts realized from the sale, exchange, or other disposition of stock acquired under a qualified stock option; and (4) Other amounts which received special tax benefits, or contributions made by the Participating Employer or Affiliate (whether or not under a salary reduction agreement) toward the purchase of an annuity described 18 in Code Section 403(b) (whether or not the amounts are actually excludable from the gross income of the Participant). 4.05 PARTICIPATION IN DEFINED BENEFIT PLAN (a) If any Participant has also participated in any qualified defined benefit plan maintained by the Company, a Participating Employer or an Affiliate, the annual additions under the defined benefit plans shall be reduced to the extent necessary so that the sum of the defined benefit plan fraction and the defined contribution plan fraction for any Limitation Year does not exceed 1.0. (b) The defined contribution plan fraction for any Limitation Year is a fraction, the numerator of which is the sum of the annual additions to the Participant's Accounts as of the close of the Limitation Year under this Plan and any other defined contribution plan maintained by the Company, a Participating Employer or an Affiliate, and the denominator of which is the sum of the lesser of the following amounts determined for such Limitation Year and each prior year of service with the Company, Participating Employer or Affiliate: (1) The product of 1.25 multiplied by the dollar limitation in effect under Section 415(c)(1)(A) of the Code for such Limitation Year; or (2) The product of 1.4 multiplied by the amount which may be taken into account under Section 415(c)(1)(B) of the Code for such Limitation Year. (c) The defined benefit plan fraction for any Limitation Year is a fraction, the numerator of which is the projected annual benefit of the Participant 19 under such plan (determined as of the close of its limitation year) and the denominator of which is the lesser of: (1) The product of 1.25 multiplied by the maximum dollar limitation in effect under Section 415(b)(1)(A) of the Code for such Limitation Year; or (2) The product of 1.4 multiplied by the amount which may be taken into account under Section 415(b)(1)(B) of the Code for such Limitation Year. 4.06 ALLOCATION OF EMPLOYER CONTRIBUTIONS A Participant eligible to share in Employer Contributions pursuant to Section 4.03 shall share in such Employer Contributions in accordance with the formula contained in Section 3.01 of the Plan. 4.07 PARTICIPANT ELECTION OF INVESTMENT FUNDS The Company shall establish separate investment funds in which the assets of the Trust shall be held. Each Participant in the Plan may select the investment fund or funds in which his Account shall be invested. Each such election shall be made in writing on forms to be furnished by the Plan Administrator and shall specify that portion of the Participant's Account Balance to be invested in each respective investment fund established by the Company, in multiples of ten percent (10%). Changes in the Account Balances invested in the specified funds due to earnings and losses shall not require reallocation of the Account Balances in the specified proportions unless subsequently elected by the Participant. The Participant may also elect the portion of future contributions made on his behalf to be invested in the respective investment funds established by the Company in multiples of ten percent (10%) of the amount of such contributions. A Participant 20 may, however, elect to have zero percent (0%) of such contributions invested in the respective investment funds. A Participant may change his investment fund elections regarding existing Account Balances and/or future contributions twice each Plan Year, effective as of January 1, April 1, July 1, or October 1 by following the procedures established by the Plan Administrator. If no election form has been executed by the Participant and submitted to the Trustee by the Plan Administrator, the entire Account shall be invested in the investment fund designated by the Plan Administrator. 21 ARTICLE V VESTING 5.01 EMPLOYER CONTRIBUTION ACCOUNT A Participant shall have a fully vested, nonforfeitable interest in his Employer Contribution Account on the first to occur of the following events: (a) His attainment of Normal Retirement Age; (b) The date on which he shall be determined to have a Permanent Disability; (c) The date of his death; or (d) Upon the completion of the number of years of Credited Service required for full vesting. 5.02 TERMINATION OF EMPLOYMENT (a) Upon a Participant's Severance from Service Date for any reason other than Permanent Disability or death and before his Normal Retirement Age, he shall be vested in the percentage of his Employer Contribution Account set forth in the following table: Completed Years of Credited Service Vested Percentage ------------------- ----------------- Less than 5 0% 5 or more 100% 22 All of a Participant's years of Credited Service shall be taken into consideration in determining the vested percentage of his Employer Contribution Account. (b) The portion of the Participant's Employer Contribution Account in which he is not vested at his Severance from Service Date shall be declared a Forfeiture on the last day of the Plan Year in which his Severance from Service Date occurred. Such Forfeiture shall be used as set forth in Section 5.03. Any person who terminates employment with no vested interest in his Account shall be deemed to have an immediate distribution of the vested portion (zero (0)) of his Account at the time of his termination of employment and the remainder of his Account (one hundred percent) shall be treated as a Forfeiture. If the Participant is reemployed before incurring five (5) consecutive one-year Periods of Severance and again terminates his employment under circumstances in which he is not fully vested in his Employer Contribution Account, such Participant's vested balance in his Employer Contribution Account shall be determined by adding to the amount actually held by the Trust any amount previously distributed to him. The vested percentage shall be applied to this total, the amount of any previous distributions shall be subtracted and the remaining amount shall be his vested balance in his Employer Contribution Account. (c) If the Participant returns to the employ of a Participating Employer or Affiliate before he incurs five (5) consecutive one-year Periods of Severance, the portion of his Employer Contribution Account that had been forfeited shall be reinstated to his Employer Contribution Account in full, unadjusted by any gains or losses occurring subsequent to the date immediately preceding his Severance from Service Date, by using the Forfeitures during the Plan Year in which his reemployment occurred. If the Forfeitures in the year of reemployment are insufficient to restore 23 the forfeited amount, the remainder shall be restored by an Employer Contribution. Such a Participant shall continue vesting in such Account. If the Participant incurs five (5) consecutive Periods of Severance, he shall not regain any interest in any Forfeiture. 5.03 DISPOSITION OF FORFEITURES Forfeitures occurring in a Plan Year shall be used to reinstate the Employer Contribution Accounts of rehired Participants who previously had a Severance from Service Date and suffered a Forfeiture. Any remaining Forfeitures shall be used to reduce the contribution of the Participating Employer who employed the Participant from whose Account the Forfeiture arose in future Plan Years. 5.04 EFFECT OF PERIODS OF SEVERANCE If a Participant or Employee incurs five (5) or more consecutive one- year Periods of Severance and is thereafter reemployed by a Participating Employer or Affiliate, he shall regain his years of Credited Service earned before such Periods of Severance upon such reemployment. However, he shall not regain any interest in any Forfeiture. If a Participant or other Employee incurs fewer than five (5) consecutive one-year Periods of Severance and is thereafter reemployed by a Participating Employer or Affiliate, he shall regain his years of Credited Service earned before such Periods of Severance and any Forfeiture shall be restored pursuant to Section 5.02. 24 ARTICLE VI TIME AND METHOD OF PAYMENT 6.01 MANNER OF PAYMENT (a) Whenever the Plan Administrator shall direct the Trustee to make payment to a Participant upon termination of the Participant's employment (whether by reason of retirement, Permanent Disability or for any other reason other than death), the Plan Administrator shall direct the Trustee to pay the Participant's vested Account Balance (determined as of the Valuation Date preceding his distribution) to or for the benefit of the Participant, in the normal form of payment described in paragraph (b) below, unless an optional form of payment is selected pursuant to a qualified election, as described in Section 6.02. (b) If a Participant is married on the Annuity Starting Date, payment to the Participant shall be made in the form of a Qualified Joint and Survivor Annuity, unless either an optional form of payment or a Life Annuity is selected pursuant to a qualified election, as described in Section 6.02. If a Participant is not married on the Annuity Starting Date, payment to the Participant shall be made in the form of a Life Annuity, unless an optional form of payment is selected pursuant to a qualified election, as described in Section 6.02. 6.02 OPTIONAL FORMS OF PAYMENT (a) By making a qualified election, as described in paragraph (b) below, any Participant may choose to receive payment of his Account Balance in a lump sum payment. 25 Notwithstanding the foregoing, if the vested value of the Participant's Account Balance (determined as of the Valuation Date preceding his Severance from Service Date) is three thousand five hundred dollars ($3,500) or less, (or such other amount as determined under the Code), payment shall be made as soon as practicable in a lump sum. (b) To make a qualified election, a married Participant must waive his right to the Qualified Joint and Survivor Annuity within the ninety (90) day period ending on the Annuity Starting Date. An unmarried Participant must waive his right to the Life Annuity in the same manner as if it were a waiver of the Qualified Joint and Survivor Annuity. A married Participant's spouse must consent to his waiver of the Qualified Joint and Survivor Annuity. The spouse's consent to the waiver must be in writing, must acknowledge the effect of the waiver and must specify the optional form of benefit selected. In order to be valid, the spousal consent must be witnessed by a Plan representative or a notary public. Such spousal consent shall not be revocable by the spouse. Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of the Plan Administrator that such written consent may not be obtained because there is no spouse or the spouse cannot be located, a waiver will be deemed a qualified election. In the event that the spouse of a Participant is legally incompetent to give consent, such consent may be given by the spouse's legal guardian, which shall include the Participant in the event the Participant is the legal guardian of the spouse. In the event the Participant is legally separated or has been abandoned, as provided by a court order, spousal consent shall not be required, except where otherwise provided by a Qualified Domestic Relations Order. 26 Any consent necessary under this provision will be valid only with respect to the spouse who signs the consent or, in the event of a deemed qualified election, the designated spouse. A revocation of a prior waiver may be made by a Participant without the consent of the spouse at any time before the Annuity Starting Date. The number of revocations shall not be limited. (c) Not less than thirty (30) days and no more than ninety (90) days prior to the Annuity Starting Date, the Plan Administrator shall provide the Participant with a written explanation of: (1) The terms and conditions of a Qualified Joint and Survivor Annuity or Life Annuity, as appropriate; (2) The Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity or Life Annuity form of payment, as appropriate; (3) The rights of the Participant's spouse; (4) The right to make and the effect of a revocation of a previous election to waive the Qualified Joint and Survivor Annuity or Life Annuity, as appropriate; and (5) The relative values of the various optional forms of benefit available under the Plan. If a Participant dies after election of an optional form but before the Annuity Starting Date, payment shall be made in accordance with Section 6.04 of the Plan. 27 (d) Any distribution, if not made in a lump sum, may not be in any form that will provide for payments over a period extending beyond either the life of the Participant (or the lives of the Participant and his designated Beneficiary) or the life expectancy of the Participant (or the life expectancy of the Participant and his designated Beneficiary). All distributions under the Plan shall meet the minimum distribution incidental benefits requirements in Section 401(a)(9) of the Code and regulations thereunder. 6.03 TIME OF PAYMENT Subject to the provisions of Section 6.06, payment shall be made or shall commence as of the later of: (1) the date the Participant attains (or would have attained) Normal Retirement Age, or (2) sixty (60) days after the close of the Plan Year in which the employment of the Participant terminates, unless the Participant, or his Beneficiary in the event of his death, requests payment at an earlier date. In such event, payment shall be made or shall commence as of the date requested. If the Participant's Account Balance exceeds three thousand five hundred dollars ($3,500) (or such other amount as determined under the Code) and payment is to be made prior to the Participant's Normal Retirement Age, the Participant must consent in writing to the distribution before payment of any portion of the distribution commences. In such a case, the Participant's spouse also must consent in writing to the timing of the distribution unless payment is made in the form of a Qualified Joint and Survivor Annuity. If the Account Balance determined at the time of distribution exceeds three thousand five hundred dollars ($3,500), then the Account Balance at any subsequent time shall be deemed to exceed three thousand five hundred dollars ($3,500). Notwithstanding the foregoing, in all cases payment shall be made or shall commence by the April 1 immediately following the year in which the Participant attains the age of seventy and one-half (70-1/2), even if he has not retired. 28 6.04 PAYMENTS TO BENEFICIARIES (a) If a Participant dies before the Annuity Starting Date, payment of his Account Balance shall be made to the surviving spouse of the Participant in the form of a Qualified Pre-retirement Survivor Annuity unless the Participant either has no spouse or has designated another Beneficiary in the manner described in this Section 6.04, or the spouse elects to receive payment in a single lump sum. Payment of the Qualified Pre-retirement Survivor Annuity shall commence on the first day of the month coincident with or next following the date the Participant would have reached Normal Retirement Age, unless the spouse consents in writing to an earlier distribution. The surviving spouse may elect to receive payment as soon as administratively feasible after the Participant's death. Notwithstanding anything to the contrary, if the Participant's Account Balance is three thousand five hundred dollars ($3,500) (or such other amount as determined under the Code) or less, payment will be made to the surviving spouse in a single lump sum as soon as administratively feasible following the Participant's death. In order for the designation of a Beneficiary other than the spouse to be valid, the designation must have been made after the first day of the Plan Year in which the Participant attains age thirty-five (35), the designation must contain a waiver of the Qualified Pre-retirement Survivor Annuity, the Participant's spouse must consent in writing to the waiver of the Qualified Pre- retirement Survivor Annuity and to the specific nonspouse Beneficiary designation. A valid spousal consent shall be witnessed by either a representative of the Plan or a notary public and shall be revocable by the spouse at any time prior to the Annuity Starting Date. The Plan Administrator shall provide to each Participant a written explanation of the Qualified Pre-retirement Survivor Annuity within the applicable period. With respect to any Participant, the applicable period means whichever of the following periods ends last: 29 (1) The period beginning with the first day of the Plan Year in which the Participant attains age thirty-two (32) and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age thirty-five (35); (2) A reasonable period ending after the individual becomes a Participant; or (3) A reasonable period ending after Section 401(a)(11) of the Code first applies to the Participant. Notwithstanding the foregoing, in the case of a Participant who separates from service before attaining age thirty-five (35), the applicable period means the period beginning one (1) year before the separation from service and ending one (1) year after such separation. The written explanation of the Qualified Pre-retirement Survivor Annuity shall provide comparable notice and information to that described in Section 6.02 with respect to the Qualified Joint and Survivor Annuity. A married Participant may designate a nonspouse Beneficiary prior to the first day of the Plan Year in which the Participant attains age thirty-five (35) if a written explanation of the benefit provided under this Section 6.04 is given to the Participant by the Plan Administrator within a reasonable period prior to the time of the designation. Such early nonspouse Beneficiary designation shall become invalid as of the first day of the Plan Year in which the Participant attains age thirty-five (35). The designation of a nonspouse Beneficiary shall be revoked automatically upon the marriage or remarriage of a Participant. Notwithstanding the foregoing, the spousal consent requirement shall not apply if it is established to the satisfaction of the Plan Administrator either that the spouse cannot be located or that other circumstances set forth in regulations promulgated under Section 417 of the Code which preclude the necessity of the spouse's consent are present with respect to the Participant. 30 (b) If a Participant is not married or if he has designated a Beneficiary other than his spouse, upon his death, his vested Account Balance shall be paid to his designated Beneficiary in the form of a single lump sum payment as soon as administratively feasible following the Participant's death. If the Participant's surviving spouse is his Beneficiary, his surviving spouse may elect to receive payment in the form of a lump sum in lieu of the Qualified Pre-retirement Survivor Annuity within a reasonable period before benefits commence. If a designated Beneficiary shall die before the Participant, his interest shall terminate, and, unless otherwise provided in the Participant's designation, such interest shall be paid in equal shares to those Beneficiaries, if any, who survive the Participant. Except as otherwise provided in paragraph (a), the Participant shall have the right to revoke the designation of any Beneficiary without the consent of the Beneficiary. (c) If a Participant fails to designate a Beneficiary, if such designation shall for any reason be illegal or ineffective or if no Beneficiary survives the Participant, his death benefits shall be paid to: (1) His surviving spouse; (2) His children in equal shares, and their descendants, PER STIRPES; (3) His parents in equal shares; or (4) His brothers and sisters in equal shares, and their descendants, PER STIRPES. If no such person shall be living on the date of any distribution, such amount shall be payable to the estate of the last survivor of said persons. 31 (d) Notwithstanding the foregoing provisions of this Section 6.04, in the event of the Participant's death prior to the Annuity Starting Date, the entire interest of the Participant shall be distributed within five (5) years after the death of such Participant, unless one (1) of the following exceptions is met: (1) (A) Any portion of the Participant's Account is payable to (or for the benefit of) a designated Beneficiary; (B) Such portion of the Participant's Account shall be distributed over a period not extending beyond the life or life expectancy of the designated Beneficiary; and (C) Such distribution commences no later than one (1) year after the date of the Participant's death. (2) (A) The portion of the Participant's Account to which his surviving spouse is entitled shall be distributed over a period not extending beyond the life or life expectancy of the surviving spouse; and (B) Such distribution commences no later than the date on which the Participant would have attained age seventy and one- half (70-1/2). If the Participant dies after the Annuity Starting Date, the remaining portion of such interest will continue to be distributed at least as rapidly 32 as under the method of distribution being used prior to the Participant's death. 6.05 DISTRIBUTION OF UNALLOCATED CONTRIBUTIONS If on the date of termination of a Participant's employment the Participating Employer shall be holding contributions made by or on behalf of the Participant but not yet allocated to his Accounts, the Participating Employer shall pay such amounts either directly to the Participant (or his Beneficiary, as the case may be) or to the Trustee, to be distributed by the Trustee in accordance with the method of distribution determined under this Article VI. 6.06 CERTAIN RETROACTIVE PAYMENTS If the amount of the payment required to be made or commence on the date determined in this Article VI cannot be ascertained by such date, a payment retroactive to such date may be made no later than sixty (60) days after the earliest date on which the amount of such payment can be ascertained under the Plan. 6.07 ADMINISTRATIVE POWERS RELATING TO PAYMENTS If a Participant or Beneficiary is under a legal disability and a conservator or other person is judicially charged with the care of such Participant or Beneficiary or his estate, all benefits to which the Participant or Beneficiary is entitled shall be paid to such conservator or other person. Any payment made pursuant to this Section 6.07 shall be in complete discharge of the obligation for such payment under the Plan. 33 6.08 DIRECT ROLLOVERS (a) A Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan in the form of a Direct Rollover. Notwithstanding the above, an Eligible Rollover Distribution of less than two hundred dollars ($200) is not eligible for a Direct Rollover. Further, if the Distributee elects to have only a portion of the Eligible Rollover Distribution paid to an Eligible Retirement Plan in the form of a Direct Rollover, that portion must be equal to at least five hundred dollars ($500). (b) For purposes of this Section 6.08, the following definitions apply: (i) "Distributee" means a Participant or former Participant, his surviving spouse, his spouse, or his former spouse who is the Alternate Payee under a Qualified Domestic Relations Order. (ii) "Eligible Rollover Distribution" means any distribution of all or any portion of the Participant's vested Account Balance except that an Eligible Rollover Distribution does not include any distribution that is one (1) of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Participant, or the joint lives (or joint life expectancies) of the Participant and his designated Beneficiary, or for a specified period of ten (10) years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without 34 regard to the exclusion for net unrealized appreciation with respect to employer securities). (iii) "Eligible Retirement Plan" means an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is limited to an individual retirement account or individual retirement annuity. (iv) "Direct Rollover" means a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. 35 ARTICLE VII ROLLOVERS AND TRANSFERS 7.01 ROLLOVERS AND TRANSFERS Rollovers and transfers from other trusts, whether or not from a plan maintained by the Participating Employer, shall not be permitted. 36 ARTICLE VIII TOP-HEAVY PROVISIONS 8.01 EFFECTIVE DATE Notwithstanding anything herein to the contrary, the following provisions shall apply and shall supersede any conflicting Plan provisions with respect to any Plan Year in which this Plan is deemed to be Top-heavy. 8.02 DEFINITIONS DETERMINATION DATE means, with respect to any Plan Year, the last calendar day of the immediately preceding Plan Year or, in the case of the first Plan Year, the last calendar day of the first Plan Year. KEY EMPLOYEE means any Employee or former Employee (or any Beneficiary of such Employee) who, at any time during the Plan Year or any of the four (4) immediately preceding Plan Years (or, if fewer, the total number of Plan Years during which the Plan has been in effect) is or was: (a) An officer of the Participating Employer whose compensation exceeds fifty percent (50%) of the amount in effect under Section 415(b)(1)(A) of the Code for such Plan Year; (b) One (1) of the ten (10) Employees whose compensation exceeds the amount in effect under Section 415(c)(1)(A) of the Code and who owns (or is considered to own under Section 318 of the Code) one (1) of the largest interests in the Participating Employer or an Affiliate; (c) A five percent (5%) owner of the Participating Employer; or 37 (d) A one percent (1%) owner of the Participating Employer whose annual compensation from the Participating Employer and Affiliates exceeds one hundred fifty thousand dollars ($150,000). An officer is defined as an actual officer of the Participating Employer or an Affiliate; provided, however, that not more than the greater of three (3) Employees or ten percent (10%) of the Employees (but in no event more than fifty (50) Employees) shall be considered as officers in determining whether the Plan is Top-heavy. NONKEY EMPLOYEE means any Employee who is not a Key Employee. PERMISSIVE AGGREGATION GROUP means the Required Aggregation Group of plans plus any other plan or plans of the Participating Employer or an Affiliate which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. REQUIRED AGGREGATION GROUP means the group of: (a) Each qualified plan of the Participating Employer or an Affiliate in which at least one (1) Key Employee participates; and (b) Any other qualified plan of the Participating Employer or an Affiliate which enables a plan described in paragraph (a) above to meet the requirements of Section 401(a)(4) or Section 410 of the Code. TOP-HEAVY The Plan shall be deemed to be Top-heavy for any Plan Year if, as of the Determination Date for such Plan Year, any of the following conditions exists: 38 (a) If the Top-heavy Ratio for the Plan exceeds sixty percent (60%) and the Plan is not part of a Required Aggregation Group of plans or a Permissive Aggregation Group of plans; (b) If the Plan is part of a Required Aggregation Group of plans (but is not part of a Permissive Aggregation Group of plans) and the Top-heavy Ratio for the group of plans exceeds sixty percent (60%); or (c) If the Plan is part of a Required Aggregation Group of plans and part of a Permissive Aggregation Group of plans and the Top-heavy Ratio for the Permissive Aggregation Group of plans exceeds sixty percent (60%). TOP-HEAVY RATIO (a) If the Participating Employer or an Affiliate maintains one (1) or more defined contribution plans (including any simplified employee pension plan) and the Participating Employer or Affiliate has not maintained any defined benefit plan which during the five (5) Plan Year period ending on the Determination Date has or has had any accrued benefits, the Top-heavy Ratio for the Plan or for the Required Aggregation Group or the Permissive Aggregation Group, as appropriate, shall be a fraction, the numerator of which is the sum of the account balances of all Key Employees under the aggregated defined contribution plans as of the Determination Date (including any part of any account balance distributed in the five (5) Plan Year period ending on the Determination Date) and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the five (5) Plan Year period ending on the Determination Date) of all Participants as of the Determination Date, both computed in accordance with Section 416 of the Code. The numerator and denominator of the Top-heavy Ratio shall be adjusted to reflect any contribution not actually made as of the 39 Determination Date, but which is required to be taken into account on that date under Section 416 of the Code. (b) If the Participating Employer or an Affiliate maintains or has maintained one (1) or more defined contribution plans (including any simplified employee pension plan) and the Participating Employer or Affiliate maintains or has maintained one (1) or more defined benefit plans which during the five (5) Plan Year period ending on the Determination Date has or has had any accrued benefits, the Top-heavy Ratio for the Required Aggregation Group or the Permissive Aggregation Group, as appropriate, shall be a fraction, the numerator of which is the sum of the account balances of all Key Employees under the aggregated defined contribution plans and the present value of the accrued benefits of all Key Employees under the aggregated defined benefit plans as of the Determination Date, and the denominator of which is the sum of the account balances of all Participants under the aggregated defined contribution plans and the present value of the accrued benefits of all Participants under the aggregated defined benefit plans as of the Determination Date, determined in accordance with Section 416 of the Code. The numerator and denominator of the Top-heavy Ratio shall be adjusted for any distribution of an account balance or accrued benefit made in the five (5) Plan Year period ending on the Determination Date and any contribution due but unpaid as of the Determination Date. (c) For purposes of paragraphs (a) and (b) above, the value of the account balances and the present value of the accrued benefits shall be determined as of the most recent Valuation Date occurring within the twelve (12) month period ending on the Determination Date, except as provided in Section 416 of the Code for the first and second Plan Years of a defined benefit plan. The accrued benefits of Nonkey Employees shall be determined under the method which is used for accrual purposes for all plans of the Participating Employers and Affiliates or, if there is no such 40 method, then as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code Section 411(b)(1)(C). The account balances and the accrued benefits of a Participant who is not a Key Employee but who was a Key Employee in a prior Plan Year or who has not performed any services for the Participating Employer under the Plan at any time during the five (5) Plan Year period ending on the Determination Date shall be disregarded. The calculation of the Top-heavy Ratio and the extent to which distributions, and direct transfers are taken into account shall be made in accordance with Section 416 of the Code. When aggregating plans, the value of the account balances and the present value of the accrued benefits shall be calculated with reference to the Determination Dates that fall within the same calendar year. VALUATION DATE means the same valuation date used for computing plan costs for minimum funding, regardless of whether an actuarial valuation is performed that year. 8.03 SPECIAL CODE SECTION 415 LIMITATIONS For purposes of Section 4.05, in any Plan Year during which the Plan is deemed to be Top-heavy and in which the Participating Employer also maintains a defined benefit plan which is deemed to be Top-heavy, the number 1.25 shall be replaced by the number 1.0 to the extent required under Section 416(h) of the Code; provided, however, that such adjustment shall not occur if the Top-heavy Ratio does not exceed ninety percent (90%) and additional contributions or benefits are provided for Nonkey Employees in accordance with the provisions of Sections 416(h)(2)(A) and (B) of the Code. In such case, the minimum allocation described in Section 8.04(a) shall be equal to seven and one-half percent (7 1/2%) of compensation for each Nonkey Employee covered under both plans. 41 8.04 MINIMUM ALLOCATION REQUIREMENTS (a) The Employer Contributions allocated on behalf of any Participant who is not a Key Employee shall not be less than the lesser of three percent (3%) of such Participant's compensation, or the largest percentage of Employer Contributions allocated on behalf of any Key Employee for that Plan Year, without, in either event, taking into consideration any contributions or benefits under Social Security or any similar legislation. The preceding provisions shall not apply to any Participant who was not employed by a Participating Employer on the last day of the Plan Year. (b) The minimum allocation in paragraph (a) shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the Plan Year because the Participant failed to complete at least one thousand (1,000) Hours of Service, the Participant's compensation was less than any stated amount or the Participant failed to make mandatory contributions to the Plan. For purposes of computing the minimum allocation, compensation shall mean compensation as defined in Section 4.04(d) of the Plan. The minimum allocation above shall not apply to a Participant covered under another defined contribution plan of a Participating Employer if such Participant receives the minimum allocation under such other plan. (c) The minimum allocation required (to the extent required to be nonforfeitable under Section 416(b) of the Code) may not be forfeited under Sections 411(a)(3)(B) or 411(a)(3)(D) of the Code. 42 8.05 VESTING REQUIREMENTS With respect to any Plan Year that the Plan is a Top-heavy plan, the Plan shall have the following vesting schedule: Completed Years of Credited Service Vested Percentage ------------------- ----------------- Less than 3 0% 3 or more 100% No reduction in vested benefits may occur in the event the Plan's status as Top-heavy changes for any Plan Year. However, this Section does not apply to any Employee who does not have an Hour of Service after the Plan has initially become Top-heavy. 43 ARTICLE IX MANAGEMENT OF FUNDS 9.01 APPOINTMENT OF TRUSTEE A Trustee shall be appointed by the Company to administer the Trust Fund. The Trustee shall serve at the pleasure of the Company and shall have the rights, powers and duties set forth in the Trust Agreement. All assets of the Trust Fund shall be held, invested and reinvested by the Trustee. 9.02 ASSETS OF TRUST All contributions under this Plan shall be paid to the Trustee and, except as provided in Section 9.03, all assets of the Trust Fund, including income from investments and from all other sources, shall be retained for the exclusive benefit of Participants, former Participants and their Beneficiaries, and shall be used to pay benefits to such persons, or to pay expenses of administration of the Plan and Trust to the extent not paid by the Company or Participating Employer. 9.03 REVERSION OF EMPLOYER CONTRIBUTIONS At no time shall any part of the corpus or income of the Trust Fund be used for or diverted to purposes other than for the exclusive benefit of Participants and their Beneficiaries. Notwithstanding the above, contributions made by a Participating Employer shall be returned to a Participating Employer in the following cases: (a) If a contribution is made by a Participating Employer by a mistake in fact, such contribution shall be returned to such Participating Employer within one (1) year after the payment of the contribution to the Trust Fund. 44 (b) Contributions are conditioned on initial qualification of the Plan under Section 401(a) of the Code, and, if the Plan does not qualify, then such contribution shall be returned to the Participating Employer within one (1) year after the date of denial of qualification of the Plan. (c) Contributions are conditioned upon their deductibility under Section 404(a) of the Code, and, to the extent the deduction is disallowed, such a contribution shall be returned to the Participating Employer within one (1) year after the disallowance of the deduction if so requested by the Participating Employer. 45 ARTICLE X ADMINISTRATION OF PLAN 10.01 PLAN ADMINISTRATOR The Company shall be the Plan Administrator. The Company, by resolution of the Board, shall appoint a Committee consisting of not less than three (3) persons who may be officers, directors, Employees, agents or shareholders of the Company. The Committee shall act as the Company's agent or delegate in carrying out its administrative duties. The Company may remove or replace any member of the Committee at any time in its sole discretion, and any Committee member may resign by delivering a written resignation to the remaining members of the Committee or, if there are none, to the Company. The Committee shall notify the Trustee promptly of any change in the composition of its members. The Company shall be the "Named Fiduciary" for purposes of ERISA and shall be subject to service of process on behalf of the Plan. 10.02 RIGHTS, POWERS AND DUTIES OF PLAN ADMINISTRATOR The Plan Administrator shall have such authority as may be necessary to discharge its responsibilities under the Plan, including the following rights, powers and duties: (a) The Plan Administrator shall adopt rules governing its procedures not inconsistent herewith, and shall keep a permanent record of its meetings and actions. The Plan Administrator shall administer the Plan uniformly and consistently with respect to persons who are similarly situated. The Plan Administrator shall maintain the Accounts of Participants and Beneficiaries under the Plan or shall cause them to be maintained under its direction. 46 (b) The Plan Administrator shall direct the Trustee in writing to make payments from the Trust Fund to persons who qualify for such payments hereunder. Such written order to the Trustee shall specify the name of the person, his address and the amount and frequency of such payments. (c) The Plan Administrator shall not take action or direct the Trustee to take any action with respect to any of the benefits provided hereunder which would be discriminatory in favor of those Participants or Employees who are officers, shareholders or highly compensated Employees of a Participating Employer. (d) The Plan Administrator shall have the sole responsibility for the administration of the Plan; and, except as herein expressly provided, the Plan Administrator shall have the exclusive right to interpret the provisions of the Plan and to determine any question arising hereunder or in connection with the administration of the Plan, including the remedying of any omission, inconsistency or ambiguity, and its decision or action in respect thereof shall be conclusive and binding upon any and all Participants, former Participants, Beneficiaries, heirs, distributees, executors, administrators and assigns, subject to the provisions of Article XI. If challenged in court, such determination shall not be subject to de novo review and shall not be overturned unless proven to be arbitrary and capricious based upon the evidence considered by the Plan Administrator at the time of such determination. (e) The Plan Administrator may employ such counsel and agents in such clerical, medical, accounting and other services as it may require in carrying out the provisions of the Plan. (f) Participants, former Participants or their Beneficiaries shall be notified by the Plan Administrator of their right to receive benefits. The Plan Administrator shall establish a uniform procedure for such notification. 47 (g) The Plan Administrator shall establish reasonable procedures to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. Such procedures must be in writing, must provide for the prompt notification of each person specified in the order as being entitled to payment of benefits under the Plan and must permit an Alternate Payee to designate a representative for receipt of copies of notices that are sent to the Alternate Payee with respect to a Domestic Relations Order. (h) The Plan Administrator may establish procedures which a Participant must follow in verifying maternity or paternity leave and the length thereof. 10.03 COMMITTEE (a) The Committee shall hold meetings upon such notice and at such times and places as its members may from time to time deem appropriate, and may adopt from time to time such bylaws and regulations for the conduct and transaction of its business and affairs consistent with the terms of the Plan and the delegation of duties and powers by the Company. A majority of its members at the relevant time shall constitute a quorum for the transaction of business. All action taken by the Committee shall be by vote of the majority of its members present at such meeting, except that the Committee also may act without a meeting by a written consent signed by a majority of its members. A member shall not be disqualified from acting because of any personal interest, benefit or advantage, inasmuch as a member may be a director of the Company, an Employee or a Participant, but no member shall vote or act in connection with an action of the Committee relating exclusively to himself. 48 (b) The Committee may allocate among its members such specific responsibilities, obligations, powers or duties as shall be deemed appropriate. (c) A member of the Committee who is an Employee shall not be entitled to receive any compensation for services rendered but shall receive reimbursement for reasonable expenses. Other members of the Committee may receive compensation for services rendered and reimbursement for reasonable expenses. (d) Except as otherwise required by ERISA, no bond or other security shall be required of any member of the Committee. 10.04 EXERCISE OF DUTIES The Plan Administrator and the Committee shall each discharge its duties solely in the interest of Participants, former Participants and their Beneficiaries: (a) For the exclusive purposes of providing benefits to such Participants, former Participants and Beneficiaries and, in the discretion of the Company, defraying reasonable expenses of Plan administration; and (b) With the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. 10.05 INDEMNIFICATION OF FIDUCIARIES The Participating Employers shall indemnify all Committee members and other officers or representatives of the Participating Employers and Employees assigned fiduciary responsibility under Federal law to the extent that such officers or representatives of 49 the Participating Employers or Employees incur loss or damage which may result from such officers' or representatives' or Employees' duties, exercises of discretion under the Plan or any other acts or omissions hereunder. Such duties, exercises of discretion, acts or omissions shall not be indemnified by the Participating Employers in the event that such loss or damage is judicially determined or agreed by the officers or representatives of the Participating Employers or Employees to be due to their respective gross negligence or willful misconduct. 10.06 EXPENSES All proper expenses incurred by an individual acting as agent of the Plan Administrator incident to the functioning of the Plan shall be paid by the Participating Employers. 50 ARTICLE XI CLAIMS PROCEDURES 11.01 CLAIMS PROCEDURE A Participant or Beneficiary is not required to file a claim for benefits under the Plan. However, if such a claim is filed, it should be submitted in writing to the Committee which shall process it and approve or disapprove it within ninety (90) days of the date that the claim is received. If special circumstances arise and the Committee cannot process the claim within ninety (90) days, the Committee shall notify the claimant that the time for making the decision is extended for up to ninety (90) additional days. If the Committee fails to notify the claimant within the applicable period, the claim is considered denied. If the Committee makes a determination to deny benefits to a Participant, the denial shall be stated in writing and delivered or mailed to the Participant or Beneficiary. Such notice shall set forth the specific reasons for the denial, written in a manner that may be understood by the Participant, and shall describe the steps necessary for appeal. The Participant whose claim for benefits has been denied shall have a period of sixty (60) days in which to appeal to the Committee and submit additional information to the Committee. The Committee shall consider the request at its next scheduled meeting. If the claim is again denied in writing, the Participant or Beneficiary may request a hearing within thirty (30) days of the second denial, and the Committee shall afford a reasonable opportunity for a hearing to any Participant or Beneficiary for a review of its decision denying the claim, which hearing shall be held within sixty (60) days following receipt of the request. The claimant shall have an opportunity to present evidence and appear before the Committee. The Committee shall review all evidence submitted by the claimant, shall make its decision regarding the claim within one hundred and twenty (120) days following the receipt of the request for a hearing by the claimant and shall provide the claimant with a written decision. The decision of the Committee regarding the claim shall be final and conclusive. 51 ARTICLE XII AMENDMENT AND TERMINATION 12.01 TERMINATION (a) It is the expectation of the Company and each Participating Employer that it shall continue this Plan and the payment of contributions hereunder indefinitely, but the continuation of the Plan is not assumed as a contractual obligation of the Company or of any Participating Employer, and the right is reserved by the Company and each Participating Employer at any time to permanently discontinue its contributions hereunder. In the event that the Plan is terminated in whole or in part or if contributions by the Company or any Participating Employer are permanently discontinued, the interest of all affected Participants shall be fully vested and nonforfeitable. (b) This Plan may be terminated by the Company by resolution of its Board of Directors, at any time when, in its judgment, business, financial or other good causes make such termination necessary. In addition, each Participating Employer may terminate the Plan by resolution of its Board of Directors with respect to its Employees at any time. Any such termination shall become effective upon the execution and delivery by the Company or Participating Employer to the Trustee of a written instrument signed on its behalf by its authorized representative and stating the fact that the Plan is terminated. (c) Upon complete termination of the Plan, further payment of Employer Contributions to the Trust shall cease. Upon termination of the Plan with respect to a Participating Employer, further payment of that Participating Employer's contributions to the Trust shall cease. The Plan Administrator shall notify each affected Participant of the termination of the 52 Plan. Each affected Participant shall be entitled to receive the entire amount of his Account Balances and the Trustee shall make payment to each such Participant of such amount in a form permitted by the Plan and as elected by the Participant. 12.02 RIGHT TO AMEND, MODIFY, CHANGE OR REVISE PLAN The Company, by resolution of its Board of Directors, may at any time and from time to time amend, modify, change or revise this Plan in whole or in part by notice thereof in writing delivered to the Trustee, and each Participating Employer shall be bound thereby; provided, however: (a) That no amendment shall have the effect of vesting in the Company or any Participating Employer any interest in or control of any funds, securities or other property subject to the terms of the Trust; (b) That no amendment shall authorize or permit at any time any part of the corpus or income of the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants and their Beneficiaries, except as provided in Section 9.03; (c) That no amendment shall have any retroactive effect as to deprive any Participant, former Participant or Beneficiary of any benefit already accrued, save only that no amendment made in conformance with the provisions of the Code or any other statute relating to employees' trusts, or of any official regulation or rulings issued pursuant thereto, shall be considered prejudicial to the rights of any Participant or Beneficiary; and (d) That no amendment shall eliminate an optional form of benefit or decrease an Account Balance. 53 12.03 MERGER AND CONSOLIDATION OF PLAN; TRANSFER OF PLAN ASSETS In the case of any merger or consolidation with or transfer of assets and liabilities to any other plan, provisions shall be made so that each Participant in the Plan on the date thereof (if the Plan then terminated) would receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately prior to the merger, consolidation or transfer (if the Plan had terminated). 54 ARTICLE XIII MISCELLANEOUS 13.01 NO CONTRACT OF EMPLOYMENT Nothing herein contained shall be construed to constitute a contract of employment between a Participating Employer and any Employee. The employment records of the Participating Employer and the Trustee's records shall be final and binding upon all Employees as to liability and participation. 13.02 RESTRICTIONS UPON ASSIGNMENTS AND CREDITORS' CLAIMS No interest of any person or entity in or right to receive distributions from the Trust Fund shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind, nor may any such interest or right to receive distributions be taken, either voluntarily or involuntarily, for the satisfaction of the debts of or other obligations or claims against such person or entity. The preceding sentence shall also apply to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a Domestic Relations Order unless such order is determined to be a Qualified Domestic Relations Order. 13.03 RESTRICTION OF CLAIMS AGAINST TRUST The Trust under this Plan and the Trust Agreement from its inception shall be a separate entity aside and apart from the Company and each Participating Employer and its assets. The Trust and the corpus and income thereof shall in no event and in no manner whatsoever be subject to the rights or claims of any creditor of the Company or any Participating Employer. Neither the establishment of the Trust, the modification thereof, the creation of any fund or account nor the payment of any benefits shall be construed as giving any Participant or any other person whomsoever any legal or 55 equitable rights against the Company, any other Participating Employer or the Trustee unless the same shall be specifically provided for in this Plan. 13.04 BENEFITS PAYABLE BY TRUST All benefits payable under the Plan shall be paid or provided for solely from the Trust, and the Company and the Participating Employers do not assume any liability or responsibility therefor. 13.05 SUCCESSOR TO COMPANY In the event that any successor to the Company or Participating Employer, by merger, consolidation, purchase or otherwise, shall elect to adopt the Plan, such successor shall be substituted hereunder for the Company or for such Participating Employer upon filing in writing with the Trustee of its election to do so, and in the case of a Participating Employer, subject to the written consent of the Company. 13.06 APPLICABLE LAW The Plan shall be construed and administered in accordance with ERISA, and any judicial review thereunder shall be governed by the "arbitrary and capricious" standard, and with the laws of the state of Illinois, to the extent that such laws are not preempted by ERISA. 13.07 DATA It shall be a condition precedent to the payment of all benefits under the Plan that each Participant and surviving spouse must furnish to the Plan Administrator such documents, evidence or information as the Plan Administrator considers necessary or desirable for the purpose of administering the Plan, or to protect the Company, the Participating Employers or the Trustee. 56 13.08 INTERNAL REVENUE SERVICE APPROVAL This Plan shall be effective as of the aforementioned Effective Date, provided that the Company shall obtain a favorable determination letter from the Internal Revenue Service that this Plan and the related Trust Agreement qualify under Sections 401(a) and 501(a) of the Code. Any modification or amendment of this Plan may be made retroactive as necessary or appropriate in order to secure or maintain such qualification. * * * * * * IN WITNESS WHEREOF, the undersigned certifies that Allied Products Corporation duly adopted the Allied Products Corporation Target Benefit Plan effective January 1, 1995 and caused such instrument to be executed by its duly authorized officers on the 29th day of December, 1995, effective as of the 1st day of January, 1995. ATTEST: Allied Products Corporation By: /s/ David B. Corwine By: /s/Kenneth B. Light ------------------------------- -------------------------------- David B. Corwine, Secretary Kenneth B. Light, Executive Vice President [Corporate Seal] 57 ALLIED PRODUCTS CORPORATION TARGET BENEFIT PLAN EXHIBIT A ACTUARIAL ASSUMPTIONS AND FACTORS Mortality Table: GA 1983 Interest Rate: 7.5% Salary Scale: 5% 58 EX-11 3 EXHIBIT 11 EXHIBIT 11 PAGE 1 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE (ALL DOLLARS ROUNDED TO THE NEAREST $1,000, EXCEPT PER SHARES AMOUNTS)
INCOME FROM LOSS ON CONTINUING DISCONTINUED NET SHARES OPERATIONS OPERATIONS INCOME ------ ------------ ------------- -------- FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 Income $ 33,989,000 $ - $ 33,989,000 Dividend requirements on Series B preferred stock (268,000) - (268,000) Dividend requirements on Series C preferred stock (932,000) - (932,000) Weighted average of outstanding shares of common stock 9,126,000 - - - Effect of assumed exercise of outstanding stock options 288,000 - - - ---------- ------------ ---------- ----------- 9,414,000 $ 32,789,000 $ - $32,789,000 ---------- ------------ ---------- ----------- ---------- ------------ ---------- ----------- Earnings per common share $ 3.48 $ - $ 3.48 ------------ ---------- ----------- ------------ ---------- ----------- FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 Income (loss) $ 19,687,000 $(5,354,000) $14,333,000 Dividend requirements on Series B preferred stock (574,000) - (574,000) Dividend requirements on Series C preferred stock (1,319,000) - (1,319,000) Weighted average of outstanding shares of common stock 9,102,000 - - - ---------- ------------ ---------- ----------- 9,102,000 $ 17,794,000 $ (5,354,000) $12,440,000 ---------- ------------ ---------- ----------- ---------- ------------ ---------- ----------- Earnings (loss) per common share $ 1.96 $ (.59) $ 1.37 ------------ ---------- ----------- ------------ ---------- -----------
EXHIBIT 11 PAGE 2 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF PRIMARY EARNINGS PER SHARE (ALL DOLLARS ROUNDED TO THE NEAREST $1,000, EXCEPT PER SHARES AMOUNTS)
INCOME FROM LOSS ON CONTINUING DISCONTINUED EXTRAORDINARY NET SHARES OPERATIONS OPERATIONS LOSS INCOME --------- ----------- ------------ ------------ ------------ FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1993 Income (loss) $ 5,951,000 $ 11,385,000 $ (2,052,000) $ 15,284,000 Dividend requirements on Series B preferred stock (603,000) - - (603,000) Dividend requirements on Series C preferred stock (1,470,000) - - (1,470,000) Weighted average of outstanding shares of common stock 8,999,000 - - - - --------- ----------- ------------ ------------ ------------ 8,999,000 $ 3,878,000 $ 11,385,000 $ (2,052,000) $ 13,211,000 --------- ----------- ------------ ------------ ------------ --------- ----------- ------------ ------------ ------------ Earnings (loss) per common share $ .43 $ 1.27 $ (.23) $ 1.47 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------
EXHIBIT 11 PAGE 3 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (ALL DOLLARS ROUNDED TO THE NEAREST $1,000, EXCEPT PER SHARES AMOUNTS)
INCOME FROM LOSS ON CONTINUING DISCONTINUED NET SHARES OPERATIONS OPERATIONS INCOME ----------- ------------ --------- ------------ FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 Income $ 33,989,000 $ - $ 33,989,000 Dividend requirements on Series B preferred stock (268,000) - (268,000) Dividend requirements on Series C preferred stock (932,000) - (932,000) Weighted average of outstanding shares of common stock 9,126,000 - - - Effect of assumed exercise of outstanding stock options 368,000 - - - ----------- ------------ --------- ------------ 9,494,000 $ 32,789,000 $ - $ 32,789,000 ----------- ------------ --------- ------------ ----------- ------------ --------- ------------ Earnings per common share $ 3.45 $ - $ 3.45 ------------ --------- ------------ ------------ --------- ------------ FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994 Income (loss) $ 19,687,000 $(5,354,000) $ 14,333,000 Dividend requirements on Series B preferred stock (574,000) - (574,000) Dividend requirements on Series C preferred stock (1,319,000) (1,319,000) - Weighted average of outstanding shares of common stock 9,102,000 - - - ----------- ------------ ------------- ------------ 9,102,000 $ 17,794,000 $ (5,354,000) $ 12,440,000 ----------- ------------ ------------- ------------ ----------- ------------ ------------- ------------ Earnings (loss) per common share $ 1.96 $ (.59) $ 1.37 ------------ --------- ------------ ------------ --------- ------------
EXHIBIT 11 PAGE 4 ALLIED PRODUCTS CORPORATION AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (ALL DOLLARS ROUNDED TO THE NEAREST $1,000, EXCEPT PER SHARES AMOUNTS)
INCOME FROM LOSS ON CONTINUING DISCONTINUED EXTRAORDINARY NET SHARES OPERATIONS OPERATIONS LOSS INCOME ---------- ------------ ------------ ------------ ------------ FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1993 Income (loss) $ 5,951,000 $ 11,385,000 $ (2,052,000) $ 15,284,000 Dividend requirements on Series B preferred stock (603,000) - - (603,000) Dividend requirements on Series C preferred stock (1,470,000) - - (1,470,000) Weighted average of outstanding shares of common stock 8,999,000 - - - - ---------- ------------ ------------ ------------ ------------ 8,999,000 $ 3,878,000 $ 11,385,000 $ (2,052,000) $ 13,211,000 ---------- ------------ ------------ ------------ ------------ ---------- ------------ ------------ ------------ ------------ Earnings (loss) per common share $ .43 $ 1.27 $ (.23) $ 1.47 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
EX-21 4 EXHIBIT 21 EXHIBIT 21 State or Other % Of Jurisdiction Securities In Which Owned by Subsidiaries of Registrant (1) Incorporated Registrant - ------------------------------------------------------------------------------- Allied Products Finance Corporation Delaware 100% (2) Aurora Corporation of Illinois..... Illinois 100% (2) Allied Products Financial Services Corporation..................... Delaware 100% (2) (1) Unnamed subsidiaries considered in the aggregate do not constitute a significant subsidiary. (2) Subsidiary included in consolidated financial statements. EX-23 5 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in this Allied Products Corporation registration statement on Form S-8 of our report, dated February 2, 1996, on our audits of the consolidated financial statements and financial statement schedule of Allied Products Corporation and consolidated subsidiaries as of December 31, 1995 and 1994 and for the three years in the period ended December 31, 1995, which report is included in the 1995 Annual Report of Form 10-K. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Chicago, Illinois March 22, 1996 EX-24 6 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY WHEREAS, ALLIED PRODUCTS CORPORATION, a Delaware corporation (herein referred to as the "Company"), is about to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, its annual report on Form 10-K for the year ended December 31, 1995 and WHEREAS, each of the undersigned holds the office or offices in the Company hereinbelow set opposite his name, respectively; NOW THEREFORE, each of the undersigned hereby constitutes and appoints KENNETH B. LIGHT and DAVID B. CORWINE, and each of them individually, his attorney, with full power to act for him and in his name, place and stead, to sign his name in the capacity or capacities set forth below to said Form 10-K and to any and all amendments thereto, and hereby ratifies and confirms all said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 11th day of March, 1996. Richard A. Drexler, Chairman of /s/ Richard A. Drexler the Board, President and Chief ------------------------- Executive Officer; Director Kenneth B. Light, Executive Vice President and Chief Financial /s/ Kenneth B. Light Officer, Chief Administrative ------------------------- Officer, Director Robert J. Fleck, Vice President -- Accounting and Chief Accounting /s/ Robert J. Fleck Officer ------------------------- Lloyd Drexler, Director /s/ Lloyd Drexler ------------------------- William D. Fischer, Director /s/ William D. Fischer ------------------------- Stanley J. Goldring, Director /s/ Stanley J. Goldring ------------------------- John E. Jones, Director /s/ John E. Jones ------------------------- John W. Puth, Director /s/ John W. Puth ------------------------- Mitchell I. Quain, Director /s/ Mitchell I. Quain ------------------------- S. S. Sherman, Director /s/ S. S. Sherman -------------------------
EX-27 7 EXHIBIT 27
5 THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 744 0 45,241 948 52,406 120,304 85,519 47,083 166,743 65,357 315 0 0 91 98,174 166,743 260,861 260,861 199,544 199,544 42,987 451 1,052 18,330 (15,659) 33,989 0 0 0 33,989 3.48 3.45
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