10-K 1 CONFORMED COPY 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, 1994 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 I-4795 MLX CORP (Exact name of registrant as specified in its charter) GEORGIA 38-0811650 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1000 CENTER PLACE, NORCROSS. GEORGIA 30093 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (404)798-0677 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports 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 requirement for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) 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 amendments to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the Registrant was $6,256,515 as of March 1, 1995, based on the ending market price as reported on the NASDAQ National Market. The number of shares outstanding of the Registrant's Common Stock, par value $.01, as of the close of business on March 1, 1995 was 2,539,550. DOCUMENTS INCORPORATED BY REFERENCE Portions of Part I, II & IV hereof incorporate information by reference from Registrant's 1994 Annual Report to Shareholders, a copy of which is filed with the Commission as Exhibit 13 hereto. Portions of Part III hereof incorporate information by reference from Registrant's definitive Proxy Statement to be filed with the Commission no later than 120 days after the close of the Registrant's fiscal year ended December 31, 1994 in connection with Registrant's 1995 Annual Meeting of Shareholders. PART I Item 1 Business. (A) General Development of Business The Registrant is engaged in the design and manufacture of high-energy friction materials which are used primarily in aircraft brakes and heavy equipment brakes, transmission and clutches. Reference is made to the information set forth in the Registrant's 1994 Annual Report to Shareholders under "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the development of the business since January 1, 1994, which information is incorporated herein by reference. (B) Financial Information About Industry Segments Reference is made to information set forth in Note J of the Notes to Consolidated Financial Statements in the Registrant's 1994 Annual Report to Shareholders, which information is incorporated herein by reference. (C) Narrative Description of Business Reference is made to the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Other Data" and Note J of Notes to Consolidated Financial Statements contained in the Registrant's 1994 Annual Report to Shareholders, which information is incorporated herein by reference. Additional information concerning the business of the Registrant follows. General: MLX owns and manages the S. K. Wellman ("Wellman") subsidiary. Wellman is one of the world's leading manufacturers of high-energy friction materials. The friction materials manufactured and sold by Wellman are used in a variety of applications which require material which will withstand and function under extreme conditions of high energy and heat. These types of conditions exist in aircraft brakes and heavy equipment brakes, transmissions and clutches. Wellman has manufacturing facilities located in Brook Park, Ohio; LaVergne, Tennessee; Concord, Ontario, Canada; and Orzinuovi, Italy. Wellman also has administrative offices and research facilities located in Solon, Ohio and sales and/or distribution offices in Madison, Wisconsin; Peoria, Illinois; Detroit, Michigan; Cleveland, Ohio; Akron, Ohio; Edmonton, Alberta, Canada; Vancouver, British Columbia, Canada; Concord, Ontario, Canada; and Orzinuovi, Italy. At December 31, 1994 Wellman had 558 employees. Approximately 247 of these employees were covered under collective bargaining agreements which expire on April 25, 1997. MLX provides managerial and administrative support to Wellman. This support is provided in the areas of strategic management, income tax compliance, legal strategy and capital and lending resources. Products: The friction materials manufactured by Wellman are made of a variety of materials, including metallic (either copper or iron based), graphitic, ceramic, and composite fiber (paper). These friction materials are used in commercial, military and general aviation aircraft brakes; friction disks for use in automatic and power shift transmissions; and clutch buttons, which are used as the main contact point between the engine and transmission. Wellman also manufactures other types of clutch facings and opposing disks to complement its clutch button business. Raw materials used by Wellman are available from multiple sources. Customers: Wellman's customers for the aircraft brake friction materials are primarily aircraft wheel and brake manufacturers. Wellman's principal customers for its friction disks are heavy equipment manufacturers such as Caterpillar Inc., John Deere & Company, and the Allison Division of General Motors Corporation. The principal customers for its clutch buttons are heavy equipment component suppliers such as Dana Corporation. More than 80% of friction disk and clutch button production is sold to original equipment manufacturers with the balance sold to end users (under the "Velvetouch" tradename) through distributors and equipment rebuilders. Competition: The Registrant believes that the domestic market for the products that it manufactures is approximately $200 million and that the total worldwide approximates $300 million. The Registrant believes that it is either the largest or the second largest manufacturer of each of the products it sells, with market share ranging between 20% and 60% of such markets. In each of its markets, the Registrant competes with a number of companies; however, there are only one or two competitors in each of its markets which are comparable in size to the Registrant. Competition is primarily based upon the ability to engineer a product which meets the customers' specifications, consistent quality, price and delivery. Research and Development: Research, product development and engineering are an important aspect of Wellman's business. Each of Wellman's products are specifically engineered to meet a customer's applications. The Registrant believes that it has the most extensive research, development and engineering capabilities and testing equipment in the industry. Product research, development and engineering expenditures for Wellman were approximately $3,374,000 in 1994, $3,365,000 in 1993, and $3,164,000 in 1992. (D) Financial Information About Foreign and Domestic Operations and Export Sales Reference is made to the information set forth in Note J of the Notes to Consolidated Financial Statements in the Registrant's 1994 Annual Report to Shareholders, which information is incorporated herein by reference. Item 2. Properties. The Registrant and its consolidated subsidiaries utilize the following properties.
Square LOCATION HOW HELD FOOTAGE UTILIZATION Brook Park, Ohio Owned(1) 111,000 Manufacturing Cleveland, Ohio Leased 14,300 Materials Storage Akron, Ohio Leased 20,400 Distribution Solon, Ohio Owned(1) 50,000 Administration & research LaVergne, Tennessee Owned1 76,100 Manufacturing Concord, Ontario, Canada Leased 15,200 Manufacturing & distribution Orzinuovi, Italy Owned 65,000 Manufacturing & sales Norcross, Georgia Leased 3,000 Executive & administration
1 These facilities and equipment at these locations are a portion of the collateral securing the Senior Lending Facility due in 1998 (S. K. Wellman) described in Note D of the Notes to the Consolidated Financial Statements contained in the Registrant's 1994 Annual Report to Shareholders. Management believes that none of the leased facilities is critical to its operations. The leases are generally for an initial term of five years and generally contain one or more renewal option periods. Management considers the properties to be suitable for their present use. Item 3. Legal Proceedings. The Registrant is unaware of any litigation which is expected to have a material effect on the results of operations or financial condition of the Registrant. Item 4. Submission of Matters to a Vote of Security Holders. No response under this item is required. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Reference is made to the information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Market, Share Ownership and Dividend Information" in the Registrant's 1994 Annual Report to Shareholders, which information is incorporated herein by reference. Item 6. Selected Financial Data. Reference is made to the information set forth in "Financial Review" under "Selected Financial Information" in the Registrant's 1994 Annual Report to Shareholders, which information is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Reference is made to the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1994 Annual Report to Shareholders, which information is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. Reference is made to the information set forth under "Consolidated Financial Statements" in the Registrant's 1994 Annual Report to Shareholders, which information is incorporated herein by reference. Reference is made to the information set forth under "Quarterly Data" in the Registrant's 1994 Annual Report to Shareholders, which information is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. No response under this item is required. PART III Item 10. Directors and Executive Officers of the Registrant. For information with respect to Directors and Executive Officers of the Registrant, the Registrant incorporates by reference herein the information appearing under the caption, "Business Experience of Directors and Executive Officers" and, with respect to compliance with Item 405 of Regulation S-K, "Security Ownership of Certain Beneficial Owners" under the table containing the "Amount and Nature of Beneficial Ownership" of executive officers and directors contained in the Registrant's definitive Proxy Statement to be filed with the Commission no later than 120 days after the close of the Registrant's fiscal year ended December 31, 1994 in connection with the Registrant's 1995 Annual Meeting of Shareholders. Item 11. Executive Compensation. Registrant incorporates by reference herein information appearing under the caption "Remuneration of Directors and Executive Officers" contained in the Registrant's definitive Proxy Statement to be filed with the Commission no later than 120 days after the close of the Registrant's fiscal year ended December 31, 1994 in connection with the Registrant's 1995 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. Registrant incorporates by reference herein information appearing under the caption "Security Ownership of Certain Beneficial Owners" contained in the Registrant's definitive Proxy Statement to be filed with the Commission no later than 120 days after the close of the Registrant's fiscal year ended December 31, 1994 in connection with the Registrant's 1995 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions. Registrant incorporates by reference herein information appearing under the caption "Employment Agreements With Executive Officers" and "Compensation Committee Interlocks and Related Transactions" contained in the Registrant's definitive Proxy Statement to be filed with the Commission no later than 120 days after the close of the Registrant's fiscal year ended December 31, 1994 in connection with the Registrant's 1995 Annual Meeting of Shareholders. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents Filed as part of the Report. (1) The following consolidated financial statements of the Registrant and its subsidiaries, included in its 1994 Annual Report to Shareholders, are incorporated in Item 8 herein by reference: Consolidated Balance Sheets at December 31, 1994 and 1993. Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992. Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992. Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992. Notes to Consolidated Financial Statements - December 31, 1994. (2) The following consolidated financial statement schedules of the Registrant and its subsidiaries are included in Item 14(D): Schedule I - Condensed Financial Information of Registrant Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) Exhibits required by Item 601 of Regulation S-K: Exhibit 3.1 & 4.1 - Articles of Incorporation of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant's Report on Form 10-Q for the quarter ended June 30, 1993). Exhibit 3.2 & 4.2 - By-Laws of the Registrant (incorpor- ated herein by reference to the Registrant's Report on Form 10-Q for the quarter June 30, 1993). Exhibit 4.3 & 9.1 - Voting Trust Agreement dated December 11, 1984 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.4 & 9.2 - Amendment No. 1 dated October 26, 1987 to the Voting Trust Agreement dated December 11, 1984 (incorporated herein by reference to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.5 & 9.3 - Amendment No. 2, dated April 2, 1991, to the Voting Trust Agreement dated December 11, 1984 (incorpor- ated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.6 - Restricted Transfer Trust Agreement dated October 10, 1986 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.7 - Amendment No. 1 dated October 26, 1987 to the Restricted Transfer Trust Agreement dated October 10, 1986 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.8 - Amendment No. 2 dated June 4, to the 1990 Restricted Transfer Trust Agreement dated October 10, 1986 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1991). Exhibit 4.9 - MLX Exchange Agreement dated as of April 13, 1990, as amended and restated as of March 19,1992, as amended and restated as of April 21,1993, among the Registrant, the Lenders listed therein, and Morgan Guaranty Trust Company of New York, as Bond Agent. Exhibit 4.10 - MLX Limited Guarantee, dated as of March 19, 1992 (incorporated herein by reference to Exhibit 2.17 to the Registrant's Current Report on Form 8-K, dated April 10, 1992). Exhibit 4.11 - Management Services Agreement, dated as of March 19, 1992, between the Registrant and Pameco Holdings, Inc. (incorporated herein by reference to Exhibit 2.16 of the Registrant's Current Report on Form 8-K, dated April 10, 1992). Exhibit 4.12 - Amendment to Management Services Agreement, dated as of November 30, 1992, between the Registrant and Pameco Holdings, Inc. (incorporated herein by reference to Exhibit 4.12 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.13 - Nomination Agreement, dated as of December 15, 1992, among the Registrant and the Investors listed therein (incorporated herein by reference to Exhibit 4.13 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.14 - Exchange Agreement, dated as of January 15, 1993, among MLX Corp. and the Investors listed therein (incorporated herein by reference to Exhibit 4.14 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.15 - Loan and Security Agreement, dated as of January 15, 1993, between S.K. Wellman Limited, Inc. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.15 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.16 - First Amendment to Loan and Security Agreement, dated as of February 19, 1993, between S.K. Wellman Limited, Inc. And Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.16 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.17 - Second Amendment to Loan and Security Agreement, dated as of March 15, 1993, between S.K. Wellman Limited, Inc. And Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.17 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.18 - Stock Pledge Agreement (S.K. Wellman S.p.A.), dated as of January 15, 1993 between The S.K. Wellman Corp. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.18 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.19 - Stock Pledge Agreement (S.K. Wellman S.p.A.), dated as of January 15, 1993, between S.K. Wellman Limited, Inc. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.19 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.20 - Stock Pledge Agreement (The S.K. Wellman Company of Canada Limited), dated as of January 15, 1993, between The S.K. Wellman Corp. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.20 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.21 - Patent Collateral Assignment and Security Agreement, dated as of January 15, 1993, between The S.K. Wellman Corp. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.21 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.22 - Trademark Security Agreement, dated as of January 15, 1993, between The S.K. Wellman Corp. and Barclays Business Credit, Inc. (incorporated herein by reference to Exhibit 4.22 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 4.23 - Exchange Agreement dated as of April 2, 1993 among MLX Corp. and the Bondholders Listed Herein. Exhibit 4.24* - First Consolidated Amendment to Loan and Security Agreement, dated as of November 16, 1994, between S.K. Wellman Limited, Inc. And Barclays Business Credit, Inc. Exhibit 10.1# - Employment Agreement dated February 10, 1991, between the Registrant and Brian R. Esher (incorporated herein by reference to Exhibit 10.1 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990). Exhibit 10.2# - First Amendment to Employment Agreement, dated as of March 19, 1992, between the Registrant and Brian Esher. Exhibit 10.3 - Severance/Consulting Agreement dated January 14, 1991, between the Registrant and William P. Panny (incorporated herein by reference to Exhibit 10.3 to the Registrant's Report on Form 10-K for the fiscal year ended December 31, 1990). Exhibit 10.4 - Purchase Agreement, dated as of March 19, 1992, among the Registrant, Pameco Holdings, Inc., and Pameco Corporation incorporated herein by reference to Exhibit 21 of Registrant's Current Report on Form 8-K dated April 10, 1992). Exhibit 10.5# - MLX Corp. Stock Option Plan, dated as of December 29, 1989 (incorporated herein by reference to Exhibit 10.5 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 10.6# - Senior Management Discretionary Bonus Plan, dated as of January 21, 1992 (incorporated herein by reference to Exhibit 10.6 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 10.7*# - Second Amendment to Employment Agreement, dated as of January 1, 1994, between Registrant and Brian Esher. Exhibit 13* - 1994 Annual Report to Shareholders of the Registrant. With the exception of information expressly incorporated herein by reference, the 1994 Annual Report is not deemed to be filed with the Commission. Exhibit 21 - Subsidiaries of the Registrant (incorporated herein by reference to Exhibit 22 of Registrant's Report on Form 10-K for the year ended December 31, 1992). Exhibit 24* - Consent of Independent Accountants. * Filed with this Report on Form 10-K # Management compensatory plan or arrangement (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1994. 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, hereunto duly authorized. MLX Corp. Dated: March 10, 1995 By: /S/ THOMAS C. WAGGONER Thomas C. Waggoner Vice President & Chief Financial Officer Pursuant to the requirement 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 indicated, on March 10, 1995. Signature Title /s/ BRIAN R. ESHER Chairman of the Board, President & Chief Executive Officer (Principal Executive Officer) and Director /s/ THOMAS C. WAGGONER Vice President, Chief Financial Officer & Secretary (Principal Financial & Accounting Officer) /s/ WILLEM F.P. de VOGEL Director /s/ ALFRED R. GLANCY III Director /s/ S. STERLING McMILLAN, III Director /s/ J. WILLIAM UHRIG Director /s/ W. JOHN ROBERTS Director /s/ H. WHITNEY WAGNER Director Report of Independent Auditors Board of Directors MLX Corp. We have audited the consolidated balance sheets of MLX Corp. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MLX Corp. and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP March 10, 1995 Atlanta, Georgia
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT MLX Corp. December 31, 1994 and 1993 (In thousands) CONDENSED BALANCE SHEETS 1994 1993 ASSETS Current Assets: Cash and cash equivalents $ 640 $ 695 Total Current Assets 640 695 Investment in Subsidiaries* 15,021 12,612 Other Assets: Leasehold improvements and equipment - net 1 7 Intangible assets - net 363 415 Other 1 1 Total Other Assets 365 423 $16,026 $ 13,730 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 14 $ 6 Other accrued liabilities. 409 1,083 Federal income taxes payable 47 150 Dividends payable on Series A Preferred Stock 212 638 Total Current Liabilities 682 1,877 Long-Term Liabilities: Zero coupon bonds. 1,022 1,005 Variable rate subordinated notes 1,441 1,397 Note payable to subsidiary* 2,152 2,127 Total Long-Term Liabilities 4,615 4,529 Shareholders' Equity: Preferred stock 7,265 6,981 Common stock 25 25 Capital in excess of par value 61,874 60,551 Retained earnings deficit since December 11, 1984 (57,147) (58,836) 12,017 8,721 Other equity deductions (1,288) (1,397) Total Shareholders' Equity 10,729 7,324 $16,026 $ 3,730 *Eliminated in consolidation.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (cont.) MLXCorp. Years Ended December 31, 1994, 1993 and 1992 (In thousands) CONDENSED STATEMENTS OF INCOME 1994 1993 1992 Revenues: Interest and other income (expense) $ (77) $ 25 $ 348 Dividends from subsidiaries* - 5,900 - Management fees from subsidiaries* 1,200 950 600 Management fee from related party - 82 470 Total Revenues 1,123 7,057 1,418 Expenses: General and administrative expenses 879 1,355 1,408 Interest expense: Subsidiary indebtedness* 185 151 295 Other indebtedness 202 366 1,334 Earnings (loss) before taxes, equity in earnings (losses) of subsidiaries and extraordinary item (143) 5,185 (1,619) Charge in lieu of federal income taxes (1,314) (1,243) (1,110) Provision for federal AMT taxes (80) (150) - Credit for subsidiary tax sharing* 1,489 1,360 2,129 Earnings (loss) before equity in earnings (losses) of subsidiaries and extraordinary item (48) 5,152 (600) Equity in earnings (losses) of subsidiaries, after payment of dividends* 2,795 (3,113) 1,985 Extraordinary gain on early retirement of debt (net of charge in lieu of federal income taxes of $1,869 in 1993 and $1,661 in 1992) - 3,627 4,124 Net earnings $2,747 $ 5,666 $5,509 CONDENSED STATEMENTS OF CASH FLOWS Net Cash Provided by (used in) Operating Activities $ (339) $ 254 $1,211 Financing Activities: Payment of dividends on Series APreferred Stock (1,200) - - Dividends and advances from subsidiary 1,398 6,538 - Increase/(reduction) in debt and preferred stock obligations 86 (6,510) (1,835) 619 28 (1,835) Increase (Decrease) in cash $ (55) $ 282 $ (624)
*Eliminated in consolidation.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS MLX CORP. AND SUBSIDIARIES COL. A COL. B. COL. C COL. D COL. E Additions Balance at Charged to Charged to Balance at Beginning Costs Other Deductions - End of Description of Period and Expenses Accounts Describe of Period Reserve and allowances deducted from asset accounts Year ended December 31, 1994: Valuation allowance for deferred tax assets $121,000,000 $ 0 $2,000,000 (1) $119,000,000 Year ended December 31, 1993: Valuation allowance for deferred tax assets 0 $124,000,000 $3,000,000 (2) $121,000,000
(1) Reduction in net operating loss carryover due to offset against taxable income and expiration of certain general business credits. (2) Reduction in net operating loss carryover due to offset against taxable income. EX-4.24 2 FIRST CONSOLIDATED AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FIRST CONSOLIDATED AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") is made and entered into this 16th day of November, 1994, by and among S. K. WELLMAN LIMITED, INC. and THE S. K. WELLMAN CORP., each a Michigan corporation (hereinafter referred to collectively as "Borrowers" and individually as a "Borrower") with their chief executive offices and principal places of business at 6180 Cochran Road, Solon, Ohio 44139, and BARCLAYS BUSINESS CREDIT, INC., a Connecticut corporation (hereinafter referred to, together with its successors and assigns, as "Lender") with an office at 6060 J. A. Jones Drive, Suite 200, Charlotte, North Carolina 28287. R E C I T A L S: Lender and Borrowers are parties to a certain Loan and Security Agreement dated January 15, 1993 (the "Loan Agreement"), as amended by that certain First Amendment to Loan and Security Agreement dated February 19, 1993, that certain Second Amendment to Loan and Security Agreement dated March 15, 1993, that certain Third Amendment to Loan and Security Agreement dated June 8, 1993, that certain Fourth Amendment to Loan and Security Agreement dated December 29, 1993, that certain Fifth Amendment to Loan and Security Agreement dated March 24, 1994 and that certain Sixth Amendment to Loan and Security Agreement dated June 14, 1994 (collectively, the "Prior Amendments"). Pursuant to the Loan Agreement, Lender has extended the following credit facilities to Borrowers: (a) revolving credit facility in the aggregate principal amount of up to $7,200,000; (b) term loan in the original principal amount of $5,725,000 ("Term Loan A"); (c) term loan in the original principal amount of $1,500,000 ("Term Loan B"); (d) term loan in the original principal amount of $1,575,000 ("Term Loan C"); (e) term loan in the original principal amount of $500,000 ("Term Loan D"); and (f) capital expenditure facility in the aggregate principal amount of up to $1,500,000 ("Equipment Facility"). As of the date hereof, Lender has made two equipment loans to Borrowers under the Equipment Facility in the original principal amounts of $1,050,000 and $450,000, respectively (the "Existing Equipment Loans"). Borrowers have requested that Lender consolidate Term Loan A, Term Loan C, the Existing Equipment Loans and a Revolver Loan in the amount of $1,706,255, such that the aggregate of such loans in the amount of $8,500,000 will be evidenced by and repaid in accordance with the terms of the Consolidated Note (as hereinafter defined). Borrowers have also requested, among other things, that Lender increase the principal amount of the Equipment Facility from $1,500,000 to $2,000,000. Borrowers and Lender also desire to consolidate into this Amendment, for ease of reference, those changes to the Loan Agreement that were effected by the Prior Amendments and that Borrowers and Lender desire to continue in effect. It is the intent of the parties hereto that this Amendment supersede all of the Prior Amendments and set forth all of the amendments to the Loan Agreement that are agreed to by the parties on and as of the date hereof. NOW, THEREFORE, for and in consideration of TEN DOLLARS ($10.00) in hand paid and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Definitions. All capitalized terms used in this Amendment, unless otherwise defined herein, shall have the meaning ascribed to such terms in the Loan Agreement. 2. Amendments to Section 1.1. Section 1.1 of the Loan Agreement is hereby amended as follows: (a) By deleting the definition of "Average Monthly Revolver Loan Balance" in its entirety and by substituting the following in lieu thereof: Average Monthly Loan Balance - the amount obtained by adding the unpaid balance of Loans owing by Borrowers to Lender at the end of each day for each day during the month in question and by dividing such sum by the number of days in such month. (b) By adding the following clause (vii) to the definition of "Distribution Conditions": ; and (vii) Borrowers shall have paid all accounts payable owing to trade creditors of Borrowers when due, except those payables that are being disputed in good faith by Borrowers and that have been disclosed to Lender in writing prior to the due date thereof. (c) By deleting the proviso at the end of the definition of "Eligible Canadian Inventory" and substituting in lieu thereof the following: provided, however, that no such inventory that is situated in provinces where Wellman Canada is not qualified to do business or where Lender's Lien search has not yet confirmed the first priority of Lender's Lien upon such Inventory shall be deemed Eligible Canadian Inventory unless and until such qualification is made and such first priority confirmed. (d) By deleting the definitions of "Factor," "Term Note A," and "Term Note C" in their entirety. (e) By deleting the definition of "Current Liabilities" and by substituting the following new definition in lieu thereof: Current Liabilities - at any date, means the amount at which the liabilities of a Person that are properly classified as current liabilities in accordance with GAAP would be shown as current liabilities on a GAAP balance sheet of such Person at such date. (f) By deleting the definition of "Consolidated Debt Service Coverage Ratio" and by substituting the following new definition in lieu thereof: Consolidated Debt Service Coverage Ratio - for any period, the Consolidated Free Cash Flow divided by the current maturities of Funded Debt. In calculating the amount of current maturities of Funded Debt during any period in question for purposes of this definition, the amount of Funded Debt at any time shall be divided by twelve and multiplied by the number of months in the period in question. For purposes of this calculation, quarterly dividend payments on Preferred Stock shall be subtracted from Consolidated Free Cash Flow. (g) By deleting the definition of "Permitted Purchase Money Indebtedness" in its entirety and by substituting in lieu thereof the following: Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of a Borrower incurred after the date hereof which is secured by a Purchase Money Lien and which, when aggregated with the principal amount of all other such Indebtedness and Capitalized Lease Obligations of Borrowers at the time outstanding, does not exceed $1,250,000. For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of Capital Leases shall be computed as a Capitalized Lease Obligation. (h) By deleting the definitions of "Term Loan A" and "Term Loan C" in their entirety and by substituting the following in lieu thereof: Term Loan A - that certain term loan made by Lender to Borrowers on January 15, 1993, in the original principal amount of $5,725,000, which term loan has been consolidated into the Consolidated Loan pursuant to Section 2.2(A) hereof. Term Loan C - that certain term loan made by Lender to Borrowers on February 19, 1993, in the original principal amount of $1,575,000, which term loan has been consolidated into the Consolidated Loan pursuant to Section 2.2(A) hereof. (i) By deleting the definitions of "Term Loans" and "Term Notes" in their entirety and by substituting in lieu thereof the following: Term Loans - collectively, the Consolidated Loan, Term Loan B and Term Loan D. Term Notes - collectively, the Consolidated Note, Term Note B and Term Note D. (j) By adding the following new definitions to Section 1.1 in proper alphabetical sequence: Consolidated Loan - the Loans that are consolidated as described in Section 2.2(A) of this Agreement and that are to be evidenced by and repaid in accordance with the Consolidated Note. Consolidated Note - the Amended, Restated and Consolidated Secured Promissory Note dated November 16, 1994, from Borrowers to Lender, in the original principal amount of $8,500,000, which shall be in the form of Exhibit A-2 attached hereto. Variable Rate Notes - collectively, (i) that certain promissory note dated June 30, 1993, in the original principal amount of $863,310, from Parent to Cudd & Co., and (ii) that certain promissory note dated June 30, 1993, in the original principal amount of $580,494, from Parent to Equitable Life Assurance Society of the United States, that evidence the obligations arising from the conversion of the Zero Coupon Bonds. 3. Amendment to Section 2. Section 2 of the Loan Agreement is hereby amended by deleting the reference to "EIGHTEEN MILLION AND NO/100 DOLLARS ($18,000,000)" contained in the introductory paragraph thereof and by substituting a reference to "NINETEEN MILLION SEVEN HUNDRED THOUSAND AND NO/100 DOLLARS ($19,700,000)" in lieu thereof. 4. Amendment to Section 2.2. Section 2.2 of the Loan Agreement is hereby amended as follows: (a) By deleting Section 2.2(A) in its entirety and by substituting the following in lieu thereof: (A) Consolidated Loan. The parties agree that the unpaid principal balances outstanding on November 16, 1994, of Term Loan A, Term Loan C and Equipment Loans in the original principal amount of $1,050,000 and $450,000, respectively and $1,706,255 of the outstanding principal balance of Revolver Loans shall be consolidated into a term loan in the amount of $8,500,000 (the "Consolidated Loan"), which Loan shall be evidenced by and repaid in accordance with the terms of the Consolidated Note and shall be secured by the Property of each Borrower described in Section 4 hereof and in the Security Documents. (b) By deleting Section 2.2(C) in its entirety and by substituting the following in lieu thereof: (C) [INTENTIONALLY OMITTED] (c) By deleting the reference to "January 14, 1995" contained in Section 2.2(E) of the Loan Agreement and by substituting in lieu thereof a reference to "January 14, 1997." (d) By deleting the reference to "$1,500,000" contained in Section 2.2(E) of the Loan Agreement and by substituting in lieu thereof a reference to "$2,000,000." (e) By deleting the last sentence of Section 2.2(F) in its entirety. 5. Amendment to Section 3.1. Section 3.1 of the Loan Agreement is hereby amended as follows: (a) By deleting Section 3.1(A) in its entirety and by substituting in lieu thereof the following: 3.1 Interest, Fees and Charges. (A) Interest. Interest shall accrue on the Term Loans and the Equipment Loans in accordance with the terms of the Term Notes and the Equipment Notes and shall accrue on the principal amount of the Revolver Loans outstanding at the end of each day at a fluctuating rate per annum equal to one and one-quarter percent (1.25%) above the Base Rate in effect on such day. The foregoing applicable rates of interest shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Base Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Base Rate becomes effective. The Base Rate in effect on the date hereof shall be the Base Rate effective as of the opening of business on the date hereof. In no event shall the per annum rate of interest with respect to the Revolver Loans be less than six percent (6.0%). Interest shall be calculated on a daily basis (computed on the actual number of days elapsed over a year of 360 days unless reference to a 365 or 366-day year is necessary in order not to exceed the Maximum Rate), commencing on the date hereof, and shall be payable monthly, in arrears, on the first day of each month. The calculation of interest on the basis of a 360-day year, as opposed to a year of 365 days, results in a higher effective rate of interest hereunder. (b) By deleting from Section 3.1(E) of the Loan Agreement the reference to "$130,000" and by substituting in lieu thereof a reference to "$95,000." (c) By deleting from Section 3.1(E) of the Loan Agreement the clause that reads "and the balance of $62,500 on February 1, 1994" and by substituting in lieu thereof a clause that reads "and the balance of $32,500 on February 1, 1994." 6. Amendment to Section 3.2. Section 3.2 of the Loan Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: 3.2. Term of Agreement. Subject to Lender's right to cease making Loans to Borrowers at any time upon or after the occurrence of a Default or an Event of Default, this Agreement shall be in effect for a period commencing on the date hereof and ending on January 15, 1998 (the "Original Term"), and this Agreement shall automatically renew itself (but no such renewal shall be construed to extend the maturity date of any of the Notes) for one (1) year periods thereafter (each a "Renewal Term"), unless terminated as provided in Section 3.3 hereof. 7. Amendment to Section 3.3. Section 3.3(C) of the Loan Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: At the effective date of any such termination, Borrowers shall pay to Lender (in addition to the then outstanding principal, accrued interest and other charges owing under the terms of this Agreement and any of the other Loan Documents), as liquidated damages for the loss of the bargain and not as a penalty, an amount equal to three percent (3%) of the highest of the Average Monthly Loan Balances outstanding during the Original Term if termination occurs during the first twelve-month period of the Original Term (January 15, 1993 through January 15, 1994); two percent (2%) of the highest of the Average Monthly Loan Balances outstanding during the Original Term if termination occurs during the second twelve-month period of the Original Term (January 16, 1994 through January 15, 1995); one percent (1%) of the highest of the Average Monthly Loan Balances outstanding during the Original Term if termination occurs during the period from January 16, 1995 through January 15, 1998; provided, however, that if termination occurs on the last day of the Original Term, no termination charge shall be payable. 8. Amendment to Section 3.4. Section 3.4 of the Loan Agreement is hereby amended by adding a new Paragraph (E) to the end of Section 3.4 of the Loan Agreement that reads as follows: (E) Notwithstanding anything to the contrary contained in paragraphs (A) and (B) of this Section 3.4, payment of the principal amount and accrued interest on each Revolver Loan shall in all events be due and payable (if not sooner paid in accordance with the provisions of paragraphs (A) and (B) of this Section 3.4), and shall be paid, one day prior to the last day of the thirty-fifth month after the month in which such Revolver Loan is made so that no Revolver Loan shall remain outstanding and unpaid for three years or more from the date such Revolver Loan was first funded by Lender to Borrowers. 9. Amendment to Section 9.1. Section 9.1 of the Loan Agreement is hereby amended by adding a new Section 9.1(U) thereto that reads as follows: (U) Accounts Payable. Pay all accounts payable owing to any Person in a timely manner. 10. Amendment to Section 9.2. Section 9.2 of the Loan Agreement is hereby amended as follows: (a) By deleting clause (ii) of Section 9.2(G) in its entirety and renumbering the existing clause (iii) of Section 9.2(G) as clause (ii) of Section 9.2(G). (b) By deleting clauses (iii) and (iv) of Section 9.2(J) of the Loan Agreement in their entirety and by substituting the following in lieu thereof: (iii) Wellman Ltd. may make Distributions to Parent on or before December 31, 1993, in an amount not to exceed $1,015,000, to enable Parent to satisfy the following obligations of Parent: (a) payment of principal and interest due and owing under the Put Notes, not to exceed $690,000 in the aggregate, and (b) operating expenses and employee bonuses for fiscal year ending December 31, 1993, not to exceed $325,000 in the aggregate; (iv) Wellman Ltd. may make Distributions to Parent on or before January 31, 1994, in an amount not to exceed $770,000, to enable Parent to pay dividends on the Preferred Stock and to pay interest then due and owing on the Variable Rate Notes; (v) except as set forth in clauses (iii) and (iv) above, after payment in full of Term Loan B and Term Loan D and subject to receipt by Lender of the annual audited financial statements of Borrowers delivered pursuant to Section 9.1(J)(i) of this Agreement, in form and substance satisfactory to Lender, Wellman Ltd. may make Distributions no more frequently than once each fiscal year for the purpose of enabling Parent to pay any unpaid Indebtedness of Parent owing to TCR or to enable Parent to make payments in respect of the Zero Coupon Bonds or any substitutions therefor, including, without limitation, the Variable Rate Notes; (vi) Wellman Corp. may make Distributions from time to time to Wellman Ltd; (vii) commencing March 31, 1994, Wellman Ltd. may make quarterly Distributions to Parent (not to exceed $245,000 per quarter) to enable Parent to pay dividends on the Preferred Stock so long as (a) Borrowers' Average Excess Availability for the thirty-day period prior to the date of such Distribution after giving effect to such Distribution is at least $1,000,000 and (b) Borrower's Average Excess Availability on the date of such Distribution and following the Distribution is at least $1,000,000; and (viii) Wellman Ltd. may make a Distribution to Parent in an aggregate amount not to exceed $425,000 on or before November 30, 1994, to enable Parent to indemnify Three Cities for unpaid tax obligations of Pameco. (c) By deleting Section 9.2(L) in its entirety and by substituting the following in lieu thereof: (L) Capital Expenditures. Make Capital Expenditures (including, without limitation, by way of Capital Leases) which, in the aggregate, as to Borrowers and their Subsidiaries, exceed $3,250,000 during any fiscal year of Borrowers. (d) By deleting Section 9.2(Q) of the Loan Agreement in its entirety and by substituting the following in lieu thereof: (Q) Key-Man Insurance. On or before December 31, 1994, deliver the Insurance Assignment to Lender, in form and substance satisfactory to Lender. (e) By deleting the reference to "$50,000" contained in Section 9.2(Y) of the Loan Agreement and by substituting in lieu thereof a reference to "$100,000." 11. Amendment to Section 9.3. Section 9.3 of the Loan Agreement is hereby amended as follows: (a) By deleting the reference to "April 1, 1994 through June 30, 1994 -- $4,300,000" contained in Section 9.3(A) and by substituting in lieu thereof a reference to "April 1, 1994 through June 30, 1994 -- $4,800,000." (b) By deleting Section 9.3(C) in its entirety and by substituting the following in lieu thereof: (C) Profitability. Achieve Consolidated Adjusted Net Earnings of not less than $1 per month or less than the amount shown below for the period corresponding thereto as of the last day of such period (and compliance with this covenant on the dates shown below shall be tested on a cumulative quarterly and annual basis): Period Amount Closing Date through $ 725,000 March 31, 1993 Closing Date through $ 1,500,000 June 30, 1993 Closing Date through $ 2,100,000 September 30, 1993 Closing Date through $ 2,700,000 December 31, 1993 January 1, 1994 through $ 725,000 March 31, 1994 January 1, 1994 through $ 1,500,000 June 30, 1994 January 1, 1994 through $ 2,100,000 September 30, 1994 January 1, 1994 through $ 2,700,000 December 31, 1994 January 1, 1995 through $ 800,000 March 31, 1995 January 1, 1995 through $ 1,650,000 June 30, 1995 January 1, 1995 through $ 2,300,000 September 30, 1995 January 1, 1995 through $ 3,050,000 December 31, 1995 January 1, 1996 through $ 800,000 March 31, 1996 January 1, 1996 through $ 1,650,000 June 30, 1996 January 1, 1996 through $ 2,300,000 September 30, 1996 January 1, 1996 through $ 3,050,000 December 31, 1996 January 1, 1997 through $ 800,000 March 31, 1997 January 1, 1997 through $ 1,650,000 June 30, 1997 January 1, 1997 through $ 2,300,000 September 30, 1997 January 1, 1997 through $ 3,050,000 December 31, 1997 January 1 through March 31 $ 800,000 of each fiscal year thereafter January 1 through June 30 $ 1,650,000 of each fiscal year thereafter January 1 through September 30 $ 2,300,000 of each fiscal year thereafter January 1 through December 31 $ 3,050,000 of each fiscal year thereafter (c) By deleting Section 9.3(D) in its entirety and by adding the following in lieu thereof: (D) Consolidated Debt Service Coverage Ratio. Maintain at all times a Consolidated Debt Service Coverage Ratio of not less than the ratio shown below for the fiscal period corresponding thereto: Closing Date through 1.75 to 1 March 31, 1993 Closing Date through 1.75 to 1 June 30, 1993 Closing Date through 1.75 to 1 September 30, 1993 Closing Date through 1.75 to 1 December 31, 1993 January 1, 1994 through 1.75 to 1 March 31, 1994 January 1, 1994 through 1.75 to 1 June 30, 1994 January 1, 1994 through 1.75 to 1 September 30, 1994 January 1, 1994 through 1.75 to 1 December 31, 1994 January 1, 1995 through 1.75 to 1 March 31, 1995 January 1, 1995 through 1.75 to 1 June 30, 1995 January 1, 1995 through 1.75 to 1 September 30, 1995 January 1, 1995 through 1.75 to 1 December 31, 1995 January 1, 1996 through 1.75 to 1 March 31, 1996 January 1, 1996 through 1.75 to 1 June 30, 1996 January 1, 1996 through 1.75 to 1 September 30, 1996 January 1, 1996 through 1.75 to 1 December 31, 1996 January 1, 1997 through 1.75 to 1 March 31, 1997 January 1, 1997 through 1.75 to 1 June 30, 1997 January 1, 1997 through 1.75 to 1 September 30, 1997 January 1, 1997 through 1.75 to 1 December 31, 1997 January 1 through March 31 1.75 to 1 of each fiscal year thereafter January 1 through June 30 1.75 to 1 of each fiscal year thereafter January 1 through September 30 1.75 to 1 of each fiscal year thereafter January 1 through December 31 1.75 to 1 of each fiscal year thereafter (d) By deleting Section 9.3(E) in its entirety and by substituting the following in lieu thereof: (E) Consolidated Free Cash Flow. Maintain at all times a Consolidated Free Cash Flow of not less than the amount shown below for the period corresponding thereto: (i) Quarterly Calculation Period Amount Closing Date through $ 750,000 March 31, 1993 April 1, 1993 through $ 750,000 June 30, 1993 July 1, 1993 through $ 750,000 September 30, 1993 October 1, 1993 through $ 750,000 December 31, 1993 January 1, 1994 through $ 750,000 March 31, 1994 April 1, 1994 through $ 750,000 June 30, 1994 July 1, 1994 through $ 750,000 September 30, 1994 October 1, 1994 through $ 750,000 December 31, 1994 January 1, 1995 and at the end $ 800,000 of each fiscal quarter thereafter (ii) Cumulative Calculation Period Amount Closing through $ 750,000 March 31, 1993 Closing through $ 2,000,000 June 30, 1993 Closing through $ 2,800,000 September 30, 1993 Closing through $ 3,675,000 December 31, 1993 January 1, 1994 through $ 750,000 March 31, 1994 January 1, 1994 through $ 2,000,000 June 30, 1994 January 1, 1994 through $ 2,800,000 September 30, 1994 January 1, 1994 through $ 3,675,000 December 31, 1994 January 1, 1995 through $ 1,000,000 March 31, 1995 January 1, 1995 through $ 2,300,000 June 30, 1995 January 1, 1995 through $ 3,250,000 September 30, 1995 January 1, 1995 through $ 4,300,000 December 31, 1995 January 1, 1996 through $ 1,000,000 March 31, 1996 January 1, 1996 through $ 2,300,000 June 30, 1996 January 1, 1996 through $ 3,250,000 September 30, 1996 January 1, 1996 through $ 4,300,000 December 31, 1996 January 1, 1997 through $ 1,000,000 March 31, 1997 January 1, 1997 through $ 2,300,000 June 30, 1997 January 1, 1997 through $ 3,250,000 September 30, 1997 January 1, 1997 through $ 4,300,000 December 31, 1997 January 1 through March 31 $ 1,000,000 of each fiscal year thereafter January 1 through June 30 $ 2,300,000 of each fiscal year thereafter January 1 through September 30 $ 3,250,000 of each fiscal year thereafter January 1 through December 31 $ 4,300,000 of each fiscal year thereafter 12. Amendment to Section 11.1. Section 11.1 of the Loan Agreement is hereby amended by deleting Section 11.1(I) entitled "Adverse Changes" in its entirety. 13. Amendment to Section 11.2. Section 11.2 of the Loan Agreement is hereby deleted in its entirety and the following substituted in lieu thereof: 11.2 Acceleration of the Obligations. Without in any way limiting the right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with this Agreement or any of the other Loan Documents, upon or at any time after the occurrence of an Event of Default all of the Obligations then outstanding (whether under this Agreement or any of the other Loan Documents or otherwise) shall, at the option of Lender and without notice or demand by Lender, become at once due and payable and Borrowers shall forthwith pay to Lender, in addition to any and all sums and charges due, the entire principal of and accrued and unpaid interest on the Obligations plus reasonable attorneys' fees, not to exceed fifteen percent (15%) of the Obligations, if the same are collected by or through an attorney at law. Nothing herein shall be construed to permit Lender to charge or collect any unmatured or unearned interest. 14. Amendment to Section 14.8. The notice address of Borrowers set forth in Section 14.8 of the Loan Agreement is hereby amended to read as follows: (B) If to either Borrower: c/o MLX Corp. 1000 Center Place Norcross, Georgia 30092 15. Substitution of Exhibits. The Exhibits to the Loan Agreement are hereby amended as follows: (a) By substituting Exhibit A-1 (Equipment Promissory Note) and Exhibit A-2 (Amended, Restated and Consolidated Secured Promissory Note) attached hereto for the Exhibit A-1 (Equipment Promissory Note) and Exhibit A-2 (Term Note A) attached to the Loan Agreement; and (b) By deleting Exhibit A-4 (Term Note C) in its entirety. 16. Interest Rate Disclosure. On the date of this Amendment, the Base Rate is seven and three-quarters percent (7.75%) and therefore, the rate of interest in effect hereunder for Revolver Loans on the date hereof, expressed in simple interest terms, is nine percent (9.0%) per annum. 17. Ratification and Reaffirmation. Each Borrower hereby ratifies and reaffirms each of the Loan Documents and all of such Borrower's covenants, duties and liabilities thereunder. 18. Additional Covenants. To induce Lender to enter into this Amendment, Borrowers covenant and agree that simultaneously with the execution and delivery of this Amendment, Borrowers shall (i) execute and deliver amendments to each of the Mortgages recorded in Cuyahoga County, Ohio and LaVergne, Tennessee, all in form and substance satisfactory to Lender; (ii) deliver endorsements or commitments for endorsements to the existing mortgagee title insurance policies insuring the Liens of such Mortgages, which shall be in form and substance satisfactory to Lender and which shall give effect to the mortgage amendments described in the foregoing clause (i); (iii) reimburse Lender for the payment of all applicable documentary stamp, intangibles, recording, note or other similar taxes payable with respect to the mortgage amendments described in clause (i); and (iv) execute and deliver the Amended, Restated and Consolidated Secured Promissory Note in the form of Exhibit A-2 attached hereto (the "Consolidated Note"). 19. Acknowledgements and Stipulations. Each Borrower acknowledges and stipulates that the Loan Agreement and the other Loan Documents executed by such Borrower are legal, valid and binding obligations of such Borrower that are enforceable against such Borrower in accordance with the terms thereof; all of the Obligations are owing and payable without defense, offset or counterclaim (and to the extent there exists any such defense, offset or counterclaim on the date hereof, the same is hereby waived by each Borrower); the security interests and Liens granted by Borrowers in favor of Lender are duly perfected, first priority security interests and liens and the unpaid principal balance of the Loans as of the opening of business on November 15, 1994, totalled $8,475,564.53 20. Representations and Warranties. Each Borrower represents and warrants to Lender, to induce Lender to enter into this Amendment, that no Default or Event of Default exists on the date hereof; the execution, delivery and performance of this Amendment have been duly authorized by all requisite corporate action on the part of each Borrower and this Amendment has been duly executed and delivered by each Borrower; and except as may have been disclosed in writing by Borrowers to Lender prior to the date hereof, all of the representations and warranties made by each Borrower in the Loan Agreement are true and correct on and as of the date hereof. 21. Expenses of Lender. Borrowers agree to pay, on demand, all costs and expenses incurred by Lender in connection with the preparation, negotiation and execution of this Amendment and any other Loan Documents executed pursuant hereto and any and all amendments, modifications, and supplements thereto, including, without limitation, the costs and fees of Lender's legal counsel. 22. Governing Law. This Amendment shall be effective when signed by each Borrower and accepted by Lender in Atlanta, Georgia, whereupon this Amendment shall be a contract made in Georgia and shall be governed by and construed in accordance with the internal laws of the State of Georgia. 23. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 24. No Novation, etc. This Amendment is not intended to be, nor shall it be construed to create, a novation or accord and satisfaction, and the Loan Agreement as herein modified shall continue in full force and effect. Notwithstanding any prior mutual temporary disregard of any of the terms of any of the Loan Documents, the parties agree that the terms of each of the Loan Documents shall be strictly adhered to on and after the date hereof. 25. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall constitute an original, but all of which taken together shall be one and the same instrument. 26. Release of Claims. To induce Lender to enter into this Amendment, each Borrower hereby releases, acquits and forever discharges Lender, and the officers, directors, agents, employees, successors and assigns of Lender from all liabilities, claims, demands, actions or causes of actions of any kind (if there be any), whether absolute or contingent, disputed or undisputed, at law or in equity, or known or unknown that any Borrower now has or ever had against Lender arising under or in connection with any of the loan documents or otherwise. 27. Waiver of Notice. Each Borrower hereby waives notice of acceptance of this Amendment by Lender. 28. Waiver of Jury Trial. To the fullest extent permitted under Applicable Law, the parties hereto each hereby waives the right to trial by jury in any action, suit, proceeding or counterclaim arising out of or related to this Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed under seal in Atlanta, Georgia, and delivered by their respective duly authorized officers on the date first written above. ATTEST: S. K. WELLMAN LIMITED, INC. ("Borrower") /s/Thomas C. Waggoner By: /s/Brian Esher Secretary Brian Esher, President [CORPORATE SEAL] ATTEST: THE S. K. WELLMAN CORP. ("Borrower") /s/Thomas C. Waggoner By:/s/Brian Esher Secretary Brian Esher, President [CORPORATE SEAL] BARCLAYS BUSINESS CREDIT, INC. ("Lender") By:/s/Elizabeth L. Walker Title: Vice President [Consent and Reaffirmation on following page] CONSENT AND REAFFIRMATION The undersigned guarantors of the Obligations of Borrowers at any time owing to Lender hereby (i) acknowledge receipt of a copy of the foregoing First Consolidated Amendment to Loan and Security Agreement; (ii) consent to Borrowers' execution and delivery thereof; (iii) agree to be bound thereby; and (iv) affirm that nothing contained therein shall modify in any respect whatsoever its respective guaranty of the Obligations and reaffirm that such guaranty is and shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Consent and Reaffirmation on the date of such First Consolidated Amendment to Loan and Security Agreement. ATTEST: MLX CORP. /s/Thomas C. Waggoner By:/s/Brian Esher Secretary Brian Esher, President [CORPORATE SEAL] ATTEST: S. K. WELLMAN, S.p.A. /s/Thomas C. Waggoner By: /s/Brian Esher Secretary Name: Brian Esher Title: [CORPORATE SEAL] ATTEST: THE S. K. WELLMAN COMPANY OF CANADA LIMITED /s/Thomas C. Waggoner By: /s/Brian Esher Secretary Brian Esher, President [CORPORATE SEAL] EX-10.7 3 SECOND AMENDMENT TO EMPLOYMENT AGREEMENT This Second Amendment is entered into effective January 1, 1994, between MLX CORP., a Georgia (formerly Michigan) corporation ("MLX"), and BRIAN R. ESHER ("Esher"). WHEREAS, MLX and Esher entered into that certain Employment Agreement effective as of February 10, 1991, (The "Employment Agreement") and that certain First Amendment to Employment Agreement effective as of March 27, 1993 ("First Amendment" and collectively as "the Contract"). WHEREAS, MLX and Esher desire to continue the employment relationship; THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Esher and MLX hereby extend the Contract to December 31, 1994 and amend it as follows: 1. Section "2." of the Contract shall be amended to reflect the extension of the Contract from a three (3) year period to a period through December 31, 1994 and this Second Amendment shall reflect changes effective from January 1, 1994 through December 31, 1994. 2. Section "3.B." of the Contract is amended to delete the number "$100,000" and substituting in lieu thereof the number "$125,000." 3. Section "3.C." shall be deleted and replaced as follows: "C. Annual Bonus. MLX shall pay to Esher an annual bonus, which shall be computed in accordance with the following formula: (i) Based on the MLX level Annual Operating Plan Profit ("AOP", pre-tax and pre-interest $6,110,000) MLX shall pay to Esher a bonus of not more than $75,000 based on a sliding scale: (ii) Sliding Scale Formula: % of AOP achieved Bonus dollars % of AOP achieved Bonus dollars <90% $0.00 90 $25,000 91 27,500 92 30,000 93 32,500 94 35,000 95 37,500 96 40,000 97 42,500 98 45,000 99 47,500 100 50,000 101 52,500 102 55,000 103 57,500 104 60,000 105 62,500 106 65,000 107 67,500 108 70,000 109 72,500 110 & > 75,000" 4. All terms and conditions of the Contract, as hereby amended, shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Second Amendment effective as of the day and year first above written. MLX CORP. By: /s/James D. Askren II, Secy. /s/Brian R. Esher EX-13 4 MLX CORP. 1994 ANNUAL REPORT PROFILE Formed as a result of a reorganization in 1984, MLX Corp is today a publicly held company owned by an estimated 10,000 beneficial shareholders. MLX owns and manages the S. K. Wellman group of specialty friction materials businesses. MLX has a federal net operating loss carryforward exceeding $300 million to offset federal taxable income from its investments. The S. K. Wellman subsidiaries are engaged in the global design and manufacture of specialty friction and related products intended for use in extremely demanding environments. Wellman produces friction components under very precise tolerances for use in brake, clutch and transmission applications in heavy equipment, farm machinery, military equipment, recreational vehicles, trains and over the road trucks as well as brake applications for commercial and military aircraft. Wellman participates in both the original equipment and replacement markets and relies on an extensive research and development and engineering staff to continually provide improved products and performance to its Fortune 500 and international customers. CONTENTS 1 Financial Highlights 2 Letter to Shareholders 4 Five-Year Financial Review 6 Management's Discussion and Analysis 9 Consolidated Financial Statements and Notes 23 Report of Independent Auditors 24 Corporate Data MLX Corp. & Subsidiaries FINANCIAL HIGHLIGHTS 1994 1993 1992 (In thousands, except per share data) Net sales $60,858 $57,036 $53,862 Operating earnings 6,668 6,218 5,373 Interest expense, net (1,553) (2,100) (2,612) Earnings before extraordinary item 2,747 2,039 1,385 Net earnings 2,747 5,666 5,509 Earnings per share before extraordinary item (Net of dividends and accretion on preferred stock) $ 0.65 $ 0.45 $ 0.55 Long-term debt 14,165 14,845 25,711 Shareholders' equity (deficit) 10,729 7,324 (1,844) Earnings per share data have been restated to reflect the 1993 one-for-ten reverse stock split. [GRAPHS] REVENUES 1994 $60,858 1993 57,036 1992 53,862 1991 50,714 1990 55,228 OPERATING EARNINGS 1994 $6,668 1993 6,218 1992 5,373 1991 3,738 1990 3,858 TANGIBLE SHAREHOLDERS' EQUITY* 1994 $ 8,441 1993 4,539 1992 (4,576) 1991 (17,165) 1990 (99,323) *Includes intangible assets of $2.7 million and $2.9 million in 1992 and 1993, respectively, and $108.2 million in 1990 including intangible assets of the RAC Group (discontinued as of December 31, 1993). MLX Corp. & Subsidiaries LETTER TO SHAREHOLDERS We are pleased to report another successful year of operations with a new record high in revenues and a five-year high for operating earnings at our S.K. Wellman operating subsidiary. This profitable operation has enabled us to further reduce our debt level and achieve an attractive, balanced debt to equity relationship. This also continues the trend of successful financial results which followed our restructuring accomplished in 1992. The year was characterized by increased sales for brake, transmission and clutch applications for original equipment manufacturers both domestically and overseas. These increases more than offset declines experienced in our sales for U.S. military applications and the military component of export shipments. We ended the year with consolidated operating earnings of $6.7 million, an increase of 7% and our highest achievement for this measure since 1988. The year also saw us expand our capital expenditures for enhanced operating capacity and efficiency at Wellman. The capital expenditures level of $3.0 million was our highest annual amount since 1990 and included a plant expansion in Italy, additional production line automation and laser cutting equipment. Our lower debt level permits us to direct more of our operating cash flow to these areas with a focus on long term benefits. We had a very active productive year in managing the affairs of both MLX and Wellman. We were pleased to announce to you in April that we had regained our listing on the NASDAQ National Market System. This achieved our long-standing goal of providing you with a more active trading market with up to date and readily available trade data. In this context, we also dissolved our Restricted Transfer and Voting Trusts in May following the annual meeting of shareholders. This freed up additional common shares for trading in the equity market. We were also successful in restructuring our financing arrangement with Wellman's senior lender. This November transaction enabled us to consolidate various loan facilities into one combined facility, lower our overall cost of borrowing and repay the Italian Seller Note in advance of its due date. In this transaction, our senior lending facility maturity was extended to January 1998. [GRAPH] REPORTED PRIMARY EARNINGS PER SHARE 1994 $0.65 1993 0.45 1992 0.55 1991 0.02 1990 0.06 TOTAL EARNINGS PER SHARE (Defined)* 1994 $1.15 1993 0.92 1992 0.98 1991 0.02 1990 0.06 From an operational viewpoint, our year was a successful one as well. At year's end our Wellman subsidiary had achieved an increase in quarterly sales over the comparable prior year quarter for eleven consecutive quarters. While we are facing various challenges at Wellman, including increasing margin pressures, our backlog of unshipped orders has reached a new record of $16.4 million. I am particularly proud of our Wellman management team for their drive and initiative in introducing many new products including various aftermarket products for motorcycle applications. We were also active in 1994 in continuing our search for acquisition candidates with a strategy and line of business compatible with those of S.K. Wellman. We recognize that Wellman operates in a mature industry, and for this reason, long term success depends in part on creating synergistic alliances. To date, we have identified many acquisition opportunities but have been unsuccessful in negotiating attractive acquisition valuations for these businesses. We will continue to investigate ways to bring enhanced value to our shareholders. Our sales outlook for 1995 continues to be strong, both domestically and overseas, and we expect to continue to fight pressures on our operating margins. In addition, we expect additional charges in 1995 pertaining to our Series A Preferred Stock since these preferred shares have a dividend rate based in part on the applicable prime rate as well as an increasing minimum rate feature. Our borrowings from our senior lender are also linked to the prime rate. We hope you share our excitement about these financial and operating results. With your support, we will attempt to continue to add to the long-term value of our common stock. Brian R. Esher Chairman, President and Chief Executive Officer March 10, 1995 [GRAPH] LATEST TWELVE MONTHS ENDED (In 000s) Income Before Twelve Months Ended: Operating Earnings Extraordinary Items 31-Dec-92 5,373 1,385 31-Mar-93 5,949 1,796 30-Jun-93 5,844 2,041 30-Sep-93 6,151 2,229 31-Dec-93 6,218 2,039 31-Mar-94 6,605 2,710 30-Jun-94 6,892 2,908 30-Sep-94 6,331 2,729 31-Dec-94 6,668 2,747 MLX Corp. & Subsidiaries FINANCIAL REVIEW
SELECTED FINANCIAL INFORMATION Years ended December 31 1994 1993 1992 1991 1990 Dollars in thousands (except earnings per share data) Operating Data Net sales $ 60,858 $ 57,036 $ 53,862 $ 50,714 $ 55,228 Gross margin 14,493 13,862 12,586 10,711 13,329 Operating expenses (excluding restructuring and other nonrecurring costs in 1990) 7,825 7,644 7,213 6,973 8,811 Operating earnings 6,668 6,218 5,373 3,738 3,858 Interest expense, net (1,553) (2,100) (2,612) (3,399) (3,333) Other income (expense) 20 (162) 367 (75) 331 Income taxes (2,388) (1,917) (1,428) (7) (413) Minority interests - - (315) (200) (310) Earnings from continuing operations 2,747 2,039 1,385 57 133 Discontinued operations - - - (23,291) (26,505) Extraordinary gain on early retirement of debt - - 3,627 4,124 - Net earnings (loss) 2,747 5,666 5,509 (23,234) (26,372) Earnings (loss) applicable to common stock $ 1,689 $ 4,793 $ 5,509 $(23,234) $(26,372) Discontinued Operations Net sales - - - $333,279 $394,849 Gross margin - - - 83,820 97,101 Operating expenses - - - (81,090) (105,488) Other expenses - - - (17,086) (18,118) Loss on disposal - - - (8,935) - Net loss from discontinued operations - - - $(23,291) $(26,505) Financial Position Working capital $10,908 $ 8,990 $ 9,752 $ 10,331 $ 14,589 Depreciation and amortization 2,277 2,671 3,421 3,622 3,396 Total assets 37,524 33,761 33,128 41,718 47,945 Long-term liabilities 16,339 17,053 26,631 40,980 46,253 Minority interests - - - 2,045 1,845 Shareholders' equity (deficit) 10,729 7,324 (1,844) (14,252) 8,852 Per Share Data Average common shares outstanding and dilutive options 2,613 2,620 2,541 2,540 2,268 Earnings (loss) per share: Continuing operations $ 0.65 $ 0.45 $ 0.55 $ 0.02 $ 0.06 Discontinued operations - - - (9.17) (11.69) Extraordinary gain on early retirement of debt - 1.38 1.62 - - Total $ 0.65 $ 1.83 $ 2.17 $ (9.15) $ (11.63)
Earnings per share data have been restated to reflect the 1993 one-for-ten reverse stock split. MLX Corp. & Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Basis of Presentation -- The accompanying financial statements include the accounts of MLX Corp. (MLX or the Company) and its wholly owned subsidiaries. Effective June 25, 1993, MLX implemented a one-for-ten reverse stock split as approved by shareholders at the 1993 annual meeting of shareholders. Historical per share data in the consolidated financial statements and in the discussion below have been retroactively adjusted to reflect this reverse split. 1994 vs 1993 -- Revenues for S. K. Wellman in 1994 were $60.9 million versus a 1993 level of $57.0 million, an increase of 6.7%. This increase resulted from increased sales of clutch, brake and transmission components for applications including on-highway hauling vehicles, construction equipment and commercial aircraft. In addition, sales volume from the Italian facility increased by 20% over the prior year due to overall increased demand in their markets. Sales of after-market components decreased by 12% in 1994 versus 1993 due to declining demand for military items and the military component of export sales. The effect of foreign currency exchange fluctuations was insignificant in 1994. The gross margin achieved in 1994 was 23.8% compared to 24.3% in 1993. This decrease resulted from increases in raw material commodity prices (principally steel), strategic price concessions, unfavorable product mix shifts and outsourcing due to capacity constraints. Consolidated selling, general and administrative expenses for 1994 amounted to $7.8 million compared to $7.6 million in 1993, an increase of 2.4%. The increases occurred principally at S. K. Wellman as a result of higher compensation charges and the marketing costs of supporting new product initiatives. These were offset in part by reduced compensation and administrative charges at MLX Corp. Consolidated interest expense dropped from $2.1 million in 1993 to a level of $1.6 million in 1994 (a reduction of 26%). The MLX Corp. component dropped by $164,000 from the prior year due to the repayment of the minority interest purchase note in December 1993. The Wellman interest component dropped by $383,000 due to lower overall borrowings under the senior credit facility. Included in the results for 1993 is an extraordinary gain from early retirement of debt resulting from an exchange of Series A Preferred Stock for certain debt obligations described in Note C to the financial statements. No such exchange or gain occurred in 1994. Dividends and accretion applicable to Series A Preferred Stock increased to $1.1 million in 1994 versus $900,000 in 1993 due to increases in the prime rate component in the dividend rate structure. In 1994, the Company had net earnings of $2.7 million (or $0.65 per share net of obligations on the Series A Preferred Stock) compared to earnings before extraordinary item in 1993 of $2.0 million (or $0.45 per share). The extraordinary gain in 1993 amounted to $1.38 per common share. 1993 vs 1992 -- Revenues for S. K. Wellman in 1993 were $57.0 million compared to a 1992 level of $53.9 million, an increase of 5.9%. This increase resulted principally from higher sales of transmission and clutch components for use in construction equipment, farm machinery and on-highway hauling vehicles. In addition, after-market sales increased by 15.4% compared to 1992 due to higher demand for sales for U.S. military applications and to export customers. Sales of aircraft brake components in 1993 decreased by approximately 10.5% compared to 1992 due to lower mid-year demand from commercial airline customers. In addition, reported 1993 sales from the Italian plant, as expressed in U.S. dollars, decreased by $700,000, or 7.3%, compared to 1992. However, if the weighted average currency exchange rate for 1992 had remained constant in 1993, reported 1993 sales from this plant would have increased by $1.7 million, or 18%. The gross margin achieved in 1993 increased to 24.3% compared to 23.4% in 1992. This favorable result was due principally to improved efficiencies in production operations which offset the unfavorable shift in product mix away from higher margin commercial aircraft products. MLX Corp. & Subsidiaries Consolidated selling, general and administrative expenses for 1993 rose by 6% to $7.6 million compared to $7.2 million in 1992. At S. K. Wellman, such expenses rose by a nominal amount to $6.3 million. At MLX Corp. charges in this area increased to $1.3 million (from $1.1 million in 1992) since 1992 had a nonrecurring credit of $675,000 resulting from a change in estimate in medical claim reserves which was partially offset by a charge of $450,000 for potential litigation and professional obligations. Consolidated interest expense dropped from $2.6 million in 1992 to $2.1 million in 1993. The interest incurred at S. K. Wellman rose to $1.7 million in 1993 (compared to $1.3 million in 1992) as a result of amounts borrowed to pay off the MLX senior term loan and the minority interest obligations. At MLX the interest charge dropped to $400,000 in 1993 (compared to $1.3 million in 1992) due to the payoff of the senior term loan and the exchange of certain of the Zero Coupon Bonds for Series A Preferred Stock. Included in the results for 1993 is an extraordinary gain from early retirement of debt of $3.6 million resulting from the exchange in the second quarter of Series A Preferred Stock and 1993 Variable Rate Notes for certain of the remaining Zero Coupon Bonds. The gain is reported net of a charge in lieu of federal income taxes of $1.9 million and is discussed in Note C to Consolidated Financial Statements. Earnings applicable to common stock for 1993 have been reduced for dividend and accretion obligations amounting to $873,000 on the Series A Preferred Stock issued as of December 31, 1992 and April 22, 1993. In 1993, the Company had earnings before extraordinary items of $2.0 million, $0.45 per share (net of obligations on the Series A Preferred Stock), and net income of $5.7 million, or $1.83 per share. In 1992, the Company had earnings before extraordinary item of $1.4 million, or $0.55 per share, and net income of $5.5 million, or $2.17 per share. The Company is able to offset substantially all of its federal taxable income with its pre-reorganization tax loss carryforwards and therefore has a federal tax liability only for Alternative Minimum Tax amounts. Accordingly, the charge in lieu of federal income taxes included in the statements of income is not accruable or payable. These pro forma charges for 1994, 1993 and 1992 (excluding the pro forma charge provided for extraordinary gains) were $1.3 million, $1.2 million and $1.1 million, respectively. The following table illustrates the effect of this pro forma charge on the Company's earnings and earnings per share. 1994 1993 1992 (Dollars in thousands, except per share data) Earnings before extraordinary item $ 2,747 $ 2,039 $ 1,385 Less dividends and accretion on preferred stock (1,058) (873) - Plus pro forma federal tax charge not due or payable 1,314 1,243 1,110 Total earnings $ 3,003 $ 2,409 $ 2,495 Total earnings per common share $ 1.15 $ 0.92 $ 0.98 Financial Position and Liquidity Consolidated working capital at December 31, 1994 was $10.9 million compared to $9.0 million at December 31, 1993. This increase resulted from higher trade receivables and inventories stemming from increased sales volume and additional inventory investments to support new product initiatives. S. K. Wellman finances its operations with cash from operations and the use of a senior credit facility. In 1993 the Company successfully executed a new senior credit agreement with a new lender which extends through January 1998. During 1993, the proceeds from this facility were used to pay down certain obligations of MLX Corp. and to replace the previous senior facility and the two Industrial Revenue Bonds. In 1994 funds from the senior credit facility were used to repay the Seller Note otherwise due in 1995 and to pay certain obligations of MLX Corp. In 1994 the senior credit facility was amended to lower the interest rate structure, extend the maturity date and to consolidate certain components of the facility. At December 31, 1994 the facility included a consolidated term component, a mezzanine component and an equipment line with varying amortization obligations and maturities ranging from July 1995 to January 1998. In addition, there is a revolving loan component with a limit of $7.2 million, subject to certain availability formulas, and an MLX Corp. & Subsidiaries MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) expiration date of January 1998. In February 1995 the remaining balance under the mezzanine facility was repaid with proceeds from the revolving loan component. The amount available under the revolving loan facility at December 31, 1994 was $4.8 million which exceeded the amount outstanding on that date by $2.8 million. Management believes that the existing lending facilities provide adequate working capital resources for its anticipated needs in 1995. The senior credit facility limits cash dividends and loans which S. K.Wellman may make to MLX Corp. Under the most restrictive covenants, retained earnings in the amount of approximately $1.3 million were free from limitations on the payment of dividends to MLX Corp. at December 31, 1994. The Zero Coupon Bonds were originally issued in 1990 and were subsequently amended in 1992. As of the end of 1993, approximately 94.2% of these bonds had been exchanged for 1993 Variable Rate Notes and shares of Series A Preferred Stock. The remaining outstanding Zero Coupon Bonds mature in 2002 and require no payments of principal or interest until maturity except in very limited circumstances. Early redemption of the Bonds is at the Company's option. The Series A Preferred Stock was issued as of December 31, 1992 and April 22, 1993 and provides for dividend rates which commence at prime plus 2.5% (but not less than 9%) and escalate gradually to a peak of prime plus 7% (but not less than 14%) for all periods after January 1, 1999. The dividend rate at December 31, 1994 was 11%. Dividends accumulate in arrears unless paid, and the redemption of the Preferred Stock is solely at the option of the Company. The 1993 Variable Rate Notes were issued in April 1993 in exchange for certain of the Zero Coupon Bonds. The Notes have an escalating interest rate feature (currently at 11%) and mature in 2002. The agreement governing the Notes requires that interest due on the Notes be paid (on a pro rata basis) whenever dividends on the Series A Preferred Stock are paid. Effective December 31, 1992 the Company purchased the 13.7% minority interest in its S. K. Wellman subsidiary under the terms of the relevant agreement. Notes were issued to the holders of such minority interests, and these notes were paid off in February and December 1993. Other Data Capital Expenditures -- Capital expenditures in 1994 amounted to $3.0 million, all of which pertains to S. K. Wellman. These expenditures were made to expand the Italian facility, add laser cutting equipment and further automate the clutch component production lines. In 1993, capital expenditures amounted to $1.8 million for capital projects to improve quality control procedures, expand existing clutch component production capabilities, install new production capabilities in other areas and to automate certain engineering design steps. There were no material commitments for capital expenditures outstanding at December 31, 1994. The expected level of capital expenditures for S.K. Wellman in 1995 is approximately $3.2 million. Seasonality -- Sales of S. K. Wellman generally do not follow a strong seasonal pattern. However, extended holiday shutdowns of major customer production sites can result in minor reductions in sales volume in the third and fourth quarters for the European operation and in the fourth quarter for the North American operation. The quarterly results are further affected by interim accounting estimates for matters such as income tax provisions, plant operating efficiencies, operating expense accruals and preferred stock dividends. Backlog -- The backlog of unshipped orders for the ensuing three months (the period which generally represents a firm customer commitment) at December 31, 1994 was $16.4 million. At December 31, 1993 the backlog for such period was $13.0 million. Employees -- At December 31, 1994 the Company had 559 employees compared to 511 at December 31, 1993. Approximately 247 are covered by collective bargaining agreements as of December 31, 1994. MLX Corp. & Subsidiaries Enviromental Status -- In connection with the loan application procedures for the new senior lender, S. K. Wellman performed certain tests for environmental contamination for each of the three owned U.S. operating sites. These tests revealed minor surface contamination at one site and no other condition requiring remediation. In 1993 the Company removed this contaminated soil following specific disposal guidelines. Costs incurred in connection with the removal were not significant. Market, Share Ownership and Dividend Information -- As of December 31, 1994 (and commencing on April 28, 1994) the Company's common shares were traded on the NASDAQ National Market under the trading symbol "MLXR." From August 30, 1993 until April 28, 1994, the Company's shares were traded in the NASDAQ Small Cap Market. From January 26, 1993 until August 30, 1993, the Company's shares were traded in the Domestic OTC Electronic Bulletin Board regulated by NASD. Prior to that time and commencing on March 27, 1992, the Company's shares were traded on the NASDAQ Small Cap Market. Prior to that date the Company's shares were traded on the NASDAQ National Market. As of December 31, 1994 the Company estimated there were approximately 6,900 shareholders of record of its common stock. In addition, the Company believes that there are approximately 2,700 shareholders whose shares are registered in names of nominees. In connection with the reverse stock split implemented in June 1993, approximately 3,200 shareholders who held fewer than 10 pre-split shares were eliminated as shareholders and given the right to redeem their shares at $1 each. MLX's current policy is to retain earnings to finance future growth and for debt repayment and, accordingly, does not currently expect to pay any cash dividends on its common stock in the foreseeable future. In addition, certain covenants relating to indebtedness of MLX and S. K. Wellman prohibit the payment of common stock cash dividends.
Quarterly Data (Unaudited) 1994 1st 2nd 3rd 4th (In thousands, except per share data) Net sales $ 14,995 $ 15,405 $ 14,940 $ 15,518 Operating earnings 1,921 1,739 1,156 1,852 Net earnings 1,046 792 493 416 Earnings applicable to common stockholders 800 543 243 103 Net earnings per common share $ 0.31 $ 0.21 $ 0.09 $ 0.04 Stock price range per common share $6.13-5.25 $7.50-5.25 $7.38-5.38 $6.00-3.75 Trading volume as reported by NASDAQ 69 174 164 129 1993 1st 2nd 3rd 4th Net sales $ 14,428 $ 14,143 $ 13,892 $ 14,573 Operating earnings 1,534 1,452 1,717 1,515 Extraordinary gain on early retirement of debt - 3,627 - - Net earnings 375 4,221 672 398 Earnings applicable to common stockholders 195 3,982 430 186 Net earnings per common share: Earnings before extraordinary item $ 0.08 $ 0.13 $ 0.16 $ 0.07 Extraordinary gain on early retirement of debt - 1.37 - - Total $ 0.08 $ 1.50 $ 0.16 $ 0.07 Stock price range per common share $9.38-3.13 $9.38-5.00 $ 9.00-4.25 $5.75-4.13 Trading volume as reported by NASDAQ 73 45 64 55
MLX Corp. & Subsidiaries CONSOLIDATED BALANCE SHEETS December 31 1994 1993 (Dollars in thousands, except share data) Assets Current assets Cash and cash equivalents $ 1,087 $ 985 Accounts receivable 9,638 8,357 Inventories 9,681 8,449 Prepaid expenses and other current assets 958 583 Total current assets 21,364 18,374 Property, plant and equipment, net 13,362 12,064 Intangible assets, net 2,288 2,785 Other assets 510 538 Total assets $37,524 $33,761 Liabilities Current liabilities Accounts payable $ 4,629 3,362 Accrued compensation and benefits 2,965 2,809 Other accrued liabilities and expenses 1,630 1,969 Accrued taxes 815 553 Dividends payable on Series A preferred stock 212 638 Current portion of long-term debt 205 53 Total current liabilities 10,456 9,384 Long-term debt 13,960 14,792 Other long-term liabilities 2,379 2,261 Shareholders' equity Preferred stock, no par value -- authorized 1,500,000 shares; none outstanding - - Preferred stock, Series A, $30 par value -- authorized 500,000 shares; 264,000 shares outstanding 7,265 6,981 Common stock, $.01 par value -- authorized 38,500,000 shares; 2,540,000 shares outstanding (2,536,000 shares in 1993) 25 25 Capital in excess of par value 61,874 60,551 Retained earnings deficit since December 11, 1984 (57,147) (58,836) 12,017 8,721 Other equity adjustments (1,288) (1,397) Total shareholders' equity 10,729 7,324 Total liabilities and shareholders' equity $37,524 $33,761 See notes to consolidated financial statements. MLX Corp. & Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Years ended December 31 1994 1993 1992 (Dollars in thousands, except per share data) Net sales $ 60,858 $ 57,036 $ 53,862 Costs and expenses Cost of products sold 46,365 43,174 41,276 Selling, general and administrative expenses 7,825 7,644 7,213 54,190 50,818 48,489 Operating earnings 6,668 6,218 5,373 Interest expense, net (1,553) (2,100) (2,612) Other income (expense) 20 (162) 367 Earnings before income taxes, minority interests, and extraordinary item 5,135 3,956 3,128 Provision for income taxes: Federal taxes due and payable 80 150 - Charge in lieu of federal income taxes 1,314 1,243 1,110 Foreign, state and local income taxes 994 524 318 Minority interests in net earnings of consolidated subsidiaries - - 315 Earnings before extraordinary item 2,747 2,039 1,385 Extraordinary gain on early retirement of debt (net of charge in lieu of federal income taxes of $1,869 in 1993 and $1,661 in 1992) - 3,627 4,124 Net earnings 2,747 5,666 5,509 Dividends and accretion on preferred stock (1,058) (873) - Earnings applicable to common stock $ 1,689 $ 4,793 $ 5,509 Earnings per share: Earnings before extraordinary item (net of dividends and accretion on preferred stock) $ 0.65 $ 0.45 $ 0.55 Extraordinary gain on early retirement of debt - 1.38 1.62 Net earnings $ 0.65 $ 1.83 $ 2.17 Average outstanding common shares and dilutive options 2,613 2,620 2,541 See notes to consolidated financial statements. MLX Corp. & Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Series A Capital In Retained Other Preferred Common Excess of Earnings Equity (Dollars in thousands) Stock Stock Par Value (Deficit) Adjustments Total Balances at January 1, 1992 $ - $ 254 $54,548 $(69,138) $ 84 $(14,252) Issuance of 200,000 shares of preferred stock in connection with the retirement of debt 5,100 - - - - 5,100 Foreign currency translation adjustment - - - - (972) (972) Benefit of pre-reorganization tax loss carryforwards - - 2,771 - - 2,771 Net earnings - - - 5,509 - 5,509 Balances at December 31, 1992 5,100 254 57,319 (63,629) (888) (1,844) Issuance of 64,000 shares of preferred stock in connection with the retirement of debt 1,646 - - - - 1,646 Dividends and accretion on preferred stock 235 - - (873) - (638) Foreign currency translation adjustment - - - - (509) (509) Benefit of pre-reorganization tax loss carryforwards - - 3,112 - - 3,112 One-for-ten reverse stock split - (229) 118 - - (111) Stock options exercised - - 2 - - 2 Net earnings - - - 5,666 - 5,666 Balances at December 31, 1993 6,981 25 60,551 (58,836) (1,397) 7,324 Dividends and accretion on preferred stock 284 - - (1,058) - (774) Foreign currency translation adjustment - - - - 109 109 Benefit of pre-reorganization tax loss carryforwards - - 1,314 - - 1,314 Stock options exercised - - 9 - - 9 Net earnings - - - 2,747 - 2,747 Balances at December 31, 1994 $7,265 $ 25 $ 61,874 $(57,147) $(1,288) $10,729
See notes to consolidated financial statements. MLX Corp. & Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 1994 1993 1992 (Dollars in thousands) Cash Flows From Operating Activities: Net earnings $ 2,747 $ 5,666 $ 5,509 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary gain on early retirement of debt - (5,496) (5,785) Charge in lieu of federal income taxes 1,314 3,112 2,771 Depreciation and amortization 2,277 2,671 3,421 Minority interests in net earnings of consolidated subsidiaries - - 315 Changes in operating assets and liabilities: Accounts receivable (1,281) (84) (2) Inventories and prepaid expenses (1,607) (390) 1,264 Accounts payable and accrued expenses 920 1,630 (1,094) Other 693 (1,053) (919) Net cash provided by operating activities 5,063 6,056 5,480 Cash Flows From Investing Activities: Purchase of property, plant and equipment (2,985) (1,820) (1,129) Net cash used in investing activities (2,985) (1,820) (1,129) Cash Flows From Financing Activities: Borrowings on long-term debt 976 10,740 - Repayment of debt (1,761) (14,611) (6,460) Payment of dividends on Series A preferred stock (1,200) - - Other 9 (47) - Net cash used in financing activities (1,976) (3,918) (6,460) Net increase (decrease) in cash and cash equivalents 102 318 (2,109) Cash and cash equivalents at January 1 985 667 2,776 Cash and cash equivalents at December 31 $ 1,087 $ 985 $ 667 See notes to consolidated financial statements. MLX Corp. & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A Summary of Significant Accounting Policies Principles of Consolidation: The financial statements include the accounts of MLX Corp. (MLX or the Company) and its wholly owned subsidiaries. The wholly owned subsidiaries include S. K. Wellman Limited, Inc. (S. K. Wellman -- the principal entity of the Company's specialty friction materials manufacturing group) and each of its wholly owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions have been eliminated. Cash Equivalents: Cash equivalents consist of investments in short-term asset management accounts. Such investments are stated at cost plus accrued interest which approximates market value. For purposes of the accompanying Consolidated Statements of Cash Flows, the Compan y considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Inventories: Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. The components of inventories are as follows (in thousands): 1994 1993 Manufactured goods $2,353 $2,298 Raw materials and work in progress 7,328 6,151 $9,681 $8,449 Property, Plant and Equipment: Properties are recorded at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the respective assets. The components of property, plant and equipment are as follows (in thousands): 1994 1993 Land and improvements $ 1,239 $ 1,179 Buildings and leasehold improvements 7,376 6,933 Machinery and equipment 17,581 16,007 Construction in progress 1,178 533 27,374 24,652 Accumulated depreciation and amortization (14,012) (12,588) $13,362 $12,064 Accrued Insurance: The Company sponsors funded health and workers' compensation plans for the majority of its employees. Premiums are based on experience and accrued insurance is based on a pre-calculated contractual obligation to the insurance company. During a portion of 1992 the Company was self-insured for both health and workers' compensation claims. Health accruals under the previous plan were based on current claims plus estimates of incurred but not reported claims. In 1992 the Company recorded income of $675,000 related to a change in its estimate of necessary claims accrual due to better than expected claims experience. MLX Corp. & Subsidiaries NOTE A Summary of Significant Accounting Policies (continued) Intangible Assets: Intangible assets are amortized using the straight-line method over the average lives indicated in the following table. The components of intangible assets are as follows (in thousands): 1994 1993 Life Excess of cost of acquired businesses over the fair value of the net assets acquired $ 2,445 $ 2,445 10 years Deferred financing costs 953 907 11 years Proprietary formulations and patents 1,806 1,806 10 years Pension costs 1,025 1,018 15 years 6,229 6,176 Accumulated amortization (3,941) (3,391) $ 2,288 $ 2,785 Accounting Changes: Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The adoption of Statement 109 did not have an impact on the Company's financial position or results of operations. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers Accounting for Post-retirement Benefits Other Than Pensions" which requires the projected future costs of providing post-retirement health care benefits be recognized as an expense as employees render service instead of when benefits are paid. The Company elected to recognize the transition obligation on a prospective basis. The transition obligation (approximately $540,000 at January 1, 1993) for prior service costs at the time of adoption of the Standard is being amortized into general and administrative expense over 20 years. Federal Income Taxes: Any tax benefits resulting from the utilization of the Company's federal net operating loss or other carryforwards existing at December 11, 1984, the date of confirmation of the Plan of Reorganization (Confirmation Date), are excluded from operations and credited to capital in excess of par value in the year such tax benefits are realized. Earnings Per Common Share: Primary earnings per common share is based on the weighted average number of shares outstanding during each year and dilutive common stock equivalents. Earnings applicable to common stock is determined by adjusting net earnings for dividends and accretion on preferred stock. NOTE B Relationship With Pameco Corporation On March 19, 1992 the Company reached an agreement with its Refrigeration & Air Conditioning (RAC) Group senior lenders (the Lenders) and a third party investment group, (the Buyers) which included a director, to sell its equity interest in its RAC Group. The loss on disposal resulting from the divestiture of the RAC Group was reported in the 1991 consolidated financial statements. MLX entered into an agreement with the Buyers pursuant to which MLX shares management, operational and administrative functions with the RAC Group (renamed Pameco Corporation). The costs for such services are also shared. In 1994 MLX paid $60,000 to Pameco Corporation under this agreement. MLX received $81,500 (net of amounts paid) in 1993 and $470,000 in 1992 from Pameco Corporation. Such amounts are included as a component of selling, general and administrative expenses in the accompanying Consolidated Statements of Income. MLX Corp. & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE C GAIN ON EARLY RETIREMENT OF DEBT Effective December 31, 1992, the Company exchanged shares of its Series A Preferred Stock (see Note F) with an approximate fair value of $5.1 million (face value of $6.0 million) for Zero Coupon Bonds with a carrying value of $7.7 million and a portion of the MLX Senior Term Loan with a carrying value of $3.1 million. In addition, a senior term loan with a carrying value of $2.6 million was replaced with a note for $2.5 million (since repaid). The resulting net gain on early retirement of debt of $4.1 million was reported as of December 31, 1992 as an extraordinary item. During the quarter ended June 30, 1993, the Company exchanged shares of its Series A Preferred Stock (see Note F) with an approximate fair value of $1.6 million (face value of $1.9 million) and 1993 Variable Rate Notes with an approximate fair value of $1.4 million for Zero Coupon Bonds with a carrying value of $8.5 million. The resulting net gain on early retirement of debt of $3.6 million was reported in the quarter ended June 30, 1993 as an extraordinary item. NOTE D LONG-TERM DEBT The components of long-term debt are as follows (in thousands): 1994 1993 S. K. Wellman: Senior credit facility: Revolving credit facility $ 1,981 $ 2,345 Real estate term facility - 6,450 Consolidated term facility 8,399 - Mezzanine component 550 1,350 Equipment term note - 420 Seller note, due 1995 with interest at 8% - 1,703 Note payable to bank 128 175 Capital leases 644 - MLX: Zero coupon bonds net of unamortized discount of $130 in 1994 and $147 in 1993 1,022 1,005 Variable rate subordinated notes 1,441 1,397 14,165 14,845 Less current portion of debt (205) (53) $ 13,960 $ 14,792 S. K. Wellman: S. K. Wellman's primary credit facility at December 31, 1994 was the senior credit facility which provides for four borrowing components with varying rates and repayment obligations. It is secured by a lien of substantially all the North American assets of S. K. Wellman and a pledge of the common stock of the Italian subsidiary. The loan and security agreement for the senior credit facility requires S. K. Wellman to, among other things, maintain certain levels of working capital, net worth and profitability. This agreement also limits cash dividends and loans to MLX Corp. Under the most restrictive covenants, retained earnings in the amount of approximately $1.3 million were free from limitations on the payment of dividends to MLX Corp. at December 31, 1994. In November 1994 the loan and security agreement was amended to extend the expiration of the facility through January 1998 and to consolidate the real estate term facility, the original equipment term note and the proceeds used to repay the seller note into the consolidated term loan. MLX Corp. & Subsidiaries NOTE D LONG-TERM DEBT (continued) The senior credit facility has a revolving credit component with a maximum borrowing limit of $7.2 million which expires in January 1998. This revolving loan bears interest at prime rate plus 1.25% (9.75%) at December 31, 1994 compared to prime rate plus 2.0% (8%) at December 31, 1993. The amount which may be borrowed is subject to certain availability formulas regarding accounts receivable and inventory. The senior credit facility also includes a consolidated term loan component with an initial balance of $8.5 million. This loan requires monthly amortization of $101,000 with any remaining unpaid balance payable in January 1998. The loan bears an initial interest rate of prime plus 2.0% which drops to prime plus 1.75% after certain conditions are met. The senior credit facility also includes a $2 million 30-month mezzanine term facility (expiring in July 1995) with monthly amortization requirements of $67,000 and an interest rate of prime plus 3.5%. This facility was repaid, with no penalty, in February 1995. The senior credit facility has an additional line of credit intended to fund capital expenditures up to a maximum of $2.0 million. At December 31, 1994 no amounts were outstanding under the arrangement. This line will bear interest at prime rate plus 1.75%. Advances may be made at any time until January 1997. The proceeds of the note payable to a bank were used to fund certain capital expenditures in Italy. The note bears interest at 9%, is unsecured and is due in varying quarterly installments through December 1996. MLX: The Company has outstanding Zero Coupon Bonds with a maturity date of March 2002. As of December 1992 and April 1993 certain of the Bonds were exchanged for MLX Series A Preferred Stock (See Note C) and Variable Rate Notes. Subsequent to these exchanges, Zero Coupon Bonds with a net carrying value at December 31, 1994 of $1.0 million remain outstanding. Such Bonds have a maturity value of $1.2 million and have an accretion rate of 1.7% for financial reporting purposes. The redemption value of the Bonds remaining after the exchange was $605,000 at December 31, 1994. In April 1993 MLX issued variable rate subordinated notes to certain holders of its Zero Coupon Bonds. These notes, which are unsecured, bear interest at an initial rate of the prime rate plus 2.5% (11% at December 31, 1994) but not less than 9%, increasing to a maximum rate of the prime rate plus 7%, but not less than 14% on January 1, 1999. The notes were initially recorded at their estimated fair value and are being increased to the redemption value of $1,444,000 during the period from date of issuance until March 19, 2002 (date of maturity). The notes are due in 2002 or, on a pro rata basis, whenever shares of the Series A preferred stock are repurchased. Aggregate maturities and other required reductions of debt for the next five years are: 1995 -$205,000, 1996 - $1.4 million, 1997 - $1.3 million, 1998 - $8.6 million and 1999 - $32,000. The Company intends to pay installments due in 1995 under the consolidated term facility and mezzanine component with borrowings under the revolving credit facility. Accordingly, such amounts have been classified as long term. Interest paid was $1.4 million in 1994, $1.5 million in 1993, and $1.2 million in 1992. NOTE E REVERSE STOCK SPLIT On June 2, 1993, the stockholders authorized a reverse stock split whereby each 10 common shares owned prior to the reverse stock split became one common share. The reverse stock split was implemented on June 25, 1993, and fractional common shares (approximately 62,000 common shares) were or will be repurchased for $1.00 per share. All references in the financial statements with regard to average number of shares of common stock and related prices and per share amounts have been restated to reflect the one-for-ten reverse stock split. MLX Corp. & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE F SHAREHOLDERS' EQUITY AND STOCK OPTIONS The assets and liabilities of foreign operations are translated into U.S. dollars at current exchange rates with the resulting cumulative translation adjustment, $(1,018,000) at December 31, 1994 and $(1,127,000) at December 31, 1993, recorded as a separate component of shareholders' equity. Exchange adjustments resulting from foreign currency translations included in other income (expense) in the accompanying Consolidated Statements of Income were $95,000 in 1994, $(255,000) in 1993 and $(461,000) in 1992. The Company has a stock option plan which provides that options may be granted to key employees, including officers and directors, to purchase common stock at a price not less than market value on the date the option is granted. The stock options are exercisable over periods not exceeding five years. A summary of transactions under the plan is as follows:
1994 1993 1992 Number Price Per Number Price Per Number Price Per of Shares Share of Shares Share of Shares Share Outstanding at beginning of year 94,733 $2.50-8.44 87,000 $2.50-33.70 75,490 $5.00-33.70 Granted 14,300 4.00 11,800 4.25-8.44 86,000 2.50 Exercised (3,600) 2.50 (867) 2.50-8.44 - - Canceled for reissuance(1) - - - - (24,450) 5.00-31.30 Canceled (966) 2.50-8.44 (3,200) 2.50-33.70 (50,040) 5.00-33.70 Outstanding at end of year 104,467 $2.50-8.44 94,733 $2.50-8.44 87,000 $2.50-33.70 At December 31: Exercisable 91,100 58,854 29,665 Reserved for future grant 3,817 17,151 25,750
(1) As a result of the sale of the RAC Group in March of 1992, certain options held by employees of that group were canceled. Options were also canceled for MLX employees and reissued at the market price as of the new date of issuance. Certain other key employees of MLX were also issued options during 1992. On February 11, 1991, MLX issued options to its Chief Executive Officer (CEO) to acquire 190,400 shares of the Company's common stock at $5.00 per share (the market value at date of grant), which are not reflected in the table above. At December 31, 1994, all such options are exercisable and will expire in February 1998. The options contain a clause that in the event that any new or existing shareholders increase their percentage ownership interest of the Company's common stock by 5% or more, the options are immediately converted to a Stock Appreciation Rights (SAR). MLX Corp. & Subsidiaries The Company is authorized to issue up to 500,000 shares designated as Series A Preferred Stock with a par value and liquidation preference of $30 per share. The Series A Preferred Stock is non-voting. Cumulative dividends on the Series A Preferred Stock are payable when, and if declared, at an initial rate of the prime rate plus 2.5% (11% at December 31, 1994), but not less than 9%, increasing to a maximum rate of the prime rate plus 7%, but not less than 14% on January 1, 1999. The dividend rate will be 1% greater than the rate reflected above for any period after March 31, 1994 during which dividends for more than one quarter remain unpaid. The Series A Preferred Stock is redeemable at the option of the Company at any time at a cash redemption price equal to $30 per share plus any and all cumulative dividends accrued and unpaid on the date of redemption. An aggregate of 264,000 shares of Series A Preferred Stock was issued (see Note C) to certain holders of Zero Coupon Bonds as of December 1992 and April 1993. The Series A Preferred Stock was initially recorded at its estimated fair value and is being increased to the redemption price of $30 per share during the period from date of issuance until January 1, 1999 (commencement of maximum annual dividend rate). The annual accretion, based on the interest method, is charged to retained earnings and amounted to $284,000 in 1994 and $235,000 in 1993. NOTE G INCOME TAXES Effective January 1, 1993, the Company adopted the liability method of accounting for income taxes as required by FASB Statement 109, "Accounting for Income Taxes." At December 31, 1994, MLX has net operating loss carryforwards, existing as of the Confirmation Date, of approximately $277.4 million which are available to offset future taxable income for federal income tax purposes. Such carryforwards expire as follows: $16.8 million in 1995, $41.3 million in 1996, $144.3 million in 1997, $1.2 million in 1998 and $73.8 million in 1999. Any tax benefit derived from the utilization of these net operating loss carryforwards is excluded from operations and credited to capital in excess of par value in the year such tax benefits are utilized. Subsequent to the Confirmation Date, the Company has available (for federal income tax purposes), net operating loss carryforwards of approximately $59.2 million, which expire as follows: $2.7 million in 2000, $45,000 in 2001, $2.2 million in 2002, $8,000 in 2004, $5.0 million in 2005, $2.0 million in 2006 and $47.3 million in 2007. The cumulative net operating loss for financial reporting purposes approximates the tax amount as shown above. The components of the income tax provision are as follows (in thousands): 1994 1993 1992 Charge in lieu of federal income taxes: Operating earnings $1,314 $1,243 $1,110 Extraordinary gain - 1,869 1,661 Total $1,314 $3,112 $2,771 Federal alternative minimum taxes $ 80 $ 150 $ - Foreign, state and local income taxes: Foreign $ 699 $ 168 $ (82) State and local 295 356 400 Total $ 994 $ 524 $ 318 The charge in lieu of federal income taxes is computed by applying the statutory rate to earnings before income taxes adjusted for items which are not deductible (includable) for income tax purposes of $(954,000) in 1994, $(2,000) in 1993 and $617,000 in 1992 (principally results from foreign operations and goodwill amortization) and further adjusted for foreign, state and local taxes. MLX Corp. & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets as of December 31, 1994 and 1993 are as follows (in thousands): 1994 1993 Federal net operating loss carryforward $ 114,000 $ 115,000 State net operating loss carryforward 3,000 3,000 Reserves and other 2,000 3,000 Total 119,000 121,000 Valuation allowance for deferred tax assets (119,000) (121,000) Net deferred tax assets $ - $ - The valuation allowance for deferred tax assets decreased $3 million during 1993. Undistributed earnings of the Company's foreign subsidiaries were not significant at December 31, 1994. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to various foreign countries. Cash paid for foreign, state and local taxes and federal alternative minimum taxes amounted to $810,000, $504,000 and $500,000 in 1994, 1993 and 1992, respectively. NOTE H EMPLOYEE BENEFITS The Company and its subsidiaries sponsor a defined contribution plan which covers a majority of their employees. This plan provides for voluntary employee contributions, a matching Company contribution and a discretionary Company contribution. Expenses related to this plan were $516,000, $470,000 and $128,000 in 1994, 1993 and 1992, respectively. The Company and certain of its subsidiaries sponsor two non-contributory defined benefit pension plans covering certain of their U.S. and Canadian employees. Benefits under one plan are based on compensation during the years immediately preceding retirement. Under the other plan, the benefits are based on a fixed annual benefit for each year of credited service. It is the Company's policy to make contributions to these plans sufficient to meet minimum funding requirements of the applicable laws and regulations, plus such additional amounts, if any, as the Company's actuarial consultants advise to be appropriate. Plan assets consist principally of equity securities and fixed income instruments. In 1992 the Company terminated one of its defined benefit plans and recognized a curtailment gain of $200,000. The Company settled the obligation under the plan in 1993, which resulted in a loss of $230,000. A summary of the components of net periodic pension costs for the plans is as follows (in thousands): 1994 1993 1992 Service cost $ 125 $ 105 $ 344 Interest cost 160 259 439 Actual return on plan assets 71 (281) (197) Net amortization and deferral (227) 88 (90) $ 129 $ 171 $ 496 Assumptions used were: Weighted average discount rate 8.38% 7.44% 8.03% Rate of increase in compensation levels 5.00% 6.00% 6.00% Weighted average expected long-term rate of return on assets 8.63% 8.63% 8.66% MLX Corp. & Subsidiaries NOTE H EMPLOYEE BENEFITS (continued) The following table presents the funded status and amounts recognized in the consolidated balance sheets at December 31, 1994 and 1993 related to the defined benefit plans (in thousands):
Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits Benefits Exceed Assets Benefits Exceed Assets Actuarial present value of benefit obligations: Vested benefit obligations $(372) $(1,558) $(423) $(1,407) Accumulated benefit obligations $(381) $(1,772) $(434) $(1,613) Projected benefit obligations $(495) $(1,772) $(537) $(1,613) Plan assets at fair value 891 1,038 1,012 984 Projected benefit obligations less than (in excess of) plan assets 396 (734) 475 (629) Unrecognized net loss 170 149 93 86 Prior service cost not yet recognized in net periodic pension cost - 349 - 200 Unrecognized net obligation (asset) at January 1 (246) 76 (284) 214 Adjustment required to recognize minimum liability - (574) - (500) Prepaid (accrued) pension cost at December 31 $ 320 $ (734) $ 284 $ (629)
The Company provides a fixed non-contributory benefit towards post-retirement health care for certain of its U.S. subsidiary's retired union employees. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7%. Post-retirement benefit costs, which are not considered significant, amounted to $50,000 in 1994 and $62,000 in 1993. Post-retirement benefit cost for 1992, which was recorded on a cash basis, has not been restated. Such amounts for 1992 are not considered significant. MLX Corp. & Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE I LEASES The Company leases certain office and warehouse facilities and equipment under noncancelable operating leases. Rental expense for 1994, 1993 and 1992 approximated $367,000, $312,000, and $351,000, respectively. Future minimum lease commitments under these agreements which have an original or existing term in excess of one year as of December 31, 1994 are: 1995 - $259,000, 1996 - $128,000, 1997 -$76,000, 1998 - $11,000 and 1999 - $9,000. NOTE J SEGMENT INFORMATION The Company is engaged in the design, manufacture and sale of high-energy friction materials which are used primarily in jet aircraft brakes and heavy equipment brakes, transmissions and clutches. The following table presents geographic segment information for the years ended December 31, 1994, 1993 and 1992 (in thousands):
Corporate United States Italy Canada Consolidated 1994: Net sales $ - $49,010 $10,195 $1,653 $60,858 Inter-area sales to affiliates - 1,093 21 288 1,402 Earnings (loss) (212) 2,445 402 112 2,747 Identifiable assets 1,005 25,699 9,086 1,734 37,524 1993: Net sales $ - $46,923 $ 8,487 $1,626 $57,036 Inter-area sales to affiliates - 853 3 292 1,148 Earnings (loss) (888) 2,943 (66) 50 2,039 Identifiable assets 1,119 23,253 7,521 1,868 33,761 1992: Net sales $ - $42,987 $ 9,157 $1,718 $53,862 Inter-area sales to affiliates - 731 82 139 952 Earnings (loss) (601) 2,291 (428) 123 1,385 Identifiable assets 921 22,824 7,494 1,889 33,128
Inter-area sales to affiliates represent products which are transferred between geographic areas on a basis intended to approximate the market value of the products. Inter-area sales to affiliates are not included in the net sales of each geographic segment. Earnings (loss) by geographic area is defined as sales less all expenses (excluding extraordinary gain on early retirement of debt). Identifiable assets are those assets used exclusively in the operations of each geographic area. Corporate assets consist principally of cash and cash equivalents, prepaid expenses and intangible assets. Product research, development and engineering expenses were $3.4 million, $3.4 million and $3.2 million in 1994, 1993 and 1992, respectively. As a percent of sales, these expenditures were 5.5%, 5.9% and 5.9% respectively. MLX Corp. &Subsidiaries NOTE J SEGMENT INFORMATION The percentage of net sales to major customers was as follows: 1994 1993 1992 Customer A 15% 16% 15% Customer B 9% 9% 12% Customer C 16% 14% 14% Customer D 9% 9% 9% The Company manufacturers and sells sintered friction materials to original equipment manufacturers, aircraft component and aftermarket customers. The Company's customers are not concentrated in any specific geographic region. The Company performs ongoing evaluations of its customers' financial condition and generally does not require collateral. Receivables generally are due within 60 days. Credit losses consistently have been within the range of management's expectations. MLX Corp. & Subsidiaries REPORT OF INDEPENDENT AUDITORSBoard of Directors MLX Corp.: We have audited the accompanying consolidated balance sheets of MLX Corp. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MLX Corp. and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31,1994 in conformity with generally accepted accounting principles. /S/ERNST & YOUNG LLP March 10, 1995 Atlanta, Georgia MLX Corp. & Subsidiaries CORPORATE DATA Board of Directors Brian R. Esher Chairman of the Board, President & Chief Executive Officer of the Company W. John Roberts (1) (2) Retired Senior Vice President-Finance and Treasurer, Amerisure Companies Willem F. P. de Vogel (2) President, Three Cities Research, Inc. H. Whitney Wagner Managing Director, Three Cities Research, Inc. Alfred R. Glancy III (1) (2) Chairman President & Chief Executive Officer, MCN Corporation S. Sterling McMillan, III (1) Vice Chairman, Greenlead Capital Management, Inc. J. William Uhrig (1) Managing Director, Three Cities Research, Inc. (1) Member of Audit Committee (2) Member of Compensation Committee MLX Corporate Management Brian R. Esher Chairman of the Board, President & Chief Executive Officer Theodore R. Kallgren Vice President, Fianance & Treasurer Thomas C. Waggoner Vice President, Chief Financial Officer & Secretary S.K. Wellman Operating Management Ronald E. Grambo President James W. Feldhouse Vice President, Operations Giovanni Cipolla General Manager, European Operations Frederich A. Kowalcyk Vice President, Velvetouch Division Anthony M. Gambatese Vice President, Sales Douglas O. Firman Corporate Controller Gail D. Terry Operations Manager, Canada Corporate Data Executive Office 1000 Center Place Norcross, Georgia 30093 Independent Auditors Ernst & Young LLP Atlanta, Georgia Legal Counsel Kilpatrick & Cody Atlanta, Georgia Stock Transfer Agent & Registrar American Stock Transfer & Trust Company New York, New York MLX Corp. common stock is traded in the NASDAQ National Market under the symbol "MLXR". For more information about the Company or to obtain a copy of the Company's annual report on Form 10-K, contact the Investor Relations Department at (404) 798-0677 or write to MLX Corp., 1000 Center Place, Norcross, Georgia 30093. MLX Corp. World Headquarters 1000 Center Place Norcross, Georgia 30093 (404) 798-0677 FAX (404) 798-0633 S. K. Wellman World Headquarters 6180 Cochran Road Solon, Ohio 44139 (216) 498-2275 FAX (216) 498-2290 EX-24 5 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No.33-32841 and No. 33-13130) pertaining to the MLX Corp. Stock Option Plan and in the related Prospectuses of our report dated March 10, 1995, with respect to the consolidated financial statements and schedules of MLX Corp. included in the Annual Report on Form 10-K for the year ended December 31, 1994. Ernst & Young LLP March 28, 1995 Atlanta, Georgia