-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S0lnj4SHpUaeiDIFUaF+1GsDxJkdlmCphAQJye2Ru95IFrGeYCjT/Y/m3f4XaXlr nR5LZWFw/TEfagKBuk3qxQ== 0000950152-98-002523.txt : 19980330 0000950152-98-002523.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950152-98-002523 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 31 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NACCO INDUSTRIES INC CENTRAL INDEX KEY: 0000789933 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL TRUCKS TRACTORS TRAILERS & STACKERS [3537] IRS NUMBER: 341505819 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09172 FILM NUMBER: 98575529 BUSINESS ADDRESS: STREET 1: 5875 LANDERBROOK DR CITY: MAYFIELD HTS STATE: OH ZIP: 44124-4017 BUSINESS PHONE: 2164499600 10-K 1 NACCO INDUSTRIES, INC. 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File No. 1-9172 NACCO INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 34-1505819 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 5875 Landerbrook Drive Mayfield Heights, Ohio 44124-4017 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (440) 449-9600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Class A Common Stock, New York Stock Exchange Par Value $1.00 Per Share
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Class B Common Stock, Par Value $1.00 Per Share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirement for the past 90 days. YES X NO Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of Class A Common Stock and Class B Common Stock held by non-affiliates as of February 27, 1998: $645,337,229 Number of shares of Class A Common Stock outstanding at February 27, 1998: 6,490,599 Number of shares of Class B Common Stock outstanding at February 27, 1998: 1,672,618 DOCUMENTS INCORPORATED BY REFERENCE (a) The Company's Proxy Statement for its 1998 annual meeting of stockholders is incorporated herein by reference in Part III. 2 ITEM 1. BUSINESS GENERAL NACCO Industries, Inc. ("NACCO" or the "Company") is a holding company which owns four principal operating subsidiaries: (a) NACCO Materials Handling Group. The Company owns approximately 98% of the outstanding capital stock of Hyster-Yale Materials Handling, Inc. ("Hyster-Yale"), which is the sole stockholder of NACCO Materials Handling Group, Inc. (For convenience of reference NACCO Materials Handling Group, Inc. and Hyster-Yale are hereinafter referred to as "NMHG"). NMHG markets two full lines of forklift trucks and related service parts under the Hyster(R) and Yale(R) brand names. NMHG accounted for 66% and 53% of NACCO's revenues and operating profits, respectively, in 1997. (b) Hamilton Beach*Proctor-Silex. The Company's wholly owned subsidiary, Hamilton Beach*Proctor-Silex, Inc. ("Hamilton Beach* Proctor-Silex"), is one of the nation's leading manufacturers and marketers of small electric kitchen appliances. Hamilton Beach*Proctor-Silex accounted for 19% and 18% of NACCO's revenues and operating profits, respectively, in 1997. (c) North American Coal. The Company's wholly owned subsidiary, The North American Coal Corporation, and its affiliated coal companies (collectively, "North American Coal"), mine and market lignite for use primarily as fuel for power generation by electric utilities. North American Coal also provides dragline mining services for a limerock quarry near Miami, Florida. North American Coal accounted for 12% and 33% of NACCO's revenues and operating profits, respectively, in 1997. (d) Kitchen Collection. The Company's wholly owned subsidiary, The Kitchen Collection, Inc. ("Kitchen Collection"), is a national specialty retailer of kitchenware, small electric appliances and related accessories. Kitchen Collection accounted for 3% and 2% of NACCO's revenues and operating profits, respectively, in 1997. Additional information relating to financial and operating data on a segment basis (including NACCO and Other, which reduced operating profits by 6% in 1997) is set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II hereof and in Note 19 to the Consolidated Financial Statements contained in Part IV hereof. NACCO was incorporated as a Delaware corporation in 1986 in connection with the formation of a holding company structure for a predecessor corporation organized in 1913. SIGNIFICANT EVENTS In 1997, NMHG announced a restructuring of its organizations around the world to reduce costs and enhance efficiencies. In connection with the restructuring, NMHG took a special charge of $16.3 million. NMHG is centralizing the administrative functions of its Hyster and Yale marketing operations and relocating those functions to one North American location (Greenville, North Carolina) and one European location (Basingstoke, England). NMHG also is restructuring its engineering and development function and consolidating that function for counterbalanced trucks in Portland, Oregon for warehouse equipment in Greenville, North Carolina and for big trucks in Nijmegen, The Netherlands. The restructuring also involves reorganizing its world headquarters in Portland, Oregon to focus on global strategic initiatives. NMHG anticipates that the restructuring will be completed by the end of 1998. On December 31, 1997, the Chinese government gave approval for the formation of Shanghai Hyster Forklift Truck, Ltd., a joint venture (the "Shanghai Hyster Joint Venture") among NMHG (55% share), Sumitomo-NACCO Materials Handling Group (30% share) and Shanghai Perfect Jinqiao United Development Co. (15% share). The Shanghai Hyster Joint Venture has acquired land in the Pudong area of Shanghai and will commence construction of a manufacturing facility in the second quarter of 1998. NMHG expects production to commence in the second quarter of 1999. The facility will manufacture Hyster large and medium capacity lift trucks primarily for sale in the Chinese domestic market. The Shanghai Hyster Joint Venture will also distribute domestic and imported Hyster forklift trucks. In February 1998, NMHG acquired land in Saltillo, Mexico and entered into an agreement to construct a manufacturing facility on the land. The purpose of the facility will be to manufacture components for shipment primarily to NMHG's plants in the United States. NMHG expects production to commence in the third quarter of 1998. 1 3 In April 1997, Hamilton Beach*Proctor-Silex began production at its recently completed manufacturing facility in Saltillo, Mexico. The new facility is expected to allow Hamilton Beach*Proctor-Silex to compete more effectively with low-cost Chinese manufacturers. In July 1997, North American Coal began providing mining services at San Miguel Electric Cooperative, Inc.'s lignite mine in Texas under a contract for 10 1/2 years. In September 1997, Phillips Coal Company and North American Coal formed a joint venture (75% owned by Phillips Coal and 25% owned by North American Coal) to develop a new lignite mine in Mississippi. The 30 year lignite sales contract between the joint venture and the electric power facility is currently being negotiated. Commercial operation of the electric power facility is scheduled for the year 2000. BUSINESS SEGMENT INFORMATION A. NACCO MATERIALS HANDLING GROUP NMHG is one of the leading worldwide designers, manufacturers and marketers of forklift trucks, which comprise the largest segment of the materials handling equipment industry. NMHG accounted for 54% and 43% of NACCO's assets and liabilities, respectively, as of December 31, 1997, while its operations accounted for 66% and 53% of NACCO's revenues and operating profits, respectively, in 1997. THE INDUSTRY Forklift trucks are used in a wide variety of business applications including manufacturing and warehousing. The materials handling industry, especially in industrialized nations, is generally a mature industry, which has historically been cyclical. Fluctuations in the rate of orders for forklift trucks reflect the capital investment decisions of the customers, which in turn depend upon the general level of economic activity in the various industries served by such customers. Since 1991, the worldwide market for forklift trucks has gradually increased to approximately 475,000 units. During this time, however, individual geographic markets have been subject to cyclicality. The North American market for forklift trucks peaked in 1995, began a cyclical downturn in 1996 and then recovered to a new high in 1997. The European market reversed a declining trend in 1994, peaked in 1996 and exhibited a decline in 1997. The Japanese market reversed a declining trend in 1994 and has since exhibited modest growth. The market in Asia-Pacific (outside of Japan) continued modest growth in 1996 and the first half of 1997. However, the late-1997 Asian financial crisis has negatively impacted lift truck demand in that part of the world. COMPANY OPERATIONS NMHG maintains product differentiation between Hyster and Yale brands of forklift trucks and distributes its products through separate worldwide dealer networks. Nevertheless, opportunities have been identified and addressed to improve the company's results by integrating overlapping operations and taking advantage of economies of scale in design, manufacturing and purchasing. NMHG provides virtually all of its own design, manufacturing and administrative functions. Products are marketed and sold through two separate dealer networks which retain and promote the Hyster and Yale identities. In Japan, NMHG has a 50% owned joint venture with Sumitomo Heavy Industries Ltd. which is generally known as Sumitomo-NACCO Materials Handling Group ("S-N"). S-N performs certain design activities and produces lift trucks and components which it markets in Japan under the name "Sumitomo Yale" and which are exported for sale by NMHG and its affiliates in the U.S., Europe and Asia-Pacific. NMHG continued to expand its presence in the European market through the acquisition in 1996 of Ormic, an Italian manufacturer of warehouse equipment. In combination with the 1995 acquisition of DECA, another Italian warehouse equipment company, NMHG can now provide a full line of Hyster and Yale warehouse equipment for the European market. PRODUCT LINES NMHG manufactures a wide range of forklift trucks under both the Hyster and Yale brand names. The principal categories of forklift trucks include electric rider, electric narrow-aisle and electric motorized hand forklift trucks primarily for indoor use and internal combustion engine ("ICE") forklift trucks for indoor or outdoor use. Forklift truck sales accounted for approximately 82%, 84% and 85% of NMHG's net sales in 1997, 1996 and 1995, respectively. NMHG also derives significant revenues from the sale of service parts for its products. Profit margins on service parts are greater than those on forklift trucks. The large population of Hyster and Yale forklift trucks now in service provides a market for service parts. In addition to parts for its own forklift trucks, NMHG has a program in North America (termed UNISOURCE(TM)) and in Europe (termed 2 4 MULTIQUIP(TM)) designed to supply Hyster dealers with replacement parts for most competing brands of forklift trucks. NMHG has a similar program (termed PREMIER(TM)) for its Yale dealers in the Americas and Europe. Accordingly, NMHG dealers can offer their mixed fleet customers a "one stop" supply source. Certain of these parts are manufactured by and purchased from third party component makers. Service parts accounted for approximately 18%, 16% and 15% of NMHG net sales in 1997, 1996 and 1995, respectively. For further information on geographic regions, see Note 19 to the Consolidated Financial Statements contained in Part IV hereof. COMPETITION The forklift truck industry is highly competitive. The worldwide competitive structure of the industry is fragmented by product line and country; however, the three largest manufacturers have a significantly greater market position on a unit volume basis than the other manufacturers. The principal methods of competition among forklift truck manufacturers are product performance, price, service and distribution networks. The forklift truck industry also competes with alternative methods of materials handling, including conveyor systems, automated guided vehicle systems and hand labor. Global competition is also affected by a number of other factors, including currency fluctuations, variations in labor costs and effective tax rates, and the costs related to compliance with applicable regulations, including export restraints, antidumping provisions and environmental regulations. Although there is no official source for information on the subject, NACCO believes that in 1997 NMHG was the leading manufacturer of forklift trucks in the world, based on number of lift trucks sold. NMHG's position is strongest in North America, where it believes it is the leader in unit sales of electric rider and ICE forklift trucks and has a significant share of unit sales of electric narrow-aisle and electric motorized hand forklift trucks. Although the European market is fragmented and competitive positions vary from country to country, NMHG believes that it has a significant share of unit sales of electric rider and ICE forklift trucks in Western Europe. Although NMHG's current market share in the Asia-Pacific, Chinese and Japanese markets is lower than in other geographic areas, these markets have been targeted for additional opportunities. The Japanese market reversed a declining trend in 1994 and has since exhibited modest growth. The market in Asia-Pacific (outside of Japan) continued a steady growth in 1996 and the first half of 1997. However, the late-1997 Asian financial crisis has negatively impacted lift truck demand in that part of the world. TRADE RESTRICTIONS A. UNITED STATES Since June 1988, Japanese-built ICE forklift trucks imported into the U.S., with lifting capacities between 2,000 and 15,000 pounds, including finished and unfinished forklift trucks, chassis, frames and frames assembled with one or more component parts, have been subject to an antidumping duty order. Antidumping duty rates in effect through 1997 range from 7.39% to 56.81% depending on manufacturer or importer. The antidumping duty rate applicable to imports from S-N is 51.33%, and is likely to continue unchanged for the foreseeable future, unless S-N and NMHG decide to participate in proceedings to have it reduced. NMHG does not currently import for sale in the United States any forklift trucks or components subject to the antidumping duty order. This antidumping duty order will remain in effect until the Japanese manufacturers and importers satisfy the U.S. Department of Commerce (the "Commerce Department") that they have not individually sold merchandise subject to the order in the United States below foreign market value for at least three consecutive years, or unless the Commerce Department or the U.S. International Trade Commission finds that changed circumstances exist sufficient to warrant the revocation of the order. The legislation implementing the Uruguay round of GATT negotiations passed in 1994 provides that the antidumping order will be reviewed for possible revocation in 2000. All of NMHG's major Japanese competitors have either built or acquired manufacturing or assembly facilities in the United States. NMHG cannot predict with any certainty if there have been or will be any negative effects to it resulting from Japanese manufacturers sourcing their forklift products from the United States. B. EUROPE From 1986 through 1994, Japanese forklift truck manufacturers were subject to informal export restraints on Japanese-manufactured electric rider, electric narrow-aisle and ICE forklift trucks shipped to Europe. These informal restraints terminated in 1995. Several Japanese manufacturers have announced either that they have established, or intend to establish, manufacturing or assembly facilities within the European Community. NMHG also cannot predict with any certainty if there have been or will be any negative effects to NMHG resulting from Japanese manufacturers sourcing their forklift products from Europe. 3 5 PRODUCT DESIGN AND DEVELOPMENT NMHG spent $23.5 million, $23.3 million and $24.2 million on product design and development activities in 1997, 1996 and 1995, respectively. The Hyster and Yale products are differentiated for the specific needs of their respective customer bases. NMHG continues to pursue opportunities to improve product costs by engineering new Hyster and Yale brand products with component commonality. Certain product design and development activities with respect to ICE forklift trucks and some components are performed in Japan by S-N. S-N spent approximately $4.1 million, $4.2 million and $3.8 million on product design and development in 1997, 1996 and 1995, respectively. BACKLOG As of December 31, 1997, NMHG's backlog of unfilled orders for forklift trucks was approximately 22,100 units, or $392 million, of which substantially all is expected to be filled during fiscal 1998. This compares to the backlog as of December 31, 1996 of approximately 11,700 units, or $219 million. An increase in the demand for forklift trucks in 1997 caused backlog levels to increase as dealers sought to increase inventory. Backlog represents unit orders to NMHG's manufacturing plants from independent dealerships, retail customers and contracts with the U.S. Government. Although these orders are believed to be firm, such orders may be subject to cancellation or modification. SOURCES NMHG has adopted a strategy of obtaining its raw materials and principal components on a global basis from competitively priced sources. NMHG is dependent on a limited number of suppliers for certain of its critical components, including diesel and gasoline engines and cast-iron counterweights used on certain forklift trucks. There would be a material adverse effect on NMHG if it were unable to obtain all or a significant portion of such components, or if the cost of such components was to increase significantly under circumstances which prevented NMHG from passing on such increases to its customers. DISTRIBUTION The Hyster and Yale brand products are distributed through separate highly developed worldwide dealer networks which are primarily independently owned. In addition, NMHG has an internal sales force for each brand to sell directly to major customers. In Japan, forklift truck products are distributed by S-N. In 1995, Yale reached agreement with Jungheinrich Aktiengesellschaft ("Jungheinrich"), a German manufacturer of forklift trucks, to terminate Jungheinrich's distribution of Yale brand products in Germany and Austria at the end of 1996. By mid-1997, NMHG ceased to provide to Jungheinrich certain ICE and electric-powered products for sale in other major European countries under the Jungheinrich brand name. Yale is continuing to establish a new distribution network in Germany through the appointment of additional dealers. NMHG's management does not believe that the termination of its relationship with Jungheinrich will have a materially adverse effect on NMHG. FINANCING OF SALES Hyster U.S. dealer and direct sales of Hyster products in the U.S. are supported by leasing and financing services provided by Hyster Credit Company, a division of Newcourt Capital Group, pursuant to an operating agreement which expires in 2000. NMHG is a 20% stockholder of Yale Financial Services, Inc., a subsidiary of General Electric Capital Corporation, which offers U.S. dealers of Yale products wholesale and retail financing and leasing services for its forklift trucks. Such retail financing and leasing services are also available to Yale national account customers. EMPLOYEES As of February 28, 1998, NMHG had approximately 7,000 employees. Employees in the Danville, Illinois manufacturing and parts depot operations are unionized, as are tool room employees located in Portland, Oregon. A three-year contract for the Danville union employees expires in June 2000. A one-year contract with the Portland tool room union expires in October 1998. Employees at the facilities in Berea, Kentucky; Sulligent, Alabama; and Greenville and Lenoir, North Carolina are not represented by unions. In Europe, shop employees in the Craigavon, Northern Ireland facility are unionized. Employees in the Irvine, Scotland and Nijmegen, The Netherlands facilities are not represented by unions. The 4 6 employees in Nijmegen have organized a works council, as required by Dutch law, which performs a consultative role on employment matters. NMHG's management believes its current labor relations with both union and non-union employees are generally satisfactory and that it will be able to renew the Portland union contract in 1998 on acceptable terms. GOVERNMENT REGULATION NMHG's manufacturing facilities, in common with others in the industry, are subject to numerous laws and regulations designed to protect the environment, particularly with respect to disposal of plant waste. NMHG's products are also subject to various industry and governmental standards. NMHG's management believes that the impact of expenditures to comply with such requirements will not have a material adverse effect on NMHG. PATENTS, TRADEMARKS AND LICENSES NMHG is not materially dependent upon patents or patent protection. NMHG is the owner of the Hyster trademark, which is currently registered in approximately 55 countries. The Yale trademark, which is used on a perpetual royalty-free basis by NMHG in connection with the manufacture and sale of forklift trucks and related components, is currently registered in approximately 150 countries. NMHG's management believes that its business is not dependent upon any individual trademark registration or license, but that the Hyster and Yale trademarks are material to its business. FOREIGN OPERATIONS For a description of net sales and other financial information by geographic region, see Note 19 to the Company's Consolidated Financial Statements contained in Part IV hereof. B. HAMILTON BEACH*PROCTOR-SILEX GENERAL Hamilton Beach*Proctor-Silex believes that it is the largest full-line manufacturer and marketer of small electric kitchen appliances in North America based on market share of key product categories. Hamilton Beach*Proctor-Silex's products are marketed primarily to retail merchants and wholesale distributors. Hamilton Beach*Proctor-Silex accounted for 17% and 12% of NACCO's assets and liabilities, respectively, as of December 31, 1997, while its operations accounted for 19% and 18% of NACCO's revenues and operating profits, respectively, in 1997. SALES AND MARKETING Hamilton Beach*Proctor-Silex manufactures and markets a wide range of small electric kitchen appliances, including motor driven appliances such as blenders, food processors, mixers and electric knives, and heat-generating appliances such as toasters, irons, coffeemakers, indoor grills and toaster ovens. Hamilton Beach*Proctor-Silex generally markets its "better" and "best" categories under the Hamilton Beach(R) brand and uses the Proctor-Silex(R) brand for the "good" and "better" categories. Hamilton Beach*Proctor-Silex generally markets its products primarily in North America, but also sells products in Latin America, Asia and Europe. Sales are generated predominantly by a network of inside sales employees to mass merchandisers, national department stores, variety store chains, drug store chains, catalog showrooms and other retail outlets. Principal customers include Wal*Mart, Kmart, Target, Canadian Tire, Caldor, Montgomery Ward, Zellers and Ames. Sales promotional activities are primarily focused on cooperative advertising. Because of the seasonal nature of the markets for small electric appliances, Hamilton Beach*Proctor-Silex's management believes that backlog is not a meaningful indicator of performance and is not a significant indicator of annual sales. Backlog of orders as of December 31, 1997 was approximately $11.0 million. This compares with the aggregate backlog as of December 31, 1996 of approximately $8.4 million. This backlog represents customer orders, which may be canceled at any time prior to shipment. Hamilton Beach*Proctor-Silex's warranty program to the consumer consists generally of a limited warranty lasting for two years for electric appliances. Under its warranty program, the company may repair or replace, at its option, those products found to contain manufacturing defects. Revenues and operating profit for Hamilton Beach*Proctor-Silex are traditionally greater in the second half of the year as sales of small electric appliances increase significantly with the fall holiday selling season. Because of the seasonality of purchases of its products, Hamilton Beach*Proctor-Silex incurs substantial short-term debt to finance inventories and accounts receivable. 5 7 PRODUCT DESIGN AND DEVELOPMENT Hamilton Beach*Proctor-Silex spent $4.4 million in 1997, $3.7 million in 1996 and $3.3 million in 1995 on product design and development activities. SOURCES The principal raw materials used to manufacture and distribute Hamilton Beach*Proctor-Silex's products are steel, aluminum, plastic and packaging materials. Hamilton Beach*Proctor-Silex's management believes that adequate quantities of raw materials are available from various suppliers. COMPETITION The small electric kitchen appliance industry is highly competitive. Based on publicly available information about the industry, Hamilton Beach*Proctor-Silex's management believes it is the largest full-line manufacturer and marketer of small kitchen appliances in North America based on key product categories. As retailers generally purchase a limited selection of small electric appliances, Hamilton Beach*Proctor-Silex competes with other suppliers for retail shelf space and focuses its primary marketing efforts on retailers rather than consumers. In 1996, the company also initiated consumer advertising for the Hamilton Beach brand. Hamilton Beach*Proctor-Silex's management believes that the principal areas of competition with respect to its products are quality, price, product design, product features, merchandising, promotion and warranty. Hamilton Beach*Proctor-Silex's management believes that it is competitive in all of these areas. GOVERNMENT REGULATION Hamilton Beach*Proctor-Silex, in common with other manufacturers, is subject to numerous Federal and state health, safety and environmental regulations. The company's management believes that the impact of expenditures to comply with such laws will not have a material adverse effect on Hamilton Beach*Proctor-Silex. The company's products are subject to testing or regulation by Underwriters' Laboratories, the Canadian Standards Association and various entities in foreign countries which review product design. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES Hamilton Beach*Proctor-Silex holds patents and trademarks registered in the United States and foreign countries for various products. The company's management believes that its business is not dependent upon any individual patent, trademark, copyright or license, but that the Hamilton Beach and Proctor-Silex trademarks are material to its business. EMPLOYEES As of February 28, 1998, Hamilton Beach*Proctor-Silex's work force consisted of approximately 4,700 employees, most of which are not represented by unions. In Canada, approximately 20 hourly employees at the Picton, Ontario distribution facility are unionized. These employees are represented by an employee association which performs a consultative role on employment matters. On January 17, 1997, a collective bargaining agreement was executed for the Saltillo manufacturing facility which was under construction at that time. There are approximately 650 employees subject to the terms of this agreement. Hamilton Beach*Proctor-Silex's management believes its current labor relations with both union and non-union employees are satisfactory. C. NORTH AMERICAN COAL GENERAL North American Coal is engaged in the mining and marketing of lignite for use primarily as fuel for power generation by electric utilities. Sales by North American Coal are made primarily through wholly owned project mining subsidiaries pursuant to long-term, cost plus a profit per ton contracts. The utility customers have arranged and guaranteed the financing of the development and operation of the project mining subsidiaries. There is no recourse to NACCO or North American Coal for the financing of these subsidiary mines. North American Coal also provides dragline mining services for a limerock quarry near Miami, Florida. At December 31, 1997, North American Coal's operating mines consisted of mines where the reserves were acquired and developed by North American Coal, except for the South Hallsville No. 1 Mine and the San Miguel Lignite Mine where reserves are owned by the customers of these mines. North American Coal also earns royalty income from the lease of various coal and gas properties. For further information as to the financing of the project mining subsidiaries, 6 8 see Note 10 to the Consolidated Financial Statements contained in Part IV hereof. Project mining subsidiaries accounted for 23% and 31% of NACCO's assets and liabilities, respectively, as of December 31, 1997, while their operations accounted for 10% and 30% of NACCO's revenues and operating profits, respectively, in 1997. SALES, MARKETING AND OPERATIONS The principal customers of North American Coal are electric utilities and a synfuels plant. In 1997, sales to one customer, which supplies coal to four facilities, accounted for 46% of North American Coal's revenues compared with 57% and 46% in 1996 and 1995, respectively. The distribution of sales in the last five years has been as follows:
DISTRIBUTION ------------ TOTAL TONS SOLD ELECTRIC SYNFUELS (MILLIONS) UTILITIES PLANT ---------- --------- ----- 1997 29.9 80% 20% 1996 27.6 77% 23% 1995 26.7 76% 24% 1994 27.2 76% 24% 1993 26.5 75% 25%
The contracts under which the project mining subsidiaries were organized provide that, under certain conditions of default, the customer(s) involved may elect to acquire the assets (subject to the liabilities) or the capital stock of the subsidiary, for an amount effectively equal to book value. In one case, the customer may elect to acquire the stock of the subsidiary after a specified period of time without reference to default, in exchange for certain payments on coal thereafter mined. North American Coal does not know of any conditions of default that currently exist. The location, mine type, reserve data, coal quality characteristics, customer, sales tonnage and contract expiration date for the mines operated by North American Coal in 1997 were as follows: 7 9 DEVELOPED LIGNITE MINING OPERATIONS - ----------------------------------- PROVEN AND PROBABLE RESERVES (MILLIONS OF TONS)(1) ---------------------
Committed Average Project Mining under BTUs Subsidiaries Mine Location Type of Mine Contract Uncommitted Per Pound - --------------- ---- -------- ------------ -------- ----------- --------- The Coteau Freedom Mine(2) Beulah, ND Surface Lignite 555.5 ---- 6,767 Properties Company The Falkirk Falkirk Mine(2) Underwood, ND Surface Lignite 528.7 ---- 6,200 Mining Company The Sabine Mining South Hallsville, TX Surface Lignite (4) (4) (4) Company Hallsville No. 1 Mine (2) Other - ----- San Miguel San Miguel Jourdanton, TX Surface Lignite (5) (5) (5) Lignite Mining Lignite Operations Mine Red River Mining Oxbow Mine Coushatta, LA Surface Lignite 10.8 (7) 12.4 6,722 Company (6) ------- ---- Total Developed 1,095.1 12.4 Undeveloped - ----------- Mining Operations - ----------------- North Dakota ---- ---- ---- ---- 566.5 6,428 Texas ---- ---- ---- ---- 129.1 6,208 Eastern ---- ---- ---- 65.2 67.4 12,070 Mississippi (9) ---- ---- ---- 39.8 24.7 5,300 ---- ---- Total 105.1 787.6 Undeveloped Total Developed/ 1,200.1 800.0 Undeveloped Average Sulfur Content Per 1997 Sales Project Mining Unit Tonnage Contract Subsidiaries Mine Location of Weight Customer(s) (Plant) (Millions) Expires - --------------- ---- -------- --------- ------------------- ---------- ------- The Coteau Freedom Mine(2) Beulah, ND 0.8% Dakota Coal Company 6.1 2007(3) Properties Company (Great Plains Synfuels Plant) Dakota Coal Company 5.4 2007(3) (Antelope Valley Station) Dakota Coal Company 3.5 2007(3) (Leland Olds Station) Dakota Coal Company 0.9 1999 (Stanton Station of United Power Association) The Falkirk Falkirk Mine(2) Underwood, ND 0.6% United Power Association/ 6.9 2020 Mining Company Cooperative Power Association (Coal Creek Station) The Sabine Mining South Hallsville, TX (4) Southwestern Electric 4.1 2020 Company Hallsville Power Company No. 1 Mine (2) (Henry W. Pirkey Power Plant) Other San Miguel San Miguel Jourdanton, TX (5) San Miguel Electric 2.0 2007 Lignite Mining Lignite Cooperative, Operations Mine Inc. (San Miguel Power Plant) Red River Mining Oxbow Mine Coushatta, LA 0.7% Central Louisiana 1.0 (8) 2010 Company (6) Electric Company/ Southwestern Electric Power Company (Dolet Hills Power Plant) Undeveloped Mining Operations North Dakota ---- ---- 0.7% ---- ---- ---- Texas ---- ---- 0.9% ---- ---- ---- Eastern ---- ---- 3.3% ---- ---- ---- Mississippi (9) ---- ---- 0.6% ---- ---- ---- (1) The projected extraction loss is approximately ten percent (10%) of the proven and probable reserves, except with respect to the reserves for the Eastern Undeveloped Mining Operations, in which case the extraction loss is approximately thirty percent (30%) of the proven and probable reserves. (2) The contracts for these mines require the customer to cover the cost of the ongoing replacement and upkeep of the plant and equipment of the mine. (3) Although the term of the existing coal sales agreement terminates in 2007, the term may be extended for six (6) additional periods of five years, or until 2037, at the option of The Coteau Properties Company. (4) The reserves of the South Hallsville No. 1 Mine are owned and controlled by the customer and, therefore, have not been listed in the table. (5) The reserves of the San Miguel Lignite Mine are owned and controlled by the customer and, therefore, have not been listed in the table. (6) Joint venture with Phillips Coal Company. (7) These amounts represent the total (100%) of the joint venture reserves. (8) These amounts represent the total (100%) of the 1997 joint venture tonnage. (9) These amounts represent 25% of the reserves owned and controlled by the joint venture with Phillips Coal Company.
8 10 Under terms of a lignite mining agreement entered into in 1985 with Houston Lighting & Power Company ("HL&P") (as successor to Utility Fuels, Inc.), a subsidiary of Houston Industries Incorporated, North American Coal was retained to design, develop, construct and operate the proposed Trinity Mine in the Malakoff-Cayuga reserves near Malakoff, Texas. The Trinity Mine was expected to produce from 4.5 to 6.5 million tons of lignite annually. After several delays, however, the proposed Malakoff Generating Station was canceled in July 1994. North American Coal and its wholly owned subsidiary, North American Coal Royalty Company ("Royalty Company"), have received certain management fees, minimum royalties and other payments in connection with the future development of the Trinity Mine project. In December 1992, the Lignite Lease and Sublease Agreement under which the minimum royalties were received was amended. The parties agreed that, in light of the delayed development of this mining project, effective January 1, 1993 HL&P was no longer obligated to pay minimum royalties to Royalty Company. Termination of this obligation reduces North American Coal's annual net income approximately $2.4 million, after tax. Under the original agreement, these minimum royalty payments would have terminated at the end of 2005. Under the lignite mining agreement with HL&P, North American Coal had been receiving annual management fees. HL&P accelerated payment of the final management fee of $2.6 million, after-tax, into 1995. In December 1995, HL&P also terminated the lignite mining agreement and North American Coal will no longer receive such management fees. Termination of this obligation reduces North American Coal's annual net income approximately $5.3 million, after-tax, compared with 1995 levels. GOVERNMENT REGULATION North American Coal, in common with other coal producers, continues to be subject to Federal and state health, safety and environmental regulations. The 1998 expenditures which will be required for compliance with the provisions of governmental regulations, including mined land reclamation and other air and water pollution abatement requirements, are estimated at $5.9 million for certain closed mines and are included in the caption "Self-Insurance Reserves and Other" in NACCO's Consolidated Financial Statements in this Annual Report on Form 10-K. The active operations are required to make certain additional capital expenditures to comply with such governmental regulations, which expenditures will be recovered under the terms of the coal sales agreements with the utility customers. North American Coal's management believes that the Clean Air Act Amendments, which became effective in 1990, will not have a material adverse effect on its current operations, because substantially all of the power generating facilities operated or supplied by North American Coal's customers meet or exceed the requirements of the Clean Air Act. The Federal Energy Regulatory Commission ("FERC") issued Order 636, effective in May 1992, which requires gas pipeline companies to separate or "unbundle" their gas sales and gas transportation functions. Effectively, order 636 forced pipelines to abandon their traditional merchant function meaning that the nation's natural gas pipeline companies, including the four which purchase gas produced by the Great Plains Synfuels Plant ("the Synfuels Plant"), which is supplied by the company's Coteau mining subsidiary, have much less need for gas supply under contract and are actively seeking to restructure or terminate many supply contracts. In 1994, the four pipeline companies that purchase gas from the Synfuels Plant each reached a tentative settlement agreement with the plant's operator, Dakota Gasification Company ("DGC"), and the U.S. Department of Energy ("DOE") over the dispute regarding the pipeline companies' gas purchase contracts. The FERC approved these settlement agreements by order of December 18, 1996. No requests for a rehearing were filed meaning the order became final and unappealable. The settlements resolve all pricing disputes for past periods and establish a new pricing formula for future gas sales. COMPETITION The coal industry competes with other sources of energy, particularly oil, gas, hydro-electric power and nuclear power. Among the factors that affect competition are the price and availability of oil and natural gas, environmental considerations, the time and expenditures required to develop new energy sources, the cost of transportation, the cost of compliance with governmental regulation of operations, the impact of Federal and State energy policies and the current trend toward deregulation of energy markets. The ability of North American Coal to market and develop its reserves will depend upon the interaction of these factors. There is no official source of information on the subject, but North American Coal believes that it is the ninth largest commercial coal producer in the United States. EMPLOYEES As of February 28, 1998, North American Coal had approximately 990 employees. 9 11 D. KITCHEN COLLECTION Kitchen Collection is a national specialty retailer of kitchenware, small electric appliances and related accessories which operated 143 retail stores as of February 28, 1998. Stores are located primarily in factory outlet complexes that feature merchandise of highly recognizable name-brand manufacturers. Kitchen Collection's product mix includes a broad line of appliances from leading manufacturers, including Hamilton Beach*Proctor-Silex. As the outlet channel of the retail industry is approaching maturity, the management of Kitchen Collection continues to explore alternate areas of growth and diversification. For the past several years, Kitchen Collection has been testing alternative store formats both within the outlet industry and the more traditional retail environments. Not all of these formats have met the company's rigorous financial performance standards. Kitchen Collection continues to explore alternate channels of distribution, including distribution through the Internet. Kitchen Collection accounted for 1% of NACCO's assets and liabilities as of December 31, 1997, while its operations accounted for 3% and 2% of NACCO's revenues and operating profits, respectively, in 1997. ITEM 2. PROPERTIES A. NACCO NACCO currently leases its corporate headquarters building in Mayfield Heights, Ohio. B. NMHG The following table summarizes certain information with respect to the principal manufacturing, distribution and office facilities owned or leased by NMHG.
LOCATION OWNED LEASED FUNCTION/PRINCIPAL PRODUCTS - -------- ----- ------ --------------------------- Basingstoke, England X Hyster and Yale forklift truck marketing and sales operations for Europe, the Middle East and Africa Berea, Kentucky X Manufacture of forklift trucks Craigavon, Northern Ireland X Manufacture of forklift trucks Danville, Illinois X Manufacture of forklift trucks, components and service parts Danville, Illinois X Distribution of service parts for both Hyster and Yale forklift trucks Danville, Illinois X Hyster forklift truck marketing and sales operations for NMHG Americas division Flemington, New Jersey X Yale forklift truck marketing and sales operations for NMHG Americas division and certain NMHG engineering operations Greenville, North Carolina X NMHG Americas division headquarters; manufacture of forklift trucks Irvine, Scotland X NMHG European division headquarters; manufacture of forklift trucks Lenoir, North Carolina X Manufacture of component parts for forklift trucks Masate, Italy X Manufacture of forklift trucks Modena, Italy X Manufacture of forklift trucks Nijmegen, The Netherlands X Manufacture of forklift trucks and component parts; distribution of service parts for forklift trucks Obu, Japan X S-N headquarters; manufacture of forklift trucks and component parts; distribution of service parts for forklift trucks
10 12
LOCATION OWNED LEASED FUNCTION/PRINCIPAL PRODUCTS - -------- ----- ------ --------------------------- Portland, Oregon X Technical center for testing of prototype equipment and component parts Portland, Oregon X NMHG headquarters Portland, Oregon X Manufacture of production tooling and prototype units Saltillo, Mexico X Land acquired for construction of manufacturing facility for component parts of forklift trucks Sao Paulo, Brazil X Assembly of forklift trucks; distribution of service parts for forklift trucks Shanghai, China X Land acquired by Shanghai Hyster Joint Venture for construction of manufacturing facility for forklift trucks Sulligent, Alabama X Manufacture of component parts for forklift trucks Sydney, Australia X Distribution of service parts for forklift trucks and staff operations for NMHG Asia-Pacific division
C. HAMILTON BEACH*PROCTOR-SILEX The following table summarizes certain information with respect to the principal manufacturing, distribution and office facilities owned or leased by Hamilton Beach*Proctor-Silex.
LOCATION OWNED LEASED FUNCTION/PRINCIPAL PRODUCTS - -------- ----- ------ --------------------------- Collierville, Tennessee X Distribution center El Paso, Texas X Distribution center Glen Allen, Virginia X Corporate headquarters Juarez, Chihuahua, Mexico X Assembly of heat driven products (two plants); plastic molding facility (one plant) Mt. Airy, North Carolina X Manufacture of heat driven products Picton, Ontario, Canada X Distribution center Southern Pines, North Carolina X Manufacture of iron components; service center for customer returns; catalog sales center; parts distribution center Toronto, Ontario, Canada X Proctor-Silex Canada sales and administration headquarters Washington, North Carolina X Distribution and warranty center; manufacture of motor driven products; plastic molding facility Saltillo, Mexico X Manufacture of heat driven and motor products and plastic molding facility
Sales offices are also leased in several cities in the United States and Canada. D. NORTH AMERICAN COAL North American Coal's proven and probable coal reserves and deposits (owned in fee or held under leases which generally remain in effect until exhaustion of the reserves if mining is in progress) are estimated at approximately 2.0 billion tons, approximately 83% of which are lignite deposits in North Dakota. Reserves are estimates of quantities of coal, made by North American Coal's geological and engineering staff, that are considered mineable in the future using existing operating methods. Developed reserves are those which have been allocated to mines which are in operation; all 11 13 other reserves are classified as undeveloped. Information concerning mine type, reserve data and coal quality characteristics for North American Coal's properties are set forth on the table on page 8 under "Item 1. Business -- C. North American Coal -- Sales, Marketing and Operations." E. KITCHEN COLLECTION Kitchen Collection currently leases its corporate headquarters building, a warehouse/distribution facility and a retail store in Chillicothe, Ohio. Kitchen Collection leases the remainder of its retail stores. A typical store is approximately 3,000 square feet. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries is a party to any material pending legal proceeding other than ordinary routine litigation incidental to its respective business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The information under this Item is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K. There exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was elected. Each executive officer serves until his successor is elected and qualified. The table on the following pages sets forth the name, age, current position and principal occupation and employment during the past five years of the Company's executive officers. 12 14 EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE CURRENT POSITION OTHER POSITIONS - ---- --- ---------------- --------------- Alfred M. Rankin, Jr. 56 Chairman, President and Chief From prior to 1993 to May 1994, President Executive Officer of NACCO (since May and Chief Executive Officer of NACCO. 1994) Charles A. Bittenbender 48 Vice President, General Counsel and Secretary of NACCO (since prior to 1993) Kenneth C. Schilling 38 Vice President and Controller of NACCO From June 1996 to May 1997, Controller of (since May 1997) NACCO. From July 1995 to May 1996, Manager of Tax and Budgeting of NACCO. From prior to 1993 to June 1995, Manager of Tax of NACCO. J.C. Butler, Jr. 37 Vice President - Corporate Development From June 1996 to May 1997, Manager of and Treasurer of NACCO (since May 1997) Corporate Development and Treasurer of NACCO. From May 1995 to May 1996, Manager of Corporate Development of NACCO. From prior to 1993 to 1995, Associate at McFarland Dewey & Co. (investment banking). Lauren E. Miller 43 Vice President - Counsulting Services From January 1996 to May 1997, Director of of NACCO (since May 1997) Internal Counsulting of NACCO. From prior to 1993 to December 1995, Manager of Strategy Development of NACCO.
13 15 PRINCIPAL OFFICERS OF THE COMPANY'S SUBSIDIARIES A. NMHG
NAME AGE CURRENT POSITION OTHER POSITIONS - ---- --- ---------------- --------------- Reginald R. Eklund 57 President and Chief Executive Officer From August 1993 to September 1993, Vice of NMHG (since prior to 1993) President of Hyster and Yale. From prior to 1993 to August 1993, President and Chief Executive Officer of Hyster-Yale. From prior to 1993 to August 1993, President and Chief Executive Officer of Yale. Julie C. Hui 41 Controller of NMHG (since January 1995) From prior to 1993 to January 1995, Controller, Burr Brown Corporation (manufacturer of micro electronics and systems products). Geoffrey D. Lewis 40 Vice President, General Counsel and From prior to 1993 to September 1995, Secretary of NMHG (since September 1995) Senior Vice President, General Counsel and Corporate Secretary for American Health Properties, Inc. (health care facilities). Jeffrey C. Mattern 45 Treasurer of NMHG (since prior to 1993) William C. Maxwell 51 Vice President, Finance and Chief From March 1993 to August 1996, Vice Financial Officer of NMHG (since August President Finance - Europe of NMHG. From 1996) prior to 1993 to February 1993, Director of Business Planning of NMHG. Frank G. Muller 56 Vice President, President - Americas From February 1993 to December 1993, Vice for NMHG (since May 1993) President of Hyster-Yale. From prior to 1993 to May 1993, Vice President, Manufacturing, Americas for NMHG. Victoria L. Rickey 45 Vice President, Managing Director, NMHG From 1993 to January 1995, Senior Vice Europe (since January 1995) President International Business Group, J.I. Case (manufacturer of agricultural and construction equipment). From prior to 1993 to 1993, Vice President, Agricultural Equipment of J.I. Case. Edward W. Ryan 59 Vice President, Marketing and From January 1994 to February 1995, Vice Counterbalanced Trucks Worldwide (since President, Yale Materials Handling February 1995) and President Corporation. From prior to 1993 to Asia-Pacific and China (since November February 1995, Vice President, Yale 1996) Marketing. Graham D. Tribe 55 Vice President, Managing Director, NMHG From prior to 1993 to May 1994, Managing Asia-Pacific (since May 1994) Director, Hyster Australia Pty. Ltd.
14 16 PRINCIPAL OFFICERS OF THE COMPANY'S SUBSIDIARIES B. HAMILTON BEACH*PROCTOR-SILEX
NAME AGE CURRENT POSITION OTHER POSITIONS - ---- --- ---------------- --------------- Richard E. Posey 51 President and Chief Executive Officer From January 1993 to June 1994, Executive of Hamilton Beach*Proctor-Silex (since Vice President, Consumer Products, North September 1995) America, S.C. Johnson & Sons, Inc. (manufacturer of consumer products). Charles B. Hoyt 50 Senior Vice President - Finance and From prior to 1993 to January 1997, Vice Chief Financial Officer of Hamilton President - Finance and Chief Financial Beach*Proctor-Silex (since January 1997) Officer of Hamilton Beach*Proctor-Silex. Clark S. Leslie 64 Senior Vice President - Operations of From March 1996 to December 1996, Vice Hamilton Beach*Proctor-Silex (since President - Operations of Hamilton January 1997) Beach*Proctor-Silex. From December 1993 to March 1996, General Manager, Washington, N.C. plant, Hamilton Beach*Proctor-Silex. From prior to 1993 to December 1993, Senior Vice President of Operations, Esselt Pendaflex Corp. (manufacturer of office supplies). Michael J. Morecroft 55 Senior Vice President, Engineering From prior to 1993 to December 1996, Vice /Product Development of Hamilton President, Engineering/Product Development Beach*Proctor-Silex (since January 1997) of Hamilton Beach*Proctor-Silex. Judith B. McBee 50 Senior Vice President - Marketing of From October 1994 to December 1996, Hamilton Beach*Proctor-Silex (since Executive Vice President - Marketing of January 1997) Hamilton Beach*Proctor-Silex. From prior to 1993 to September 1994, Executive Vice President - Marketing/Sales of Hamilton Beach*Proctor Silex. Paul C. Smith 51 Senior Vice President - Sales and From September 1994 to January 1996, International of Hamilton Beach*Proctor Senior Vice President - Sales of Hamilton Silex (since January 1996) Beach*Proctor-Silex. From prior to 1993 to September 1994, Vice President and General Manager, Consumer Markets Division, Fuji Photo Film U.S.A. (manufacturer of photographic film). George P. Manson, Jr. 44 Vice President, General Counsel and From March 1995 to July 1996, Corporate Secretary of Hamilton Counsel of American Home Products Corp. Beach*Proctor-Silex (since July 1996) (health care and consumer products manufacturer). From February 1994 to January 1995, Assistant General Counsel, A.T. Massey Coal Company (mining company). From prior to 1993 to December 1993, Corporate Counsel of American Home Products Corp. James H. Taylor 40 Vice President and Treasurer of Hamilton Beach*Proctor-Silex (since prior to 1993)
15 17 PRINCIPAL OFFICERS OF THE COMPANY'S SUBSIDIARIES C. NORTH AMERICAN COAL
NAME AGE CURRENT POSITION OTHER POSITIONS - ---- --- ---------------- --------------- Clifford R. Miercort 58 President and Chief Executive Officer of North American Coal (since prior to 1993) Herschell A. Cashion 55 Senior Vice President - Business From prior to 1993 to August 1994, Vice Development of North American Coal President - Business Development of North (since August 1994) American Coal. Charles B. Friley 56 Vice President and Chief Financial From prior to 1993 to October 1994, Senior Officer of North American Coal (since Vice President of Phillips Alaska Natural February 1995) Gas Company. Thomas A. Koza 51 Vice President - Law and Administration of North American Coal; Secretary of North American Coal (since prior to 1993) K. Donald Grischow 50 Controller and Treasurer of North American Coal (since prior to 1993)
16 18 PRINCIPAL OFFICERS OF THE COMPANY'S SUBSIDIARIES D. KITCHEN COLLECTION
NAME AGE CURRENT POSITION OTHER POSITIONS - ---- --- ---------------- --------------- Randall D. Lynch 50 President and Chief Executive Officer of Kitchen Collection (since prior to 1993) Randolph J. Gawelek 50 Executive Vice President and Secretary of Kitchen Collection (since prior to 1993)
17 19 PART II ITEM 5. MARKET FOR NACCO INDUSTRIES, INC. COMMON STOCK AND RELATED SECURITY HOLDERS' MATTERS NACCO Industries, Inc. Class A common stock is traded on the New York Stock Exchange under the ticker symbol NC. Because of transfer restrictions, no trading market has developed, or is expected to develop, for the Company's Class B common stock. The Class B common stock is convertible into Class A common stock on a one-for-one basis. The high and low market prices for the Class A common stock and dividends per share for both classes of stock for each quarter during the past two years are presented in the table below:
1997 ---- Sales Price ----------- Cash High Low Dividend ------- ------ ----------- First quarter $ 55.38 $49.13 18.75(cents) Second quarter $ 56.69 $44.38 19.50(cents) Third quarter $119.50 $55.75 19.50(cents) Fourth quarter $127.00 $96.28 19.50(cents)
1996 ---- Sales Price ----------- Cash High Low Dividend ------- ------ ----------- First quarter $59.88 $51.50 18.00(cents) Second quarter $64.00 $54.63 18.75(cents) Third quarter $56.00 $47.75 18.75(cents) Fourth quarter $55.00 $43.13 18.75(cents)
At December 31, 1997, there were approximately 600 holders of record of Class A common stock and 400 holders of record of Class B common stock. On February 10, 1998, the Company issued 9,657 shares of Class A common stock to certain employees of the Company pursuant to the NACCO Industries, Inc. Executive Long-Term Incentive Compensation Plan (the "Plan"). These shares are fully vested but are subject to a ten year restriction on transfer. The Plan is further described in footnote 1 to the table "Item 1. Election of Directors - Long-Term Incentive Plans" in the 1998 Proxy Statement. 18 20 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA NACCO Industries, Inc. and Subsidiaries
Year Ended December 31 ---------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In millions, except per share and employee data) Total revenues $2,246.9 $2,273.2 $2,204.5 $1,864.9 $1,549.4 Operating profit $ 132.0 $ 131.2 $ 148.7 $ 129.6 $ 88.5 Income before extraordinary items $ 61.8 $ 50.6 $ 65.5 $ 45.3 $ 11.6 Extraordinary items: Extraordinary gain, net-of-tax 32.3 Extraordinary charges, net-of-tax (3.4) (3.2) (3.3) -------- -------- -------- -------- -------- Net income (loss) $ 61.8 $ 50.6 $ 94.4 $ 42.1 $ 8.3 ======== ======== ======== ======== ======== Total assets $1,729.1 $1,708.1 $1,833.8 $1,694.3 $1,642.5 Long-term debt $ 230.2 $ 333.3 $ 320.2 $ 286.7 $ 357.8 Stockholders' equity $ 425.1 $ 379.3 $ 370.1 $ 279.4 $ 235.6 Basic earnings per share: Income before extraordinary items $ 7.56 $ 5.67 $ 7.31 $ 5.06 $ 1.30 Extraordinary items: Extraordinary gain, net-of-tax 3.61 Extraordinary charges, net-of-tax (0.38) (.36) (.37) -------- -------- -------- -------- -------- Net income (loss) $ 7.56 $ 5.67 $ 10.54 $ 4.70 $ .93 ======== ======== ======== ========= ======== Diluted earnings per share: Income before extraordinary items $ 7.55 $ 5.67 $ 7.30 $ 5.05 $ 1.30 Extraordinary items: Extraordinary gain, net-of-tax 3.60 Extraordinary charges, net-of-tax (0.38) (.35) (.37) -------- -------- -------- -------- -------- Net income (loss) $ 7.55 $ 5.67 $ 10.52 $ 4.70 $ .93 ======== ======== ======== ======== ======== Cash dividends $ 0.773 $ 0.743 $ 0.710 $ 0.675 $ 0.655 Market value at December 31 $ 107.19 $ 53.50 $ 55.50 $ 48.38 $ 51.50 Stockholders' equity $ 52.13 $ 46.34 $ 41.28 $ 31.21 $ 26.35 Average shares outstanding 8.171 8.920 8.963 8.948 8.938 Total employees 13,400 11,800 12,300 11,100 10,900
19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) FINANCIAL SUMMARY NACCO Industries, Inc. ("NACCO," the parent company) has four operating subsidiaries (collectively, the "Company"): NACCO Materials Handling Group, Inc. ("NMHG"), Hamilton Beach/Proctor-Silex, Inc. ("HB*PS"), The North American Coal Corporation ("NACoal") and The Kitchen Collection, Inc. ("KCI"). Consolidated net income was $61.8 million, or $7.56 basic earnings per share, in 1997, $50.6 million, or $5.67 basic earnings per share, in 1996, and $94.4 million, or $10.54 basic earnings per share, in 1995. Included in the 1995 net income are extraordinary items, which affect the year-to-year comparison. An extraordinary gain of $32.3 million, net-of-tax, or $3.61 basic earnings per share, was recognized as a result of an adjustment to the obligation to the United Mine Workers of America Combined Benefit Fund ("UMWA"). In addition, an extraordinary charge of $3.4 million, net-of-tax, or $0.38 basic earnings per share, was recognized in 1995 to reflect retirement of debt and debt restructuring costs at NMHG. Income before the effect of these extraordinary items was $65.5 million, or $7.31 basic earnings per share, in 1995. See Note 3 to the Consolidated Financial Statements contained in Part IV hereof. The following schedule identifies the components of the changes in consolidated revenues, operating profit and net income for 1997 compared with 1996:
Operating Net Revenues Profit Income ------------------ ------------------ ------------------ 1996 $ 2,273.2 $ 131.2 $ 50.6 Increase (decrease) in 1997 from: NMHG (Excluding special charges) (72.1) 14.3 14.8 HB*PS 28.0 (1.0) (.8) NACoal 13.8 3.6 (1.3) KCI 4.1 (.3) (.2) NACCO & Other (.1) .5 (.1) Difference between effective and statutory tax rates (Excluding special credit) -- -- (.5) Minority interest -- -- .5 ------------------ ------------------ ------------------ $ 2,246.9 $ 148.3 $ 63.0 Special charge: Restructuring (8.0) (5.2) Special charge: Employee relocation (8.3) (5.4) Special credit: Tax adjustments 9.4 ------------------ ------------------ ------------------ 1997 $ 2,246.9 $ 132.0 $ 61.8 ================== ================== ==================
The special charges and credits noted above, which were recorded in the fourth quarter of 1997, materially affect year-to-year comparability and are discussed below. 20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) FINANCIAL SUMMARY--Continued During the fourth quarter of 1997, the board of directors approved a plan to restructure certain operating activities and to relocate certain employees at NMHG. In accordance with this plan, NMHG recognized special charges of $16.3 million. The planned restructuring activities, which the Company began to implement in December 1997, include the relocation and consolidation of certain engineering and marketing functions with the objective of improving customer service, raising productivity and thereby reducing costs. The Consolidated Statements of Income include a Restructuring charge, which was recorded in the fourth quarter of 1997, of $8.0 million ($4.8 million after effective tax provision, or $0.59 per share) and represents an accrual for employee severance costs and costs to terminate certain facility leases. In addition, Selling, general and administrative expenses in the 1997 Consolidated Statements of Income include a charge of $8.3 million ($5.0 million after effective tax provision, or $0.61 per share) arising from commitments to provide relocation benefits to certain employees. See also Note 4 to the Consolidated Financial Statements for additional discussion of these special charges. Restructuring activities and employee relocations are expected to be completed by the end of 1998, and no material incremental costs resulting from these activities are anticipated in future periods. In 1999, it is anticipated that cost savings will be approximately $14.0 million ($8.4 million after effective tax provision). Also during the fourth quarter of 1997, NMHG recognized several tax adjustments that affect year-to-year comparability. Management identified certain future business opportunities and financing alternatives and concluded that the earnings of its foreign subsidiaries will remain invested offshore for the foreseeable future. This conclusion resulted in a fourth quarter credit to net income of $17.4 million, representing the reversal of deferred taxes on unremitted foreign earnings of $15.3 million provided prior to 1997 and $2.1 million provided in the first three quarters of 1997. In addition, NMHG recognized a valuation allowance of $5.9 million against certain deferred tax assets. See Note 17 to the Consolidated Financial Statements for a further discussion of these items. The net effect of these tax adjustments of $9.4 million (or $1.15 per share) reduced NACCO's consolidated effective tax rate by 11 percent and reduced NMHG's effective tax rate by 18 percent in 1997. SEGMENT INFORMATION NACCO's four subsidiaries function in distinct business environments, and results of operations and financial condition are, therefore, discussed at the subsidiary level. Results by segment are summarized in Note 19 to the Consolidated Financial Statements. 21 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO MATERIALS HANDLING GROUP, INC. NMHG, 98 percent-owned by NACCO, designs, manufactures and markets forklift trucks and related service parts under the Hyster(R) and Yale(R) brand names. FINANCIAL REVIEW The results of operations for NMHG were as follows for the year ended December 31:
1997 1996 1995 -------------- -------------- -------------- Revenues Americas $ 1,015.4 $ 1,015.5 $ 1,002.7 Europe, Africa and Middle East 398.9 451.8 422.3 Asia - Pacific 73.7 92.8 85.1 -------------- -------------- -------------- $ 1,488.0 $ 1,560.1 $ 1,510.1 ============== ============== ============== Operating profit (loss) Americas $ 52.3 $ 43.7 $ 48.8 Europe, Africa and Middle East 22.6 32.5 34.4 Asia - Pacific (4.4) (3.7) .2 -------------- -------------- -------------- $ 70.5 $ 72.5 $ 83.4 ============== ============== ============== Operating profit (loss) excluding goodwill amortization Americas $ 60.2 $ 51.6 $ 56.5 Europe, Africa and Middle East 26.2 35.9 37.2 Asia - Pacific (4.2) (3.5) .5 -------------- -------------- -------------- $ 82.2 $ 84.0 $ 94.2 ============== ============== ============== Net income before extraordinary charges $ 38.7 $ 26.4 $ 36.9 Extraordinary charges, net-of-tax -- -- (3.4) -------------- -------------- -------------- Net income $ 38.7 $ 26.4 $ 33.5 ============== ============== ==============
22 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO MATERIALS HANDLING GROUP, INC.--Continued FINANCIAL REVIEW--Continued 1997 COMPARED WITH 1996 The following schedule identifies the components of the changes in revenues, operating profit and net income for 1997 compared with 1996:
Operating Net Revenues Profit Income -------------- -------------- ----------------- 1996 $ 1,560.1 $ 72.5 $ 26.4 Increase (decrease) in 1997 from: Unit volume (71.2) (16.0) (10.4) Sales mix 8.3 11.9 7.7 Average sales price 1.5 1.5 1.0 Service parts 14.5 5.5 3.6 Foreign currency (25.2) (3.6) (2.4) Manufacturing cost -- 18.4 11.9 Other operating expense -- (3.4) (2.2) Other income and expense -- -- 5.6 Difference between effective and statutory tax rates -- -- (1.3) -------------- -------------- -------------- $ 1.488.0 $ 86.8 $ 39.9 Restructuring charge -- (8.0) (5.2) Employee relocation charge -- (8.3) (5.4) Tax adjustments -- -- 9.4 -------------- -------------- -------------- 1997 $ 1,488.0 $ 70.5 $ 38.7 ============== ============== ==============
While revenues in 1997 decreased 4.6 percent, net income increased 46.6 percent. The decrease in revenues can be attributed to a decline in worldwide unit volume from 69,389 units in 1996 to 66,833 units in 1997. Unit volume declined significantly during the first quarter of 1997 as compared with the first quarter of 1996, while unit volume during the last nine months of 1997 was comparable to the same period of 1996. The decrease in unit volume in the first quarter of 1997 was driven by decreased demand for forklift trucks during the fourth quarter of 1996 and the first quarter of 1997, resulting in a decline in production rates, especially during the first quarter of 1997. In addition to the decrease in unit volume, a slight decline in the European market size, coupled with adverse currency impacts on pricing, contributed to NMHG's decline in revenue. A decrease in the Asia-Pacific market size and a decline in NMHG's market share in that region due to intense competition also contributed to the drop in revenue. Although revenues declined in 1997, worldwide backlog increased to 22,100 units at December 31, 1997 from 11,700 units at December 31, 1996. The strengthening of the British pound sterling during 1997 had an adverse impact on NMHG's revenues, operating profit and net income. This impact on operating profit and net income was partially offset, however, by significant savings from material purchases denominated in Japanese yen, which weakened against the U.S. dollar. 23 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO MATERIALS HANDLING GROUP, INC.--Continued FINANCIAL REVIEW--Continued Excluding the effects of the restructuring charge, the employee relocation provision and the tax adjustments discussed previously, operating profit and net income increased as compared with 1996. This increase primarily resulted from improved manufacturing efficiencies, savings from process re-engineering, gains from strategic supplier alliances, favorable sales mix and increased parts sales. In addition, net income increased due to lower interest expense as a result of reduced borrowings, reflecting strong operating cash flows and the impact of the sale of certain accounts receivable. 1996 COMPARED WITH 1995 The following schedule identifies the components of the changes in revenues, operating profit and net income for 1996 compared with 1995:
Operating Net Revenues Profit Income -------------- -------------- -------------- 1995 $ 1,510.1 $ 83.4 $ 33.5 Increase (decrease) in 1996 from: Unit volume (14.4) (2.4) (1.6) Sales mix 43.4 5.9 3.8 Average sales price (4.0) (4.0) (2.6) Service parts 26.5 11.6 7.5 Foreign currency (1.5) 9.6 6.2 Manufacturing cost -- (19.7) (12.5) Other operating expense -- (11.9) (7.7) Other income and expense -- -- (1.5) Difference between effective and statutory tax rates -- -- (2.1) Extraordinary charges -- -- 3.4 -------------- -------------- -------------- 1996 $ 1,560.1 $ 72.5 $ 26.4 ============== ============== ==============
While the worldwide market size of forklift trucks declined approximately 3 percent during 1996, NMHG obtained a slightly improved market share in 1996 over 1995. Unit volume in the Americas declined 5 percent to 47,628 units due to the decline in market size and dealer inventory reductions. This decline was partially offset by increased volume in Europe of 12 percent to 18,702 units and in Asia-Pacific of 7 percent to 3,059 units. Late 1995 and mid 1996 acquisitions of European warehouse equipment businesses principally contributed to the unit growth in Europe. Product sales mix favorably impacted revenues due to increased sales of higher value product. Intensified pricing pressures in the Americas due to decreased industry demand, slightly offset by price increases implemented in Europe, caused the unfavorable pricing impact. The improvement in service parts, concentrated in the Americas, resulted from NMHG's increasing lift truck population. Operating profit was positively affected by currency as the strength of the U.S. dollar against the Japanese yen reduced the cost of Japanese sourced goods. Manufacturing costs increased due to lower plant utilization and labor inefficiencies resulting from the decline in market demand and due to increased warranty and inventory reserves. Higher marketing costs expended to generate sales volume and operating expenses of recently acquired businesses also contributed to the decline in operating profit and net income. 24 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO MATERIALS HANDLING GROUP, INC.--Continued FINANCIAL REVIEW--Continued OTHER INCOME, EXPENSE AND INCOME TAXES: The components of other income (expense) and the effective tax rate are as follows for the year ended December 31:
1997 1996 1995 -------------- -------------- -------------- Interest expense $ (14.5) $ (25.0) $ (25.9) Other-net (3.7) (1.5) .7 -------------- -------------- -------------- $ (18.2) $ (26.5) $ (25.2) ============== ============== ============== Effective tax rate 26.0% 42.5% 36.8%
The decline in interest expense in 1997 as compared with 1996 and 1995 resulted from both a decrease in the effective interest rate and reduced average borrowings during 1997. The reduction in the average borrowings was facilitated by improved cash flow from operations and proceeds from the sale of certain accounts receivable. Other-net consists primarily of equity in the earnings of unconsolidated affiliates, including Sumitomo-NACCO Materials Handling Group ("S-N"), a 50 percent-owned joint venture, and gains and losses on the sale of assets, including receivables. In 1997, other-net included income of $0.4 million from S-N, compared with income of $1.5 million in 1996 and $2.2 million in 1995. Discounts on the sale of receivables, including domestic and international, were $4.3 million in 1997, $1.8 million in 1996 and $1.6 million in 1995, reflecting the 1997 addition of the domestic sale of receivables and an increase in the amount of international receivables sold in 1997. As noted previously, the net effect of an adjustment to reverse the unremitted foreign earnings reserve and the recognition of a valuation allowance against certain deferred tax assets resulted in an 18 percent reduction in the effective tax rate in 1997. Excluding these adjustments, the increase in the 1997 effective tax rate as compared with 1996 and 1995 primarily resulted from non-recurring favorable income tax adjustments recognized in 1996 and 1995 due to the resolution of tax issues from prior years. EXTRAORDINARY CHARGES: In 1995, NMHG recognized an extraordinary charge of $3.4 million due to the write-off of premiums and unamortized financing fees associated with the early retirement of certain debt agreements and debentures. See Note 3 to the Consolidated Financial Statements for further discussion. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, NMHG had available $181.4 million of its $350.0 million revolving credit facility. The expiration date of this revolving credit facility, which is currently June 2002, may be extended, on an annual basis, for one additional year upon the mutual consent of NMHG and the bank group. In addition, the NMHG facility has performance-based pricing which sets interest rates based upon the achievement of certain financial performance targets. NMHG also has separate credit facilities totaling $38.5 million, of which $27.6 million was available at December 31, 1997. NMHG believes it can meet all of its current and long-term commitments and operating needs from operating cash flows and funds available under revolving credit agreements. 25 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO MATERIALS HANDLING GROUP, INC.--Continued LIQUIDITY AND CAPITAL RESOURCES.--Continued Planned capital expenditures for property, plant and equipment in 1998 are anticipated to be approximately $78.1 million, compared with capital expenditures of $25.3 million in 1997 and $42.3 million in 1996. The increase in the anticipated 1998 capital expenditures results from significant capital projects to be undertaken, including: office additions related to the restructuring program, a plant expansion in Europe, investments in manufacturing facilities in Mexico and China, information systems and tooling for new products. Capital for these expenditures has been and is expected to be provided primarily by internally generated funds and short-term borrowings. In the second quarter of 1997, NMHG entered into an agreement with a financial institution to sell an undivided percentage ownership interest in certain eligible domestic accounts receivable, on a revolving basis, up to a maximum of $60.0 million. The expiration date of this agreement, which is currently April 1998, may be extended for one-year periods through April 2001, upon the mutual consent of both parties. As of December 31, 1997, $18.6 million of NMHG's trade receivables were sold in accordance with this agreement and are reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, net. The proceeds from the sale of receivables were used to reduce the level of borrowings under NMHG's revolving credit facility. Discounts and other transaction losses incurred in 1997 were approximately $1.4 million and have been reflected in other - net in the Consolidated Statements of Income. In connection with this transaction, NMHG's revolving credit facility was amended to provide that the total credit available at any point in time under this $350 million facility will be reduced by the amount of domestic receivables sold at such time. As of December 31, 1997, $33.5 million of trade accounts receivable have been sold pursuant to the agreement discussed above and pre-existing agreements to sell trade accounts receivable in Europe and Australia. This compares with $56.3 million of trade receivables sold as of December 31, 1996. 26 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO MATERIALS HANDLING GROUP, INC.--Continued LIQUIDITY AND CAPITAL RESOURCES - Continued NMHG's capital structure is presented below:
DECEMBER 31 DECEMBER 31 1997 1996 ----------------- ----------------- Total net tangible assets $ 188.4 $ 267.9 Goodwill at cost 447.7 443.6 ----------------- ----------------- Net assets before goodwill amortization 636.1 711.5 Accumulated goodwill amortization (94.4) (82.8) Total debt (156.8) (258.9) ----------------- ----------------- Stockholders' equity $ 384.9 $ 369.8 ================= ================= Debt to total capitalization 29% 41%
The decrease in net tangible assets of $79.5 million primarily results from a $25.7 million decline in cash and cash equivalents, a $9.5 million reduction of inventory, a $42.8 million increase in accounts payable and a $40.6 million increase in other current liabilities. These items are partially offset by a $16.9 million increase in accounts receivable, a $10.0 million addition to net current deferred tax assets and a $12.5 million decrease in net non-current deferred tax liabilities. The decrease in cash and cash equivalents results from the repayment of $102.1 million of debt, the expenditure of $36.9 million for capital improvements and a business acquisition and the payment of a $15.3 million dividend to stockholders, partially offset by cash generated from operations of $126.9 million. The decline in inventory reflects a reduction in the number of days supply on hand and the increase in accounts payable reflects an increase in the volume of inventory purchases. Other current liabilities have increased primarily due to the 1997 restructuring and employee relocation reserves, an increase in accrued warranty obligations and an increase in other employee wage and benefit accruals. The change in accounts receivable reflects an increase in the volume of fourth quarter 1997 sales as compared with 1996 and a reduction in the amount of receivables sold. The increase in net current deferred tax assets relates to provisions for increased accruals and reserves, including the restructuring and employee relocation reserves. The net non-current deferred tax liability decreased due to the reversal of the reserve for unremitted foreign earnings, as previously discussed. Debt levels declined due to an improvement in domestic cash flow and proceeds from the sale of accounts receivable which were used to retire debt. 27 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) HAMILTON BEACH*PROCTOR-SILEX, INC. HB*PS, wholly owned by NACCO, is a leading manufacturer of small electric appliances. In 1996, NACCO purchased the remaining 20 percent minority interest in HB*PS from the minority stockholder. The housewares business is seasonal. A majority of revenues and operating profit is earned in the second half of the year, when sales of small electric appliances increase significantly for the fall holiday selling season. FINANCIAL REVIEW The results of operations for HB*PS were as follows for the year ended December 31:
1997 1996 1995 -------------- -------------- -------------- Revenues $ 423.1 $ 395.1 $ 381.4 Operating profit $ 23.3 $ 24.3 $ 25.0 Operating profit excluding goodwill amortization $ 27.3 $ 28.1 $ 27.8 Net income $ 9.2 $ 10.7 $ 11.8
1997 COMPARED WITH 1996 The following schedule identifies the components of the changes in revenues, operating profit and net income for 1997 compared with 1996:
Operating Net Revenues Profit Income -------------- -------------- -------------- 1996 $ 395.1 $ 24.3 $ 10.7 Increase (decrease) in 1997 from: Unit volume and sales mix 40.7 13.1 8.5 Average sales price (12.7) (12.7) (8.3) Manufacturing cost -- .4 .3 Other operating expense -- (1.8) (1.1) Other income and expense -- -- (.2) Difference between effective and statutory tax rates -- -- (.7) -------------- -------------- -------------- 1997 $ 423.1 $ 23.3 $ 9.2 ============== ============== ==============
28 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) HAMILTON BEACH*PROCTOR-SILEX, INC.--Continued FINANCIAL REVIEW--Continued Revenues in 1997 increased due to an increase in unit volume, partially offset by a decline in the average sales price per unit. Increased volume from 29.6 million units in 1996 to 33.4 million units in 1997 resulted from increased sales of toasters, blenders, hand mixers and irons, partially offset by decreased sales of toaster ovens, roasters and can openers. These volume increases were largely driven by increased sales to key mass merchants and resulted in improved market share. The increase in operating profit and net income resulting from this volume growth was almost entirely offset by price decreases primarily on irons, toasters, coffeemakers and indoor grills, which were necessary to compete with Chinese imports. Also contributing to the decline in net income were higher employee costs, start-up costs of the Saltillo facility, expenses to reduce manufacturing activities in the United States and increased interest expense due to higher average debt levels. Average debt levels were higher in 1997 due to capital expenditures and the 1996 purchase of the minority interest. 1996 COMPARED WITH 1995 The following schedule identifies the components of the changes in revenues, operating profit and net income for 1996 compared with 1995:
Operating Net Revenues Profit Income -------------- -------------- -------------- 1995 $ 381.4 $ 25.0 $ 11.8 Increase (decrease) in 1996 from: Unit volume and sales mix 23.3 11.1 7.2 Average sales price (9.6) (9.6) (6.3) Manufacturing cost -- 5.1 3.3 Other operating expense -- (7.3) (4.7) Other income and expense -- -- .7 Difference between effective and statutory tax rates -- -- (1.3) -------------- -------------- -------------- 1996 $ 395.1 $ 24.3 $ 10.7 ============== ============== ==============
Increased unit sales of blenders, coffeemakers, food processors and sandwich makers partially offset by reduced unit sales of toasters, irons and toaster ovens were driven by increased sales to key mass merchants and resulted in improved market share. The benefit from this volume growth was somewhat offset by a decrease in the average sales price due to competition from low-cost Chinese imports. Favorable materials pricing somewhat offset by higher overhead costs contributed to the reduction in manufacturing costs. The reduction in materials pricing includes the favorable effect of the 1995 acquisition of Plasticos Sotec de Mexico, S.A. de C.V. ("Sotec"), which supplies plastic parts to certain of HB*PS's Mexican operations. Other operating expenses increased over 1995 due to additional marketing expenses relating to a national advertising campaign and additional amortization related to the 1995 acquisition of Sotec. 29 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) HAMILTON BEACH*PROCTOR-SILEX, INC.--Continued FINANCIAL REVIEW--Continued OTHER INCOME, EXPENSE AND INCOME TAXES: The components of other income (expense) and the effective tax rate are as follows for the year ended December 31:
1997 1996 1995 --------------- -------------- -------------- Interest expense $ (6.9) $ (6.6) $ (7.2) Other-net (.1) (.3) (.8) --------------- -------------- -------------- $ (7.0) $ (6.9) $ (8.0) =============== ============== ============== Effective tax rate 43.6% 38.5% 31.0%
Interest expense in 1996 was less than 1997 and 1995 due to lower average borrowings during 1996. The effective tax rates in 1996 and 1995 were reduced by the utilization of foreign tax credits resulting from the repatriation of foreign earnings previously taxed at a rate in excess of the U.S. statutory tax rate. In addition, the effective tax rate for 1996 was also reduced by favorable income tax adjustments relating to the resolution of tax issues from prior years. LIQUIDITY AND CAPITAL RESOURCES HB*PS has in place a $160.0 million revolving credit facility, which expires in May 2002 and is secured by substantially all of HB*PS's assets. This facility provides lower interest rates if HB*PS achieves a certain interest coverage ratio and allows for interest rates quoted under a competitive bid option. At December 31, 1997, HB*PS had $82.9 million available under this facility and also had $24.7 million available under separate facilities. HB*PS believes it can meet all of its current and long-term commitments and operating needs from operating cash flows and funds available under revolving credit agreements. Planned expenditures for property, plant and equipment in 1998 are anticipated to be approximately $16.5 million, compared with capital expenditures of $17.7 million in 1997 and $15.1 million in 1996. Planned expenditures for 1998 include purchases of machinery and equipment which will be used primarily to reduce manufacturing costs and increase efficiency. Capital for these expenditures has been and is expected to be provided primarily by internally generated funds and bank borrowings. 30 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) HAMILTON BEACH*PROCTOR-SILEX, INC.--Continued LIQUIDITY AND CAPITAL RESOURCES--Continued HB*PS's capital structure is presented below:
DECEMBER 31 DECEMBER 31 1997 1996 ------------------ ----------------- Total net tangible assets $ 115.5 $ 111.1 Goodwill at cost 118.9 118.9 ------------------ ----------------- Net assets before goodwill amortization 234.4 230.0 Accumulated goodwill amortization (26.5) (22.5) Total debt (80.8) (89.7) ------------------ ----------------- Stockholder's equity $ 127.1 $ 117.8 ================== ================= Debt to total capitalization 39% 43%
In 1997, capital expenditures exceeded depreciation, resulting in an increase in total net tangible assets. Although average debt levels were higher in 1997, the debt outstanding at December 31, 1997 declined as compared with December 31, 1996 due to an improvement in operating cash flow during 1997. 31 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE NORTH AMERICAN COAL CORPORATION NACoal mines and markets lignite for use primarily as fuel for power generation by electric utilities. The lignite is surface-mined in North Dakota, Texas and Louisiana. Total coal reserves approximate 2.0 billion tons, with 1.2 billion tons committed to electric utility customers pursuant to long-term contracts. NACoal operates five lignite mines, including three project mining subsidiaries (Coteau, Falkirk and Sabine), a NACoal division (San Miguel) and a joint venture with Phillips Coal Company (Red River). NACoal signed a contract to mine lignite for San Miguel Electric Cooperative on January 22, 1997. The contract requires NACoal to deliver lignite tons at a specified fixed price over the next 10 years, expiring on December 31, 2007. Operations with NACoal as the new mine operator began as scheduled on July 1, 1997. NACoal delivered approximately 2.0 million tons during the second half of 1997 and expects to deliver 3.0 million tons annually through 2007. In November 1995, NACoal began providing dragline mining services ("Florida dragline operations") for a limerock quarry near Miami, Florida. The operating results for the Florida dragline operations are included in other mining operations. FINANCIAL REVIEW NACoal's three project mining subsidiaries (Coteau, Falkirk and Sabine), which represent a significant portion of NACoal's operations, mine lignite for utility customers pursuant to long-term contracts at a price based on actual cost plus an agreed pretax profit per ton. Due to the cost-plus nature of these contracts, revenues and operating profits are impacted by increases and decreases in operating costs, as well as by tons sold. Net income of these project mines, however, is not significantly affected by changes in such operating costs, which include costs of operations, interest expense and certain other items. Because of the nature of the contracts at these mines, operating results are best analyzed in terms of lignite tons sold, income before taxes and net income. Lignite tons sold by NACoal's five operating lignite mines were as follows for the year ended December 31:
1997 1996 1995 -------------- -------------- -------------- Coteau Properties 15.9 15.6 15.1 Falkirk Mining 6.9 7.2 7.1 Sabine Mining 4.1 4.0 3.7 San Miguel 2.0 -- -- Red River Mining 1.0 .8 .8 -------------- -------------- -------------- Total lignite 29.9 27.6 26.7 ============== ============== ==============
The Florida dragline operations mined 7.6 million and 7.4 million cubic yards of limerock for the years ended December 31, 1997 and 1996, respectively. 32 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE NORTH AMERICAN COAL CORPORATION - Continued FINANCIAL REVIEW - Continued Revenues, income before taxes, provision for taxes and net income were as follows for the year ended December 31:
1997 1996 1995 -------------- -------------- -------------- Revenues Project mines $ 227.4 $ 227.8 $ 221.0 Other mining operations 29.7 17.8 14.7 -------------- -------------- -------------- 257.1 245.6 235.7 Royalties and other 5.8 3.5 12.3 -------------- -------------- -------------- $ 262.9 $ 249.1 $ 248.0 ============== ============== ============== Income before taxes Project mines $ 24.7 $ 25.7 $ 24.5 Other mining operations 5.2 2.8 1.0 -------------- -------------- -------------- Total income from operating mines 29.9 28.5 25.5 Escrow payments -- 4.2 2.1 Royalty and other income, net 3.2 2.5 11.9 Other operating expenses (6.0) (6.1) (6.1) -------------- -------------- -------------- 27.1 29.1 33.4 Provision for taxes 8.1 9.9 10.8 -------------- -------------- -------------- Net income $ 19.0 $ 19.2 $ 22.6 ============== ============== ==============
33 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE NORTH AMERICAN COAL CORPORATION - Continued FINANCIAL REVIEW - Continued 1997 COMPARED WITH 1996 The following schedule identifies the components of the changes in revenues, income before taxes and net income for 1997 compared with 1996:
Income Net Revenues Before Taxes Income -------------- --------------- -------------- 1996 $ 249.1 $ 29.1 $ 19.2 Increase (decrease) in 1997 from: Project mines Tonnage volume 1.5 -- -- Pass-through costs (.3) -- -- Agreed profit per ton (1.6) (1.0) (.7) Other mining operations Tonnage volume 13.0 10.1 6.6 Average selling price (1.1) (1.1) (.7) Operating costs -- (6.3) (4.1) Other -- (.3) (.2) -------------- --------------- -------------- Changes from operating mines 11.5 1.4 .9 Escrow payments -- (4.2) (2.7) Royalties and other income, net 2.3 .7 .5 Other operating expenses -- .1 -- Difference between effective and statutory tax rates -- -- 1.1 -------------- --------------- -------------- 1997 $ 262.9 $ 27.1 $ 19.0 ============== =============== ==============
Operating results from project mines declined from 1996 due to a decrease in project mine incentive payments received. These incentive payments were received in 1996 because actual operating results exceeded benchmarks specified in the long-term sales contracts. Excluding this variance, operating results at the project mines were comparable, as increased tons sold by Coteau and Sabine were offset by decreased tons sold by Falkirk. As compared with 1996, tons sold by Coteau and Sabine increased due to customer requirements, while tons sold by Falkirk decreased due to adverse weather conditions during the first quarter of 1997 and a customer's power plant outage in the first half of 1997. Operating results from other mining operations improved due to increased tons sold by Red River and the addition of the San Miguel lignite mining operation, which completed its first six months of operations in 1997. In 1996, NACoal received a non-recurring escrow payment, which negatively affects the year-to-year comparison. 34 36 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE NORTH AMERICAN COAL CORPORATION - Continued FINANCIAL REVIEW - Continued 1996 COMPARED WITH 1995 The following schedule identifies the components of the changes in revenues, income before taxes and net income for 1996 compared with 1995:
Income Net Revenues Before Taxes Income -------------- --------------- -------------- 1995 $ 248.0 $ 33.4 $ 22.6 Increase (decrease) in 1996 from: Project mines Tonnage volume 9.0 .8 .6 Mix of tons sold (.2) (.2) (.1) Agreed profit per ton 1.8 .6 .4 Pass-through costs (3.8) -- -- Other mining operations Tonnage volume 2.9 3.5 2.3 Mix of tons sold .1 .1 .1 Average selling price .1 .1 .1 Operating costs -- (1.9) (1.3) -------------- --------------- -------------- Changes from operating mines 9.9 3.0 2.1 Escrow payments -- 2.1 1.3 Royalties and other income, net (.6) (1.2) (.9) Management fees (8.2) (8.2) (5.3) Difference between effective and statutory tax rates -- -- (.6) -------------- --------------- -------------- 1996 $ 249.1 $ 29.1 $ 19.2 ============== =============== ==============
Increased tonnage volume at Coteau, Falkirk and Sabine as a result of increased customer demand, a project mine incentive payment received in the fourth quarter of 1996 and an escalation in the profit per ton as provided in Coteau's long-term sales contract contributed to improved operating results at the project mines. The increase in tonnage volume and operating costs from other mining operations resulted from the Florida dragline operation's full year of production in 1996 versus two months in 1995. Reduced activity at former coal properties caused a decrease in royalties and other income, net. Matters affecting year-to-year comparability include the receipt in 1996 of the final escrow payment from the sale of a previously owned eastern U.S. underground mining property and the discontinuation of an annual management fee, which was accelerated and finalized in 1995, under a contract mining agreement between NACoal and a public utility company. 35 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE NORTH AMERICAN COAL CORPORATION--Continued OTHER INCOME, EXPENSE AND INCOME TAXES: The components of other income (expense) and the effective tax rate are as follows for the year ended December 31:
1997 1996 1995 -------------- -------------- -------------- Interest expense Project mines $ (12.7) $ (13.6) $ (14.0) Other mining operations (2.1) (.2) (1.3) -------------- -------------- -------------- $ (14.8) $ (13.8) $ (15.3) ============== ============== ============== Other-net Project mines $ (.4) $ (.1) $ 1.3 Other mining operations (1.6) 2.7 1.6 -------------- -------------- -------------- $ (2.0) $ 2.6 $ 2.9 ============== ============== ============== Effective tax rate 29.9% 34.0% 32.4%
In 1997, other-net from other mining operations includes the write-off of certain non-productive assets, while 1996 includes $4.2 million from the receipt of the final escrow payment from the 1988 sale of a previously owned eastern underground mining property. The reduction in the 1997 effective tax rate results from the resolution of certain tax issues provided for in previous years. The increase in the 1996 effective tax rate, as compared with 1995, is due to the receipt of a non-recurring tax refund in 1995. LIQUIDITY AND CAPITAL RESOURCES NACoal has in place a $50.0 million revolving credit facility. The expiration date of this facility, which was extended to September 2002 during 1997, may be extended, on an annual basis, for one additional year upon the mutual consent of NACoal and the bank group. NACoal had $36.0 million of its revolving credit facility available at December 31, 1997. The outstanding balance is attributable to funds loaned to NACCO to partially finance NACCO's Class A common stock repurchase program. The financing of the project mining subsidiaries, which is either provided or guaranteed by the utility customers, consists of long-term equipment leases, notes payable and non-interest-bearing advances from customers. The obligations of the project mining subsidiaries do not impact the short- or long-term liquidity of NACoal and are without recourse to NACCO or NACoal. These arrangements allow the project mining subsidiaries to pay dividends to NACCO in amounts equal to their retained earnings. NACoal believes it can meet all of its current and long-term commitments and operating needs from operating cash flows, funds available under its revolving credit agreement and financing provided by the project mining subsidiaries' customers. Planned expenditures for property, plant and equipment in 1998 are anticipated to be approximately $28.9 million, of which $21.3 million relates to the development, establishment and improvement of the project mining subsidiaries' mines and are financed or guaranteed by the utility customers. The 1998 planned expenditures compare with capital expenditures of $24.8 million incurred in 1997 and $19.5 million incurred in 1996. Increasing expenditures in 1997 and 1998 primarily relate to costs incurred to build infrastructure and to replace aging assets. 36 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE NORTH AMERICAN COAL CORPORATION--Continued LIQUIDITY AND CAPITAL RESOURCES--Continued NACoal's capital structure, excluding the project mining subsidiaries, is presented below:
DECEMBER 31 DECEMBER 31 1997 1996 --------------- ---------------- Investment in project mining subsidiaries $ 4.3 $ 3.3 Other net tangible assets 3.4 (.8) --------------- ---------------- Net tangible assets 7.7 2.5 Advances to parent company 21.9 41.9 Debt related to parent advances (14.4) (29.0) Other debt (.1) (.3) --------------- ---------------- Total debt (14.5) (29.3) --------------- ---------------- Stockholder's equity $ 15.1 $ 15.1 =============== ================ Debt to total capitalization 49% 66%
The increase in other net tangible assets is primarily due to capital expenditures incurred to develop the Red River mine and the San Miguel lignite mining operation. The reduction in advances to parent company and debt related to parent advances resulted from payments received from the parent company. 37 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE KITCHEN COLLECTION, INC. KCI is a national specialty retailer of kitchenware, tableware, small electric appliances and related accessories. The specialty retail business is seasonal, with the majority of its revenues and operating profit generated in the fourth quarter during the fall holiday selling season. FINANCIAL REVIEW The results of operations for KCI were as follows for the year ended December 31:
1997 1996 1995 --------------- -------------- -------------- Number of stores 143 144 134 Revenues $ 79.0 $ 74.9 $ 69.6 Operating profit $ 2.8 $ 3.1 $ 3.3 Net income $ 1.3 $ 1.5 $ 1.6
1997 COMPARED WITH 1996 The following schedule identifies the components of the changes in revenues, operating profit and net income for 1997 compared with 1996:
Operating Net Revenues Profit Income -------------- -------------- -------------- 1996 $ 74.9 $ 3.1 $ 1.5 Increase (decrease) in 1997 from: Stores opened in 1997 1.7 .2 .1 Stores opened in 1996 .2 (.5) (.3) Comparable stores 2.2 .8 .5 Other -- (.8) (.5) -------------- -------------- -------------- 1997 $ 79.0 $ 2.8 $ 1.3 ============== ============== ==============
At December 31, 1997, KCI operated 143 stores compared with 144 stores at December 31, 1996. Revenue increased from 1996 due to an increase in the average sales transaction, partially offset by a decrease in the number of customer transactions. The increase in the average sales transaction can be attributed to a management incentive program, an increase in the retail prices of select products and improved sales within KCI's gadget category. The continuing difficult factory outlet retail environment led to lower levels of customer traffic within factory outlet malls resulting in a decrease in the number of customer sales. In addition, KCI incurred store closing costs in 1997, including costs to complete the closure or conversion of all Hearthstone(TM) stores, combined with increased employee costs which contributed to the decline in operating profit and net income. 38 40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE KITCHEN COLLECTION--Continued FINANCIAL REVIEW--Continued 1996 COMPARED WITH 1995 The following schedule identifies the components of the changes in revenues, operating profit and net income for 1996 compared with 1995:
Operating Net Revenues Profit Income -------------- -------------- -------------- 1995 $ 69.6 $ 3.3 $ 1.6 Increase (decrease) in 1996 from: Stores opened in 1996 2.6 .1 -- Stores opened in 1995 3.1 .4 .2 Comparable stores (.4) -- -- Other -- (.7) (.3) -------------- -------------- -------------- 1996 $ 74.9 $ 3.1 $ 1.5 ============== ============== ==============
KCI had a net increase in new stores of 10, or approximately 8 percent, in 1996. The increased number of stores, along with a full year's operation of the 15 stores opened in 1995, resulted in increased revenues in 1996 compared with 1995. The results at comparable stores and the profitability at new stores were adversely affected by the continuing difficult factory outlet retail environment evidenced by lower levels of customer traffic in factory outlet malls. The unfavorable other variance is due primarily to higher payroll and store rent costs. OTHER INCOME, EXPENSE AND INCOME TAXES: Interest expense was $0.4 million, $0.5 million and $0.5 million in 1997, 1996 and 1995, respectively. KCI's effective tax rate was 43.5 percent, 42.7 percent and 41.9 percent in 1997, 1996 and 1995, respectively. LIQUIDITY AND CAPITAL RESOURCES KCI's credit agreement provides for a $5.0 million revolving credit facility. This facility has performance-based pricing which provides for reduced interest rates based on the achievement of certain financial performance measures. The expiration date of KCI's revolving credit facility is May 2000 and may be extended, on an annual basis, for one additional year upon the mutual consent of KCI and the bank. At December 31, 1997, KCI had $4.9 million of its facility available. KCI believes it can meet all of its current and long-term commitments and operating needs from operating cash flows and funds available under its revolving credit agreement. Expenditures for property, plant and equipment were $0.6 million in 1997, $1.1 million in 1996 and are anticipated to be approximately $0.9 million in 1998. These expenditures are primarily for fixtures and equipment for new and existing stores, and are funded by internally generated funds and short-term borrowings. 39 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) THE KITCHEN COLLECTION--Continued LIQUIDITY AND CAPITAL RESOURCES--Continued KCI's capital structure is presented below:
DECEMBER 31 DECEMBER 31 1997 1996 ----------------- ----------------- Total net tangible assets $ 12.3 $ 14.6 Goodwill at cost 4.6 4.6 ----------------- ----------------- Net assets before goodwill amortization 16.9 19.2 Accumulated goodwill amortization (1.1) (.9) Total debt (5.0) (5.0) ----------------- ----------------- Stockholder's equity $ 10.8 $ 13.3 ================= ================= Debt to total capitalization 32% 27%
Stockholder's equity declined from 1996 due to a dividend payment made to the parent company. This decline contributed to the increase in debt to total capitalization, as shown above. 40 42 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO AND OTHER FINANCIAL REVIEW NACCO and Other includes the parent company operations and Bellaire Corporation ("Bellaire"), a non-operating subsidiary of NACCO. Although Bellaire's operations are immaterial, it has significant long-term liabilities related to closed mines, primarily from former eastern U.S. underground coal mining activities. Cash payments related to Bellaire's obligations, net of internally generated cash, are funded by NACCO and amounted to $3.6 million during 1997, $5.1 million during 1996 and are anticipated to be $4.2 million in 1998. The results of operations at NACCO and Other were as follows for the year ended December 31:
1997 1996 1995 --------------- --------------- --------------- Revenues $ .2 $ .3 $ .5 Operating loss $ (8.5) $ (9.0) $ (8.8) Other income (expense), net $ (.4) $ .2 $ .9 Loss before extraordinary items $ (5.5) $ (5.8) $ (4.1) Extraordinary gain, net-of-tax -- -- 32.3 --------------- --------------- --------------- Net income (loss) $ (5.5) $ (5.8) $ 28.2 =============== =============== ===============
The extraordinary gain in 1995 of $32.3 million, net of $19.8 million in taxes, relates to a downward revision in the UMWA obligation. This obligation was recognized by Bellaire as an extraordinary charge in 1992 to accrue for the estimated costs associated with the Coal Industry Retiree Health Benefit Act of 1992. The accrual was revised in 1995 due to a change in the assumptions used to estimate the liability. LIQUIDITY AND CAPITAL RESOURCES Although NACCO's subsidiaries have entered into substantial borrowing agreements, NACCO has not guaranteed the long-term debt or any borrowings of its subsidiaries. The borrowing agreements at HB*PS and KCI allow for the payment of dividends to NACCO under certain circumstances. There are no restrictions on the transfer of assets from NACoal. NMHG's borrowing agreement prior to the fourth quarter of 1997 restricted dividends or advances paid to its stockholders to an aggregate of $25.0 million, but provided for the release of this restriction, as well as other covenant restrictions, if NMHG achieved specified performance measures. In the fourth quarter of 1997, NMHG was permanently released from the covenant restrictions specified in the NMHG revolving credit agreement as a result of satisfying the necessary performance criteria during 1997. Therefore, at December 31, 1997, dividends or advances from NMHG to its stockholders were not restricted. Dividends and advances from subsidiaries are the primary sources of cash for NACCO. The Company believes it can adequately meet all of its current and long-term commitments and operating needs. This outlook stems from amounts available under revolving credit facilities, anticipated funds generated from operations and the utility customers' funding of the project mining subsidiaries. 41 43 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO AND OTHER--Continued NACCO'S consolidated capital structure is presented below:
DECEMBER 31 DECEMBER 31 1997 1996 ------------------- ------------------- Total net tangible assets $ 328.4 $ 397.7 Goodwill at cost 571.3 567.2 ------------------- ------------------- Net assets before goodwill amortization 899.7 964.9 Accumulated goodwill amortization (122.0) (106.2) Total debt, excluding current and long-term portion of obligations of project mining subsidiaries (257.0) (382.8) Closed mine obligations, (Bellaire), including UMWA, net-of-tax (79.0) (82.5) Minority interest (16.6) (14.1) ------------------- ------------------- Stockholder's equity $ 425.1 $ 379.3 =================== =================== Debt to total capitalization 37% 50%
INTEREST RATE PROTECTION NMHG, HB*PS, NACoal and KCI have entered into interest rate swap agreements for portions of their floating rate debt. These interest rate swaps provide protection against significant increases in interest rates and have terms ranging from one to six years, with the counterparty's option to extend certain contracts to eight years. The Company evaluates its exposure to floating rate debt on an ongoing basis. The notional amounts, fixed rates paid and remaining duration of these swaps for each subsidiary are included in Note 13 to the Consolidated Financial Statements. EFFECTS OF FOREIGN CURRENCY AND INFLATION NMHG and HB*PS operate internationally and enter into transactions denominated in foreign currencies. As a result, the Company is subject to the transaction exposures that arise from exchange rate movements between the dates foreign currency transactions are recorded and the dates they are consummated. The effects of foreign currency on revenues, operating income and net income at NMHG are discussed above. At HB*PS, foreign currency effects had an immaterial impact on operating results in 1997 and 1996. NMHG and HB*PS use forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies. These contracts usually have maturities of one to twelve months and generally require the companies to buy or sell Japanese yen, Australian dollars, Canadian dollars or various European currencies for the U.S. dollar at rates agreed to at the inception of the contracts. See Note 2 and Note 13 to the Consolidated Financial Statements for additional discussion. The Company believes that inflation has not materially affected its results of operations in 1997 and does not expect inflation to be a significant item in 1998. 42 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO AND OTHER--Continued ENVIRONMENTAL MATTERS The Company's manufacturing operations, like those of other companies engaged in similar businesses, involve the use, disposal and cleanup of substances regulated under environmental protection laws. The Company's NACoal subsidiary is affected by the regulations of agencies under which it operates, particularly the Federal Office of Surface Mining, the United States Environmental Protection Agency and associated state regulatory authorities. In addition, NACoal is attentive to any changes which may arise due to proposed legislation concerning the Clean Air Act Amendments of 1990, reauthorization of the Resource Conservation and Recovery Act, the Clean Water Act, the Endangered Species Act and other regulatory actions. Compliance with these increasingly stringent standards results in higher expenditures for both capital improvements and operating costs. The Company's policies stress environmental responsibility and compliance with these regulations. Based on current information, management does not expect compliance with these regulations to have a material adverse effect on the Company's financial condition or results of operations. YEAR 2000 The Company has developed an action plan and identified the resources needed to convert the majority of its computer systems and software applications to achieve a year 2000 date conversion with no effect on customers or disruption to business operations. Implementation of the plan has begun, and the Company anticipates completion of testing of mission critical systems by the end of 1998. The Company estimates that the cost to complete these efforts, which primarily includes the purchase of software upgrades under normal maintenance agreements with third party vendors, will not be material and will be expended primarily in 1998. The Company is currently evaluating its computer-controlled machinery and equipment for year 2000 compliance. Although the Company does not anticipate the cost to convert, or failure to convert, this machinery and equipment to be material to the Company's operating results, the ultimate impact is unknown at this time. In addition, the Company has discussed with its vendors and customers the need to be year 2000 compliant. Although the Company has no reason to believe that its vendors and customers will not be compliant by the year 2000, the Company is unable to determine the extent to which year 2000 issues will effect its vendors and customers. The Company continues to discuss with its vendors and customers the need for implementing procedures to address this issue. OUTLOOK NMHG: In 1998, NMHG does not expect the record levels of factory bookings experienced in the North American market in 1997 to continue. However, given NMHG's worldwide backlog of 22,100 units at the end of the fourth quarter of 1997, compared with 11,700 units at the end of the fourth quarter of 1996, forklift truck shipments are expected to remain strong in the first quarter of 1998. NMHG's continuing focus on improving margins and reducing costs is expected to have a positive impact on 1998 results. The continued strength of the British pound sterling may offset favorable impacts from stronger consumer demand anticipated in Europe. Declines in operating results are anticipated in Asia-Pacific due to the weakening of currencies and economic uncertainty in that region. Asia-Pacific's revenue and operating loss were 5.0 percent and 6.2 percent, respectively, of NMHG's consolidated revenue and operating profit in 1997. 43 45 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO AND OTHER--Continued OUTLOOK - Continued HB*PS: HB*PS expects 1998 to remain highly competitive, with overall industry growth projected to be less than 1 percent. However, planned product line extensions with the Hamilton Beach(R) brand name should provide HB*PS with the opportunity to continue its market share growth. Growth is also anticipated from international opportunities. In 1998, the new Saltillo facility is expected to continue to increase productive capacity. HB*PS plans to add additional manufacturing activities to this facility, which currently manufactures selected lines of blenders, toasters and food processors. Cost savings from Saltillo may be offset in 1998 by additional start-up costs and transition costs at other manufacturing facilities. NACOAL: NACoal anticipates an increase in the number of tons delivered in 1998 as a result of a full year of operations at the San Miguel lignite mining operation. NACoal's other lignite mines and the Florida dragline operations are expected to produce about the same number of total tons and cubic yards, respectively, in 1998 as in 1997, as customer requirements appear level with the previous year. Sales contracts with customers at Coteau, Falkirk, Sabine, Red River and San Miguel extend to 2037, 2020, 2020, 2010 and 2007, respectively. In addition, NACoal anticipates a reduction in 1998 royalty income. NACoal is involved in ongoing initiatives to obtain additional mining contracts. However, the successful achievement of these contracts is uncertain at this time. NACoal anticipates that 1998 operating results will reflect an increase in costs resulting from the pursuit of these contracts. KCI: Sales growth in 1998 may be absorbed by other expenses, due to the difficult retail factory outlet environment and normal inflationary increases in fixed costs. However, to improve profitability in the competitive retail environment, KCI will continue to implement marketing programs designed to increase the average amount and number of sales transactions. Where necessary, KCI will relocate or close nonproductive stores. The statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere throughout this Annual Report that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties which could cause actual results to differ materially from those presented in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward looking statements to reflect events or circumstances that arise after the date hereof. Such risks and uncertainties with respect to each subsidiary's operations includes without limitation: NMHG: (1) changes in demand for forklift trucks and related service parts on a worldwide basis, (2) changes in sales prices, (3) delays in delivery or increased costs of raw materials or sourced products and labor, (4) delays in manufacturing and delivery schedules, (5) exchange rate fluctuations, changes in foreign import tariffs and monetary policies and other changes in the regulatory climate in the foreign countries in which NMHG operates and/or sells products, (6) product liability or other litigation, warranty claims or other returns of products, and (7) delays or increased costs of employee relocations and/or in the execution of the restructuring program. 44 46 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NACCO INDUSTRIES, INC. AND SUBSIDIARIES--Continued (Tabular Amounts in Millions, Except Per Share, Unit, Store and Percentage Data) NACCO AND OTHER--Continued OUTLOOK - Continued HB*PS: (1) delays or increased costs in the start-up of the operations in Saltillo, Mexico, (2) bankruptcy of or loss of major retail customers, (3) changes in the sales price, product mix or levels of consumer purchasing of small electric appliances, (4) exchange rate fluctuations, changes in foreign import tariffs and monetary policies and other changes in the regulatory climate in the foreign countries in which HB*PS operates and/or sells products, and (5) product liability or other litigation, warranty claims or other returns of products. NACOAL: (1) weather conditions and other events that would reduce the level of customers' fuel requirements and (2) weather or equipment problems that could affect lignite deliveries to customers. KCI: (1) weather conditions which would affect the number of customers visiting the stores, (2) changes in the sales price, product mix or level of consumer purchasing of kitchenware and small electric appliances, and (3) delays in opening of proposed new stores. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is set forth in the Financial Statements and Supplementary Data contained in Part IV hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to Directors of the Company is set forth in the 1998 Proxy Statement under the headings "Business to be Transacted -- 1. Election of Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance," which information is incorporated herein by reference. Information regarding the executive officers of the Company is included as Item 4A of Part I as permitted by Instruction 3 to Item 401(b) of Regulation S-K. ITEM 11. EXECUTIVE COMPENSATION Information with respect to executive compensation is set forth in the 1998 Proxy Statement under the heading "Business to be Transacted -- 1. Election of Directors" under the subheadings "-- Compensation of Directors," "--Compensation of Executive Officers," "--Stock Option Grants," "--Stock Option Exercises and Fiscal Year-End Values," "--Long-Term Incentive Plans," "--Compensation Committee Interlocks and Insider Participation" and "--Pension Plans," which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is set forth in the 1998 Proxy Statement under the heading "Business to be Transacted -- 1. Election of Directors -- Beneficial Ownership of Class A Common and Class B Common," which information is incorporated herein by reference. 45 47 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships and related transactions is set forth in the 1998 Proxy Statement under the heading "Business to be Transacted -- 1. Election of Directors -- Compensation Committee Interlocks and Insider Participation," which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) and (2) The response to Item 14(a)(1) and (2) is set forth beginning at page F-1 of this Annual Report on Form 10-K included in Exhibit 13. (a) (3) Listing of Exhibits -- See the exhibit index beginning at page X-1 of this Annual Report on Form 10-K. (b) The Company has not filed any current reports on Form 8-K during the fourth quarter of 1997. (c) The response to Item 14(c) is set forth beginning at page X-1 of this Annual Report on Form 10-K. (d) Financial Statement Schedules -- The response to Item 14(d) is set forth beginning at page F-33 of this Annual Report on Form 10-K included in Exhibit 13. 46 48 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. NACCO Industries, Inc. By: /s/ Kenneth C. Schilling ----------------------------- Kenneth C. Schilling Vice President and Controller (principal financial and accounting officer) March 27, 1998 47 49 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Alfred M. Rankin, Jr. Chairman, President and March 27, 1998 - ------------------------------------------ Chief Executive Officer (principal Alfred M. Rankin, Jr. executive officer), Director /s/ Kenneth C. Schilling Vice President and Controller March 27, 1998 - ------------------------------------------ (principal financial and Kenneth C. Schilling accounting officer) * Owsley Brown II Director March 27, 1998 - ------------------------------------------ Owsley Brown II * John J. Dwyer Director March 27, 1998 - ------------------------------------------ John J. Dwyer * Robert M. Gates Director March 27, 1998 - ------------------------------------------ Robert M. Gates * Leon J. Hendrix, Jr. Director March 27, 1998 - ------------------------------------------ Leon J. Hendrix, Jr. * Dennis W. LaBarre Director March 27, 1998 - ------------------------------------------ Dennis W. LaBarre * Ian M. Ross Director March 27, 1998 - ------------------------------------------ Ian M. Ross * John C. Sawhill Director March 27, 1998 - ------------------------------------------ John C. Sawhill * Britton T. Taplin Director March 27, 1998 - ------------------------------------------ Britton T. Taplin * David F. Taplin Director March 27, 1998 - ------------------------------------------ David F. Taplin * John F. Turben Director March 27, 1998 - ------------------------------------------ John F. Turben *Kenneth C. Schilling, by signing his name hereto, does hereby sign this Annual Report on Form 10-K on behalf of each of the above named and designated officers and directors of the Company pursuant to a Power of Attorney executed by such persons and filed with the Securities and Exchange Commission. /s/ Kenneth C. Schilling March 27, 1998 - ------------------------------------------------------------ Kenneth C. Schilling, Attorney-in-Fact
48 50 EXHIBIT INDEX (3) Articles of Incorporation and By-laws. (i) Restated Certificate of Incorporation of the Company is incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 1-9172. (ii) Restated By-laws of the Company are incorporated by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 1-9172. (4) Instruments defining the rights of security holders, including indentures. (i) The Company by this filing agrees, upon request, to file with the Securities and Exchange Commission the instruments defining the rights of holders of Long-Term debt of the Company and its subsidiaries where the total amount of securities authorized thereunder does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. (ii) The Mortgage and Security Agreement, dated April 8, 1976, between The Falkirk Mining Company (as Mortgagor) and Cooperative Power Association and United Power Association (collectively as Mortgagee) is incorporated by reference to Exhibit 4(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 1-9172. (iii) Amendment No. 1 to the Mortgage and Security Agreement, dated as of December 15, 1993, between Falkirk Mining Company (as Mortgagor) and Cooperative Power Association and United Power Association (collectively as Mortgagee) is attached hereto as Exhibit 4(iii). (iv) Stockholders' Agreement, dated as of March 15, 1990, among the signatories thereto, the Company and Ameritrust Company National Association, as depository, is incorporated herein by reference to Exhibit 2 to the Schedule 13D filed on March 29, 1990 with respect to the Class B Common Stock, par value $1.00 per share, of NACCO Industries, Inc. (v) Amendment to Stockholders' Agreement, dated as of April 6, 1990, among the signatories thereto, the Company and Ameritrust Company National Association, as depository, is incorporated herein by reference to Exhibit 4 to the Amendment No. 1 of the Schedule 13D filed on April 11, 1990 with respect to the Class B Common Stock, par value $1.00 per share, of NACCO Industries, Inc. (vi) Amendment to Stockholders' Agreement, dated as of April 6, 1990, among the signatories thereto, the Company and Ameritrust Company National Association, as depository, is incorporated herein by reference to Exhibit 5 to the Amendment No. 1 of the Schedule 13D filed on April 11, 1990 with respect to the Class B Common Stock, par value $1.00 per share, of NACCO Industries, Inc. (vii) Amendment to Stockholders' Agreement, dated as of November 17, 1990, among the signatories thereto, the Company and Ameritrust Company National Association, as depository, is incorporated herein by reference to the Amendment No. 2 of the Schedule 13D filed on March 18, 1991 with respect to the Class B Common Stock, par value $1.00 per share, of NACCO Industries, Inc. (viii) Amendment to Stockholders' Agreement, dated November 14, 1996, adding CTR Family Associates, L.P. as a Participating Stockholder, among the signatures thereto, the Company and Key Bank, N.A. (successor to Ameritrust Company National Association), as depository, is incorporated herein by reference to Amendment No. 3 of the Schedule 13D filed on November 26, 1996, with respect to the Class B Common Stock, par value $1.00 per share, of NACCO Industries, Inc. (ix) Amendment to Stockholders' Agreement, dated as of November 14, 1996, adding Rankin Management, Inc. as a Participating Stockholder, among the signatories thereto, the Company and Key Bank, N.A. (successor to Ameritrust Company National Association), as depository, is incorporated herein by reference to Amendment No. 3 of the Schedule 13D filed on November 26, 1996, with respect to the Class B Common Stock, par value $1.00 per share, of NACCO Industries, Inc. (10) Material contracts. *(i) The NACCO Industries, Inc. 1975 Stock Option Plan (as amended and restated as of July 17, 1986) is incorporated herein by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(ii) Form of Incentive Stock Option Agreement for incentive stock options granted before 1987 under The NACCO Industries, Inc. 1975 Stock Option Plan (as amended and restated as of July 17, 1986) is incorporated herein by reference to Exhibit 10(ii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. X-1 51 *(iii) Form of Incentive Stock Option Agreement for incentive stock options granted after 1986 under The NACCO Industries, Inc. 1975 Stock Option Plan (as amended and restated as of July 17, 1986) is incorporated herein by reference to Exhibit 10(iii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(iv) Form of Non-Qualified Stock Option Agreement under The NACCO Industries, Inc., 1975 Stock Option Plan (as amended and restated as of July 17, 1986) is incorporated herein by reference to Exhibit 10(iv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(v) The NACCO Industries, Inc. 1981 Stock Option Plan (as amended and restated as of July 17, 1986) is incorporated herein by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(vi) Form of Non-Qualified Stock Option Agreement under The NACCO Industries, Inc. 1981 Stock Option Plan (as amended and restated as of July 17, 1986) is incorporated herein by reference to Exhibit 10(vi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(vii) Form of Incentive Stock Option Agreement for incentive stock options granted before 1987 under The NACCO Industries, Inc. 1981 Stock Option Plan (as amended and restated as of July 17, 1986) is incorporated herein by reference to Exhibit 10(vii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(viii) Form of Incentive Stock Option Agreement for incentive stock options granted after 1986 under The NACCO Industries, Inc. 1981 Stock Option Plan (as amended and restated as of July 17, 1986) is incorporated herein by reference to Exhibit 10(viii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(ix) The Retirement Benefit Plan for Alfred M. Rankin, Jr., effective as of January 1, 1994 is incorporated herein by reference to Exhibit 10 (ix) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission File Number 1-9172. *(x) Amendment No. 1 to the Retirement Benefit Plan for Alfred M. Rankin, Jr., dated as of March 15, 1995, is incorporated herein by reference to Exhibit 10 (x) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission File Number 1-9172. *(xi) Instrument of Adoption and Merger for NACCO Industries, Inc. for the NACCO Materials Handling Group, Inc. Unfunded Benefit Plan (As Amended and Restated Effective October 1, 1994) dated December 30, 1994, is incorporated herein by reference to Exhibit 10(xxii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission File Number 1-9172. *(xii) Instrument of Withdrawal and Transfer of Liabilities from The North American Coal Corporation Deferred Compensation Plan for Management Employees, effective as of December 31, 1994, is incorporated herein by reference to Exhibit 10(xxiii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission File Number 1-9172. *(xiii) NACCO Industries, Inc. Annual Incentive Compensation Plan, effective as of January 1, 1997, is incorporated herein by reference to as Exhibit 10(xx) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. *(xiv) NACCO Industries, Inc. Supplemental Annual Incentive Compensation Plan, effective as of January 1, 1996, is incorporated herein by reference to Exhibit 10(xiv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File Number 1-9172. *(xv) NACCO Industries, Inc. Executive Long-Term Incentive Compensation Plan, amended and restated as of January 1, 1996, is attached incorporated herein by reference to Exhibit 10(xv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. (xvi) Assumption Agreement, made as of December 20, 1991, between the Company and Citicorp North America, Inc., as agent is incorporated herein by reference to Exhibit 10(xciii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. (xvii) Intentionally left blank. *(xviii) NACCO Industries, Inc. Non-Employee Directors' Equity Compensation Plan, effective January 1, 1992, is incorporated by reference to Exhibit 10(cxi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 1-9172. X-2 52 *(xix) Amendment No. 2 to the Retirement Benefit Plan for Alfred M. Rankin, Jr. (as amended and restated effective January 1, 1994) dated June 30, 1995 is incorporated herein by reference to Exhibit 10 (clxxi) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, Commission File Number 1-9172. *(xx) NACCO Industries, Inc. Annual Incentive Compensation Plan, effective as of January 1, 1998, is attached hereto as Exhibit 10(xx). (xxi) - (xxx) Intentionally left blank. *ff(xxxi) The North American Coal Annual Incentive Plan, effective as of January 1, 1997, is incorporated herein by reference to Exhibit 10(xlv) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996, Commission File Number 1-9172. *(xxxii) Instrument of Merger, Amendment and Transfer of Sponsorship of Benefit Plans, effective as of August 31, 1994, is incorporated herein by reference to Exhibit 10(xxviii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission File Number 1-9172. (xxxiii) Credit Agreement, dated as of September 27, 1991, among the North American Coal Corporation, Citibank, N.A., Ameritrust Company National Association and Morgan Guaranty Trust Company of New York, as agent is incorporated herein by reference to Exhibit 10(xcii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. (xxxiv) Subordination Agreement, dated September 27, 1991, among The North American Coal Corporation, the Company and Morgan Guaranty Trust Company of New York, as agent, is incorporated herein by reference to Exhibit 10(xciv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(xxxv) The North American Coal Corporation Value Appreciation Plan, as amended on March 11, 1992 is incorporated herein by reference to Exhibit 10(xcviii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 1-9172. *(xxxvi) Amendment No. 1 to The North American Coal Corporation Value Appreciation Plan, dated as of December 14, 1994, is incorporated herein by reference to Exhibit 10(xcix) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission File Number 1-9172. (xxxvii) Intentionally left blank. (xxxviii) Amendment No. 1 to the Credit Agreement dated as of July 28, 1993 among The North American Coal Corporation and the banks listed on the signatory pages and Morgan Guaranty Trust Company of New York, as Agent, is incorporated herein by reference to Exhibit 10(cxxxxiii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File Number 1-9172. (xxxix) Amendment No. 2 to the Credit Agreement dated as of September, 1995 among The North American Coal Corporation and the banks listed on the signatory pages and Morgan Guaranty Trust Company of New York, as Agent, is incorporated herein by reference to Exhibit 10(xxxix) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File Number 1-9172. *(xl) The North American Coal Corporation Supplemental Retirement Benefit Plan as amended and restated effective September 1, 1994 is incorporated by reference to Exhibit 10 (clxv) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, Commission File Number 1- 9172. *(xli) The North American Coal Corporation Deferred Compensation Plan for Management Employees (as amended and restated effective January 1, 1996), is incorporated herein by reference to Exhibit 10(xli) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File Number 1-9172. *(xlii) Amendment No. 1, dated December 1, 1995, to The North American Coal Corporation Supplemental Retirement Benefit Plan (as amended and restated effective September 1, 1994), effective as of December 31, 1994, is incorporated herein by reference to Exhibit 10 (xlii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File Number 1-9172. (xliii) Amendment No. 3 to the Credit Agreement dated as of September 16, 1996 among North American Coal Corporation and the banks listed on the signatory pages and Morgan Guaranty Trust Company of New York, as Agent, is incorporated herein by reference to Exhibit 10(xliii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. X-3 53 *(xliv) Amendment No. 1, dated December 9, 1996, to The North American Coal Corporation Deferred Compensation Plan for Management Employees (as amended and restated effective January 1, 1996) is incorporated herein by reference to Exhibit 10(xliv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. *(xlv) The North American Coal Annual Incentive Plan, effective as of January 1, 1998, is attached hereto as Exhibit 10(xlv). (xlvi) Waiver Agreement dated November 15, 1996 by and among Morgan Guaranty Trust Company, Citibank, N.A., Wells Fargo (Texas), N.A., Key Bank National Association and The North American Coal Corporation is incorporated herein by reference to Exhibit 10(xlvi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. (xlvii) Amendment No. 4 to the Credit Agreement dated as of July 29, 1997 among the North American Coal Corporation, the banks listed on the signatory pages and Morgan Guaranty Trust Company of New York, as Agent, is attached hereto as Exhibit 10(xlvii). (xlviii) Assignment and Assumption Agreement dated as of August 22, 1997 among the North American Coal Corporation, the banks listed on the signatory pages and Morgan Guaranty Trust Company of New York, as Agent, is attached hereto as Exhibit 10(xlviii). (xlix) - (liii) Intentionally left blank. *(liv) Amendment No. 1 to the Hyster-Yale Materials Handling, Inc. Long-Term Incentive Compensation Plan, effective as of January 1, 1994, is incorporated herein by reference to Exhibit 10(lxxxviii) to the Hyster-Yale Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission File Number 33-28812. (lv) Agreement and Plan of Merger, dated as of April 7, 1989, among NACCO Industries, Inc., Yale Materials Handling Corporation, Acquisition I, Esco Corporation, Hyster Company and Newesco, is incorporated herein by reference to Exhibit 2.1 to Hyster-Yale Materials Handling, Inc.'s Registration Statement on Form S-1 filed May 17, 1989 (Registration Statement Number 33-28812). (lvi) Agreement and Plan of Merger, dated as of April 7, 1989, among NACCO Industries, Inc., Yale Materials Handling Corporation, Acquisition II, Hyster Company and Newesco, is incorporated herein by reference to Exhibit 2.2 to Hyster-Yale Materials Handling, Inc.'s Registration Statement on Form S-1 filed May 17, 1989 (Registration Statement Number 33-28812). (lvii) Amendment to the Third Amended and Restated Operating Agreement, dated as of January 31, 1990, between Hyster Company and PacificCorp Credit, Inc. (succesor to Hyster Credit Corporation) is incorporated herein by reference to Exhibit 10(xlvii) to the Hyster-Yale Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 33-28812. *(lviii) NACCO Materials Handling Group, Inc. Annual Incentive Compensation Plan for 1997 is incorporated herein by reference to Exhibit 10(lxiii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. *(lix) Hyster-Yale Materials Handling, Inc. Long-Term Incentive Compensation Plan, dated as of January 1, 1990, is incorporated herein by reference to Exhibit 10(lxxxix) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (lx) Amendment to the Third Amended and Restated Operating Agreement, dated as of November 7, 1991, between Hyster Company and AT&T Commercial Finance Corporation (successor to PacificCorp Credit, Inc.) is incorporated herein by reference to Exhibit 10(1) to the Hyster-Yale Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission File Number 33-28812. (lxi) Agreement and Plan of Merger dated as of December 20, 1993, between Hyster Company, an Oregon corporation, and Hyster Company, a Delaware corporation, is incorporated herein by reference to Exhibit 10(lxxviii) to Hyster-Yale Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File Number 33-28812. *(lxii) Agreement and Plan of Merger dated as of December 20, 1993, between Yale Materials Handling Corporation, a Delaware corporation, Hyster Company, a Delaware corporation, and Hyster-Yale Materials Handling, Inc., a Delaware corporation, is incorporated herein by reference to Exhibit 10(lxxix) to Hyster-Yale Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File Number 33-28812. *(lxiii) NACCO Materials Handling Group, Inc. Annual Incentive Plan, effective as of January 1, 1998, is attached hereto as Exhibit 10(lxiii). X-4 54 (lxiv) - (lxvi) Intentionally left blank. *(lxvii) Amendment No. 3 to the Hyster-Yale Materials Handling, Inc. Long-Term Incentive Compensation Plan effective January 1, 1994 is incorporated herein by reference to Exhibit 10 (lxxxxv) to the Hyster-Yale Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, Commission File Number 33-28812. *(lxviii) Amendment No. 2 effective as of December 31, 1993 to the Hyster-Yale Materials Handling, Inc. Long-Term Incentive Compensation Plan is incorporated herein by reference to Exhibit 10 (lxxxxiii) of the Hyster-Yale Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File Number 33-28812. (lxix) Amendment dated as of January 1, 1994 to the Third Amendment and Restated Operating Agreement dated as of November 7, 1991, between NACCO Materials Handling Group and AT&T Commercial Finance Corporation is incorporated herein by reference to Exhibit 10(c) to the Hyster-Yale Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, Commission File Number 330-28812. *(lxx) The Yale Materials Handling Corporation Deferred Incentive Compensation Plan (also known as The Yale Materials Handling Corporation Short-Term Incentive Compensation Deferral Plan), dated March 1, 1984, is incorporated herein by reference to Exhibit 10(lxxi) to the Hyster-Yale Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 33-28812. (lxxi) Intentionally left blank. (lxxii) Credit Agreement between NACCO Materials Handling Group, Inc. and Morgan Guaranty Trust company of New York, as Agent, and the other banks listed thereto, dated February 28, 1995, is incorporated by reference herein to Exhibit 10(lxxxvii) of the Hyster-Yale Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission File Number 33-28812. (lxxiii) Intentionally left blank. *(lxxiv) The NACCO Materials Handling Group, Inc. Unfunded Benefit Plan (as amended and restated effective as of January 1, 1996) is incorporated by reference as Exhibit 10(lxxiv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File Number 1-9172. (lxxv) Amended and Restated Credit Agreement dated as of June 4, 1996 among NACCO Materials Handling Group, Inc., the Banks party thereto, the Co-Arrangers and Co-Agents listed on the signature page thereto and Morgan Guaranty Trust Company of New York, as Agent, is incorporated by reference to Exhibit 10(lxxv) to the Company's Quarterly Statement on Form 10-Q for the quarter ended June 30, 1996, Commission File Number 1-9172. (lxxvi) Amendment dated as of December 16, 1996 to the Amended and Restated Credit Agreement dated as of June 4, 1996 among NACCO Materials Handling Group, Inc., the Banks party thereto, the Co-Arrangers and Co-Agents listed on the signature page thereto and Morgan Guaranty Trust Company of New York, as Agent, is incorporated herein by reference to Exhibit 10(lxxxvi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. (lxxvii) Amendment No. 2 dated as of March 26, 1997 to the Amended and Restated Credit Agreement dated as of June 4, 1996 among NACCO Materials Handling Group, Inc., the Banks party thereto, the Co-arrangers and Co-agents listed on the signature page thereto and Morgan Guaranty Trust Company of New York, as Agent, is incorporated herein by reference to Exhibit 10(lxxviii) to the Company's Quarterly Statement on Form 10-Q for the quarter ended March 31, 1997, Commission File Number 1-9172. (lxxviii) Amendment No. 3 dated as of May 19, 1997 to the Amended and Restated Credit Agreement dated as of June 4, 1996 among NACCO Materials Handling Group, Inc., the Banks party thereto, the Co-arrangers and Co-agents listed on the signature page thereto and Morgan Guaranty Trust Company of New York, as Agent, is incorporated herein by reference to Exhibit 10(lxxviii) to the Company's Quarterly Statement on Form 10-Q for the quarter ended June 30, 1997, Commission File Number 1-9172. (lxxix) - (lxxxv) Intentionally left blank. (lxxxvi) Agreement of Merger, dated as of January 20, 1988, among NACCO Industries, Inc., Housewares Holding Company, WE-PS Merger, Inc. and WearEver-ProctorSilex, Inc., is incorporated herein by reference to pages 8 through 97 of Exhibit 2 to the Company's Current Report on Form 8-K, dated February 1, 1988, Commission File Number 1-9172. X-5 55 (lxxxvii) Shareholders Agreement, dated January 20, 1988, among NACCO Industries, Inc. and the shareholders named therein is incorporated herein by reference to pages 98 through 108 of Exhibit 2 to the Company's Current Report on Form 8-K, dated February 1, 1988, Commission File Number 1-9172. (lxxxviii) Intentionally left blank. *(lxxxix) The Hamilton Beach/Proctor-Silex, Inc. Unfunded Benefit Plan (As Amended and Restated Effective January 1, 1997) is incorporated herein by reference to Exhibit 10(lxxxix) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. *(xc) Amendment No. 1 dated as of December 29, 1997 to the Hamilton Beach/Proctor-Silex, Inc. Unfunded Benefit Plan (As Amended and Restated Effective January 1, 1997) is attached hereto as Exhibit 10(xc). (xci) Intentionally left blank. (xcii) Pledge Agreement re: 66% Pledge of PSC Stock, dated as of October 11, 1990, between Hamilton Beach/Proctor-Silex and The Chase Manhattan Bank (National Association) is incorporated herein by reference to Exhibit 10(cx) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (xciii) Pledge Agreement re: 66% Pledge of PSM Stock, dated as of October 11, 1990, between Hamilton Beach/Proctor-Silex and The Chase Manhattan Bank (National Association) is incorporated herein by reference to Exhibit 10(cxi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (xciv) Pledge Agreement re: 34% pledge of PSC Stock, dated as of October 11, 1990, between Hamilton Beach/Proctor-Silex and The Chase Manhattan Bank (National Association) is incorporated herein by reference to Exhibit 10(cxii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (xcv) Pledge Agreement re: 33.2% Pledge of PSM Stock, dated as of October 11, 1990, between Hamilton Beach Proctor/Silex and The Chase Manhattan Bank (National Association) is incorporated herein by reference to Exhibit 10(cxiii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (xcvi) Pledge Agreement, dated as of October 11, 1990, between Housewares Holding Company and The Chase Manhattan Bank (National Association) is incorporated herein by reference to Exhibit 10(cxiv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (xcvii) Pledge Agreement, dated as of October 11, 1990, between HB-PS Holding Company, Inc. and The Chase Manhattan Bank (National Association) is incorporated herein by reference to Exhibit 10(cxv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (xcviii) Security Agreement, dated as of October 11, 1990, between Hamilton Beach/Proctor-Silex and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxvi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (xcix) Collateral Assignment of Patents and Trademarks and Security Agreement, dated as of October 11, 1990, between Hamilton Beach/Proctor-Silex and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxvii) to the Company s Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (c) NACCO Supplemental Agreement, dated as of October 11, 1990, between NACCO and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxviii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (ci) Housewares Supplemental Agreement, dated as of October 11, 1990, between Housewares Holding Company and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxix) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (cii) Holdings Supplemental Agreement, dated as of October 11, 1990, between HB-PS Holding Company, Inc. and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxx) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. X-6 56 (ciii) Override Agreement, dated as of October 11, 1990, among the Company, Housewares Holding Company, Glen Dimplex, Precis [521] Ltd., Glen Electric, Ltd. and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxxi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (civ) General Security Agreement, dated as of October 11, 1990, by Proctor-Silex Canada to and in favor of The Chase Manhattan Bank of Canada, as the Canadian agent, is incorporated herein by reference to Exhibit 10(cxxii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. *(cv) The Hamilton Beach/Proctor-Silex, Inc. 1997 Annual Incentive Compensation Plan is incorporated herein by reference to Exhibit 10(cxvii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File Number 1-9172. *(cvi) Hamilton Beach/Proctor-Silex, Inc. Long-Term Incentive Compensation Plan, effective January 1, 1993, is incorporated by reference to Exhibit 10(cxxiv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission File Number 1-9172. (cvii) First Amendment to the Housewares Supplemental Agreement, dated as of March 1, 1991, between Housewares Holding Company and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxxv) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (cviii) First Amendment to the Holdings Supplemental Agreement, dated as of March 1, 1991, between HB-PS Holding Company and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxxvi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (cvix) Consent and Authorization with reference made to the Credit Agreement dated October 11, 1990, as amended among Hamilton Beach/Proctor-Silex, Inc., Proctor-Silex Canada, Inc., Proctor-Silex S.A. de C.V., the banks named on the signatory pages and The Chase Manhattan Bank is incorporated herein by reference to Exhibit (cxxxvii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission File Number 1-9172. (cx) Amended and Restated Credit Agreement, dated as of May 10, 1994 among Hamilton Beach/Proctor-Silex, Inc., Proctor-Silex Canada, Inc., Proctor-Silex S.A. DE C.V., the banks named on the signatory pages and the Chase Manhattan Bank is incorporated herein by reference to as Exhibit 10 (cxxxviii) to the NACCO Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, Commission File Number 1-9172. (cxi) Confirmation Agreement dated May 10, 1994 among Hamilton Beach/Proctor-Silex, Inc., Housewares Holding Company, Precis [521] Ltd., HB-PS Holding Company, Glen Dimplex, Glen Electric, Ltd., the banks named on the signatory pages, the Chase Manhattan Bank and the Chase Manhattan Bank of Canada is incorporated herein by reference to Exhibit 10 (cxxix) to the NACCO Industries, Inc. Quarterly Report on Form 10-Q for the quarter ended on June 30, 1994, Commission File Number 1-9172. (cxii) First Amendment to the NACCO Supplemental Agreement, dated as of March 1, 1991, between the Company and The Chase Manhattan Bank (National Association), as the United States agent, is incorporated herein by reference to Exhibit 10(cxxi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission File Number 1-9172. (cxiii) Waiver Agreement, dated January 16, 1996 among Hamilton Beach/Proctor-Silex, Inc., Proctor-Silex Canada, Inc., Proctor-Silex S.A. de C.V. the banks named on the signatory pages and Chase Manhattan Bank is incorporated herein by reference to Exhibit 10 (cxiii) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File Number 1-9172. (cxiv) Amended and Restated Credit Agreement, dated as of April 18, 1995, among Hamilton Beach/Proctor-Silex, Inc., Proctor-Silex, Inc., Proctor-Silex S.A. de C.V., the banks named on the signatory pages and The Chase Manhattan Bank is incorporated herein by reference to Exhibit 10(cxiv) to the Company's Annual Report on From 10-K for the fiscal year ended December 31, 1995, Commission File Number 1-9172. (cxv) Amendment No. 1 dated as of March 29, 1996 to the Second Amended and Restated Credit Agreement, dated as of October 11, 1990, amended and restated as of April 18, 1995, among Hamilton Beach*Proctor-Silex, Inc. Proctor-Silex Canada, Inc., Proctor-Silex S.A de C.V., as Borrowers, the Banks signatory thereto and the Chase Manhattan Bank, N.A., as U.S. Agent, and The Chase Manhattan Bank of Canada, as Canadian Agent, is incorporated by reference herein to Exhibit 10 (xvii) on the Company's Quarterly Statement on Form 10-Q for the quarter ended June 30, 1996, Commission File Number 1-9172. X-7 57 (cxvi) Amendment No. 2 dated as of October 4, 1996 to the Second Amended and Restated Credit Agreement, dated as of October 11, 1990, amended and restated as of April 18, 1995, among Hamilton Beach-Proctor-Silex, Inc., Proctor-Silex Canada, Inc., Proctor-Silex S.A. de C.V., as Borrowers, the Banks signatory thereto and the Chase Manhattan Bank, N.A., as U.S. Agent, and the Chase Manhattan Bank of Canada, as Canadian Agent, is incorporated herein by reference to Exhibit 10(cxviii) to the Company's Quarterly Statement for the quarter ended September 30, 1996, Commission File Number 1-9172. (cxvii) Amendment No. 3 dated as of April 14, 1997 to the Second Amended and Restated Credit Agreement, dated as of October 11, 1990, amended and restated as of April 18, 1995, among Hamilton Beach/Proctor-Silex, Inc., Proctor-Silex Canada, Inc., Proctor-Silex S.A. de C.V., as Borrowers, the Banks signatory thereto and the Chase Manhattan Bank, N.A., as U.S. Agent, and the Chase Manhattan Bank of Canada, as Canadian Agent, is incorporated herein by reference to Exhibit 10(cxviii) to the Company's Quarterly Statement for the quarter ended June 30, 1997, Commission File Number 1-9172. (cxviii) Pledge Agreement, dated as of November 30, 1995, between Hamilton Beach/Proctor-Silex and The Chase Manhattan Bank (National Association) is attached hereto as Exhibit 10 (cxviii). (cxix) Pledge Agreement re: 66% of PST Stock, dated as of November 30, 1995, between HB/PS El Paso, Inc. and The Chase Manhattan Bank (National Association), is attached hereto as Exhibit 10(cxix). *(cxx) The Hamilton Beach/Proctor-Silex, Inc. 1998 Annual Incentive, Plan is attached hereto as Exhibit 10(cxx). (cxxi) - (cxxviii) Intentionally left blank. (cxxix) Credit Agreement, effective as of May 31, 1995, by and between The Kitchen Collection, Inc. and Society National Bank, N.A., is incorporated herein by reference to Exhibit 10 (cxvi) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Commission File Number 1-9172. (13) Consolidated Financial Statements for NACCO Industries, Inc. and subsidiaries for the year ended December 31, 1997 and Supplementary Data are attached hereto as Exhibit 13. (21) Subsidiaries. A list of the subsidiaries of the Company is attached hereto as Exhibit 21. (23) Consents of experts and counsel. (i) The consent of Arthur Andersen LLP, independent accountant, is attached hereto as Exhibit 23(i). (24) Powers of Attorney (i) A copy of a power of attorney for Owsley Brown II is attached hereto as Exhibit 24(i). (ii) A copy of a power of attorney for John J. Dwyer is attached hereto as Exhibit 24(ii). (iii) A copy of a power of attorney for Robert M. Gates is attached hereto as Exhibit 24(iii). (iv) A copy of a power of attorney for Leon J. Hendrix, Jr. is attached hereto as Exhibit 24(iv). (v) A copy of a power of attorney for Dennis W. LaBarre is attached hereto as Exhibit 24(v). (vi) A copy of a power of attorney for Ian M. Ross is attached hereto as Exhibit 24 (vi). (vii) A copy of a power of attorney for John C. Sawhill is attached hereto as Exhibit 24(vii). (viii) A copy of a power of attorney for Britton T. Taplin is attached hereto as Exhibit 24 (viii). (ix) A copy of a power of attorney for David F. Taplin is attached hereto as Exhibit 24 (ix). (x) A copy of a power of attorney for John F. Turben is attached hereto as Exhibit 24(x). (27) Financial Data Schedules -- filed electronically for SEC information purposes only. (99) Other exhibits not required to otherwise be filed.** (i) Audited Financial Statements for NACCO Materials Handling Group, Inc. for the fiscal year ended December 31, 1997, are attached hereto as Exhibit 99(i). X-8 58 (ii) Audited Financial Statements for Hamilton Beach/Proctor-Silex, Inc. for the fiscal year ended December 31, 1997, are attached hereto as Exhibit 99(ii). (iii) Audited Financial Statements for The North American Coal Corporation for the fiscal year ended December 31, 1997, are attached hereto as Exhibit 99(iii). (iv) Audited Financial Statements for The Kitchen Collection, Inc. for the fiscal year ended December 31, 1997, are attached hereto as Exhibit 99(iv). *Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Annual Report on Form 10-K. **Audited Financial Statements of subsidiary companies are not required disclosures and are included only for informational purposes. These statements do not reflect certain adjustments (including reclassifications and eliminations) that are required by GAAP in the preparation of NACCO Industries, Inc. and Subsidiaries Consolidated Financial Statements included in Part IV hereof, and should be read accordingly. X-9 EX-4.III 2 EXHIBIT 4(III) 1 Exhibit 4(iii) AMENDMENT TO MORTGAGE AND SECURITY AGREEMENT -------------------------------------------- This Amendment to Mortgage and Security Agreement (this "Amendment") is made as of the 15th day of December, 1993, by and among THE FALKIRK MINING COMPANY, an Ohio corporation qualified to do business in North Dakota and having an address at 2000 Schafer Street, Bismarck, North Dakota ("Mortgagor"), COOPERATIVE POWER ASSOCIATION, a Minnesota electric cooperative qualified to do business in North Dakota and having an address at 14615 Lone Oak Road, Eden Prairie, Minnesota, and UNITED POWER ASSOCIATION, a Minnesota electric cooperative qualified to do business in North Dakota and having an address at 17845 East Highway 10, Post Office Box 800, Elk River, Minnesota (COOPERATIVE POWER ASSOCIATION AND UNITED POWER ASSOCIATION are collectively referred to herein as "Mortgagee"); WITNESSETH THAT: ---------------- WHEREAS, pursuant to a Mortgage and Security Agreement dated April 8, 1976, filed for record in the office of the Register of Deeds for McLean County, North Dakota, on May 21, 1976, as Document Number 268423, and duly recorded in Book B-86 of Mortgages, Page 497 (the "Mortgage"), Mortgagor mortgaged and granted a security interest to Mortgagee in and to certain real and personal property more particularly described therein; and WHEREAS, portions of the property encumbered by the Mortgage have from time to time been released pursuant to Partial Satisfactions of Mortgage executed by the appropriate parties and duly recorded in the aforementioned records; and 1 2 WHEREAS, Mortgagor and Mortgagee have agreed to submit certain additional real property to the lien, security interest and operation of the Mortgage, and have further agreed that certain real property shall be released from the Mortgage under the circumstances hereinafter set forth. NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagor and Mortgagee agree as follows: 1. Unless otherwise defined herein, terms used in this instrument shall have the meanings ascribed to them in the Mortgage. 2. ADDITION TO PROPERTY. The Mortgage is hereby amended by including all of Mortgagor's right, title and interest in and to that certain Sublease Agreement dated as of December 15, 1993, between North American Coal Royalty Company and Mortgagor which is made a part hereof by this reference, in the Mortgaged Property upon and subject to all of the terms and conditions of the Mortgage. From and after the date hereof, Mortgagor's right, title and interest in the Sublease Agreement property described on the attached SCHEDULE 1 shall be deemed to be "Mortgaged Property" under the Mortgage. 3. CERTAIN RELEASES. Mortgagee hereby agrees that if it shall, in its capacity as "Buyer" under that certain Coal Sales Agreement, dated July 1, 1974, between Mortgagor and Mortgagee, as such agreement has been or may hereafter be modified and amended (the "Coal Sales Agreement"), instruct Mortgagor, in its capacity as "Mining Company" under the Coal Sales Agreement, to permanently 2 3 cease deliveries of coal shipments from Mortgaged Property comprised within the Riverdale Coal Field (as such term is defined in the Coal Sales Agreement) (in any case, the "Severed Property"), Mortgagee shall, concurrently with its delivery of such instruction, cause the Severed Property to be released from the lien and operation of the Mortgage. Mortgagee shall, and hereby covenants and agrees to, execute and deliver any and all documents, instruments and agreements necessary to implement the provisions of this Section 3. 4. MISCELLANEOUS. Mortgagor and Mortgagee hereby ratify and affirm the Mortgage, and each and every provision thereof, as amended hereby and as affected by the aforementioned Partial Satisfaction of Mortgage executed in connection therewith, and agrees that (as so modified, amended and affected) the Mortgage remains in full force and effect. IN WITNESS WHEREOF, the parties have caused this instrument to be executed as of the day and year first above written. Signed and acknowledged THE FALKIRK MINING COMPANY in the presence of: By: /s/ Dan W. Swetich - -------------------------- -------------------------------------- Title: President Attest: /s/ Marc M. Schulz - -------------------------- ---------------------------------- Title: Vice President 3 4 COOPERATIVE POWER ASSOCIATION By: /s/ Julian J. Brix - -------------------------- -------------------------------------- Title: General Manager Attest: /s/ Donald H. Richardson - -------------------------- ---------------------------------- Title: Manager, Funds & Risk Management UNITED POWER ASSOCIATION By: /s/ P. O. Martin - -------------------------- ------------------------------------- Title: General Manager Attest: /s/ Vivian Bennett - -------------------------- ---------------------------------- Title: Administrative Secretary 4 EX-10.XX 3 EXHIBIT 10(XX) 1 Exhibit 10(xx) ================================================================================ NACCO INDUSTRIES, INC. 1998 ANNUAL INCENTIVE COMPENSATION PLAN ================================================================================ 1. Purpose of the Plan ------------------- The purpose of the NACCO Industries, Inc. 1998 Annual Incentive Compensation Plan (the "Plan") is to further the profits and growth of NACCO Industries, Inc. (the "Company") by enabling the Company to attract and retain key employees of the Company by offering annual incentive compensation to those key employees who will be in a position to help the Company to meet its financial and business objectives. 2. Definitions ----------- (a) "Award" means cash paid to a Participant under the Plan for the Award Term in an amount determined in accordance with Section 4. (b) "Award Term" means the period from January 1, 1998 through December 31, 1998. (c) "Base Amount" means for any Participant a dollar amount, which shall be equal to the salary midpoint for the Salary Points assigned to the Participant by the Committee for the Award Term multiplied by 60% of the short-term incentive compensation target percent for those Salary Points. Attached hereto as EXHIBIT A is a schedule listing the Base Amount for each Participant for the Award Term. (d) "Committee" means the Nominating, Organization and Compensation Committee of the Company's Board of Directors or any other committee appointed by the Company's Board of Directors to administer this Plan in accordance with Section 3, so long as any such committee consists of not less than two directors of the Company and so long as each member of the Committee is not an employee of the Company or any of its subsidiaries. (e) "Participant" means any salaried employee of the Company who in the judgment of the Committee occupies a key position in which his efforts may significantly contribute to the profits or growth of the Company; provided, however, that the Committee may select any employee who is expected to contribute, or who has contributed, significantly to the Company's profitability to participate in the Plan and receive an Award hereunder; and further provided, however, that following the end of the Award Term the Committee may make one or more discretionary Awards to employees of the Company who are not Participants. Directors of the Company who are also employees of the Company are eligible to participate in the Plan. Employees of the Company's subsidiaries shall not be eligible to participate in 2 the Plan. The Committee shall have the power to add Participants at any later date in the Award Term if individuals subsequently become eligible to participate in the Plan. Each Participant shall be notified that he is eligible to receive an Award for such term and the amount of his Base Amount. If a Participant receives a change in Salary Points, salary midpoint and/or short-term incentive compensation target percent, such change and any resulting change in his Base Amount will be reflected on an amended EXHIBIT A. Unless otherwise determined by the Committee, a Participant must be both employed by the Company and a Participant on December 31 of the Award Term, and the amount of any Award to a Participant who was not also employed by the Company and a Participant on the first day of the Award Term shall be not more than the pro-rated amount based upon the number of days actually employed by the Company in the Award Term. Attached hereto as EXHIBIT A is a schedule listing the Participants for the Award Term. (f) "Salary Points" means the salary points assigned to a Participant by the Committee pursuant to the Hay salary point system, or any successor salary point system adopted by the Committee. 3. Administration -------------- This Plan shall be administered by the Committee. The Committee shall have complete authority to interpret all provisions of this Plan consistent with law, to prescribe the form of any instrument evidencing any Award granted or paid under this Plan, to adopt, amend and rescind general and special rules and regulations for its administration, and to make all other determinations necessary or advisable for the administration of this Plan. A majority of the Committee shall constitute a quorum, and the action of members of the Committee present at any meeting at which a quorum is present or acts unanimously approved in writing, shall be the act of the Committee. All acts and decisions of the Committee with respect to any questions arising in connection with the administration and interpretation of this Plan, including the severability of any or all of the provisions hereof, shall be conclusive, final and binding upon the Company and all present and former Participants, all other employees of the Company, and their respective descendants, successors and assigns. No member of the Committee shall be liable for any such act or decision made in good faith. 4. Awards ------ The Committee may, from time to time and upon such conditions as it may determine, authorize Awards for Participants, which Awards shall be not inconsistent with, and shall be subject to all of the requirements of, the following provisions: 2 3 (a) PERFORMANCE TARGETS. The Committee shall determine performance target descriptions, weightings and targets for the Award Term, which shall be attached hereto as EXHIBIT B. The Committee shall have the power to add, delete and amend target descriptions, weightings and targets during the Award Term, which shall be reflected on an amended EXHIBIT B. No performance targets used in this Plan shall be used in the Company's Supplemental Annual Incentive Compensation Plan in the same year. (b) AWARDS. Following the end of the Award Term, the Committee shall compare the actual performance against the performance targets for each of the performance target descriptions. Based thereupon, the Committee shall determine the total payout percentage under the Plan (the "Payout Percentage"). The Committee shall then determine the Award for each Participant, which shall be equal to the Participant's Base Amount, multiplied by the Payout Percentage, and further adjusted by such other factors, including an individual performance factor for each Participant, as the Committee shall determine are appropriate; provided, however, that no Award may be made to any Participant which exceeds 150% of his Base Amount. Promptly following the approval of the final Awards, the Company shall pay the amount of such Awards to the Participants in cash, subject to all withholdings and deductions pursuant to Section 5; provided, however, that no Award shall be payable to a Participant except as determined by the Committee. 5. Withholding Taxes ----------------- Any Award paid to a Participant under this Plan, shall be subject to standard federal, state and local income tax, social security and other standard withholdings and deductions. 6. Amendment and Termination ------------------------- The Committee may alter or amend this Plan from time to time or terminate it in its entirety; provided, however, that no such action shall, without the consent of a Participant, affect the rights in an outstanding Award of such Participant. 7. General Provisions ------------------ (a) NO RIGHT OF EMPLOYMENT. Neither the adoption or operation of this Plan, nor any document describing or referring to this Plan, or any part thereof, shall confer upon any employee any right to continue in the employ of the Company, or shall in any way affect the right and power of the Company 3 4 to terminate the employment of any employee at any time with or without assigning a reason therefor to the same extent as the Company might have done if this Plan had not been adopted. (b) GOVERNING LAW. The provisions of this Plan shall be governed by and construed in accordance with the laws of the State of Delaware. (c) MISCELLANEOUS. Headings are given to the sections of this Plan solely as a convenience to facilitate reference. Such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of this Plan or any provisions thereof. The use of the masculine gender shall also include within its meaning the feminine. The use of the singular shall also include within its meaning the plural, and vice versa. 8. Effective Date -------------- This Plan shall become effective as of January 1, 1998. 4 EX-10.XLV 4 EXHIBIT 10(XLV) 1 Exhibit 10(xlv) 1998 INCENTIVE COMPENSATION PLAN SUMMARY The Incentive Compensation Plan (Plan) offers a highly attractive incentive compensation opportunity to senior managers when all performance objectives under their control or influence are achieved. This is accomplished through a structure containing the following elements: - Each participant is assigned an individual incentive target, stated as a percentage of their salary midpoint, that establishes the incentive compensation amount they will receive when performance objectives are met. - The individual target amount is allocated among the following performance components: - North American Coal (NAC) corporate performance. - Bellaire Corporation cash flow. - Business unit results. - Individual achievement. - Percentage weightings are assigned to each component, based on the participant's accountabilities and their impact on each component. - One or more performance objectives will be established at the beginning of the year for each performance component. - A performance range, which defines the acceptable level of results, from threshold to maximum, is created for each performance objective. - A payout range is defined, which provides for incentive payments of up to 150 percent of the incentive target, except to the extent the Committee elects to increase the actual pool by up to 10 percent, as described below. - A performance/payout schedule combines the two ranges into a matrix that defines the level of incentive compensation payment that will result from each level of performance. - After audited financials are available, awards will be calculated based on actual results against the established objectives. - A final individual performance adjustment may be made, within a range of +10 percent of the calculated award, based on a judgment of the participant's overall performance. This Incentive Compensation Plan will allow management and the Board to establish, in advance, the performance expectations and related incentive compensation potential that NAC's executives can expect for the year. At year-end, the Plan focuses judgment of the management team's performance on predetermined objectives that should produce fairness in the determination of rewards. 2 1998 INCENTIVE COMPENSATION PLAN page 2 PLAN STRUCTURE INDIVIDUAL INCENTIVE TARGETS The primary focus of the proposed Plan is the individual incentive compensation target. Each participant is assigned a target, stated as a percentage of the mid-point of base salary, which will be paid when all relevant performance objectives are achieved. The Plan provides for payments above or below the target to reflect acceptable variances from performance objectives. Performance Goals ----------------- Four sets of goals are proposed: INTENTIONALLY LEFT BLANK Incentive Award Range --------------------- Actual performance results attained probably will not match the established performance goals exactly. Therefore, the Plan is designed to provide incentive compensation payouts of up to 150 percent of the target award if actual results fall within a predetermined range of acceptable performance. The award range is defined as follows:
% OF AWARD LEVEL TARGET DESCRIPTION ---------------------- ---------------- ---------------------------------------------- Maximum 150% Highest level of incentive paid. Target 100% Competitive incentive opportunity for achieving all important goals. Threshold 50% Incentive paid when results meet minimum acceptable standards. Below threshold 0% Performance does not merit incentive payment.
3 1998 INCENTIVE COMPENSATION PLAN page 3 COMPONENT WEIGHTINGS Participants' potential incentive awards will be allocated between performance components based on their individual impact on results. The allocations allow for awards to be earned based on the achievement of the performance objectives over which each executive has the most control. Weightings will be stated as a percentage and total 100 percent for each participant. The weightings will be established each year to reflect current organizational accountabilities and the relative importance of the various performance components. Our recommended weightings are as follows: INTENTIONALLY LEFT BLANK When there is more than one goal for a performance component, further percentage weightings may be assigned, within the overall weightings, to reflect the relative priority of each goal. For example, if the individual component has a 40 percent weighting and there are five individual goals, each individual goal might be assigned a priority weighting of 20 percent. PERFORMANCE RANGE A range of performance acceptable for incentive compensation payment will be established for each performance objective. For quantitative goals, the range may be set as a percentage of the objective. For goals that cannot be quantified, the range will be defined in narrative form. The following general definitions will apply. The percentage ranges indicated are only guidelines; specific percentage ranges or narrative descriptions should be determined for each goal based on the definitions. 4 1998 INCENTIVE COMPENSATION PLAN page 4
PERFORMANCE PERFORMANCE PERCENTAGE LEVEL GUIDELINE DEFINITION ---------------------- ------------------- -------------------------------------------- Threshold 75% Minimum acceptable results justifying payment of incentives. Objective 100% Results meet high performance demands justifying fully competitive rewards. Maximum 125% Highest foreseeable level of performance.
PERFORMANCE/PAYOUT SCHEDULE Combining the performance and payout ranges yields a performance/ payout schedule as in the following example: PERFORMANCE DEFINITION RESULTS AWARD LEVELS PAYOUT ------------------ ---------------------------- ----------- -------------------- ----------- Threshold Minimum 75% Threshold 50% Objective On plan 100% Target 100% Maximum Exceeding expectations 125% Maximum 150%
This schedule is applied separately to the results of each established performance element to determine the incentive amount earned in accordance with assigned weightings. Performance that falls between the defined levels would result in proportionally adjusted payouts, which may be calculated mathematically or determined judgmentally. CORPORATE PERFORMANCE THRESHOLD No incentive compensation awards will be earned under the Plan in any year unless the threshold level of the corporate performance component is achieved. Once the corporate performance threshold is attained, each performance objective is separate and distinct. This means that partial awards can be earned for the attainment of one performance objective even if another is not sufficient to generate a payout. INDIVIDUAL ADJUSTMENT FACTOR Each individual award, as calculated above, may be adjusted upward or downward by as much as 10 percent of the total award, based on management's' perceptions of each individual's overall performance. 5 1998 INCENTIVE COMPENSATION PLAN page 5 PARTIAL AWARDS Executives who are hired or promoted during the year to positions eligible for participation in the Plan may be included in the Plan on a prorata basis. COMMITTEE DISCRETION It is the intent of the Plan that the total incentive compensation, as determined above, will be the final total corporate incentive compensation to be paid. However, the Committee, in its sole discretion, may increase or decrease, by up to 10 percent, the total incentive compensation or may approve an incentive compensation payment where normally there would be no payment, due to corporate performance which is below the criteria established for the year. 1998 PERFORMANCE TARGETS See Plan Summary. EX-10.XLVII 5 EXHIBIT 10(XLVII) 1 Exhibit 10 (xlvii) July 29, 1997 EXTENSION AGREEMENT ------------------- The North American Coal Corporation 14785 Preston Road Suite 1100 Dallas, Texas 75240 Morgan Guaranty Trust Company of New York, as Agent under the Credit Agreement referred to below 60 Wall Street New York, New York 10260 Gentlemen: The undersigned hereby agree to extend, effective September 27, 1997, the Termination Date under the Credit Agreement dated as of September 27, 1991 among The North American Coal Corporation, the Banks listed therein and Morgan Guaranty Trust Company of New York, as Agent (the "Credit Agreement") for one year to September 27, 2002. Terms defined in the Credit Agreement are used herein as therein defined. This Extension Agreement shall be construed in accordance with the governed by the law of the State of New York. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Patricia P. Lunka ------------------------------------------ Title: Vice President CITIBANK By: /s/ Majorie Futornick ------------------------------------------ Title: Vice President 2 TEXAS COMMERCE BANK NATIONAL ASSOCIATION By: /s/ Allen King ------------------------------------------- Title: Vice President KEY BANK NATIONAL ASSOCIATION By: /s/ Marianne Meil ----------------------------------------- Title: Vice President Agreed and accepted: THE NORTH AMERICAN COAL CORPORATION By: /s/ K. Donald Grischow - ----------------------------------------------------- Title: Controller and Treasurer MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: /s/ Patricia P. Lunka - ----------------------------------------------------- Title: Vice President EX-10.XLVIII 6 EXHIBIT 10(XLVIII) 1 Exhibit 10(xlviii) ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of August 22,1997 among WELLS FARGO BANK (TEXAS), N.A. (the "Assignor"), TEXAS COMMERCE BANK NATIONAL ASSOCIATION (the "Assignee"), THE NORTH AMERICAN COAL CORPORATION (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H - - - - - - - - - - WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Credit Agreement dated as of September 27, 1991 among the Borrower, the Assignor and the other Banks party thereto, as Banks, and the Agent (as amended from time to time, the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $7,500,000; WHEREAS, immediately prior to the effectiveness hereof, there are no outstanding Committed Loans made to the Borrower by the Assignor under the Credit Agreement; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of its Commitment thereunder in an amount equal to $7,500,000 (the "Assigned Amount") and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. 2 SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount. Provided that all the Committed Loans made by the Assignor to the Borrower have been repaid in full, upon the (x) execution and delivery hereof by the Assignor, the Assignee, the Borrower and the Agent and (y) payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. The Assignor shall pay to the Agent an administrative fee for processing this assignment of $2,000. SECTION 4. Consent of the Borrower and the Agent. This Agreement is conditioned upon the consent of the Borrower and the Agent pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Agent is evidence of this consent. Pursuant to Section 9.06(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the obligations of the Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. 2 3 SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. WELLS FARGO BANK (TEXAS), N.A. By /s/ Ken Taylor ---------------------------- Title: Assistant Vice President TEXAS COMMERCE BANK NATIONAL ASSOCIATION By /s/ Allen King ---------------------------- Title: Vice President THE NORTH AMERICAN COAL CORPORATION By /s/ K. Donald Grischow ----------------------------- Title: Controller and Treasurer 3 4 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Patricia P. Lunka ------------------------------ Title: VICE PRESIDENT 4 EX-10.LXIII 7 EXHIBIT 10(LXIII) 1 Exhibit 10(lxiii) ANNUAL INCENTIVE COMPENSATION PLAN ---------------------------------- 1998 GENERAL - ------- NACCO Materials Handling Group, Inc., (the "Company") has established an Annual Incentive Compensation Plan ("Plan") as part of a competitive compensation program for the officers and key management employees of the Company and its Subsidiaries. PLAN OBJECTIVE - -------------- The Company desires to attract and retain talented employees to enable the Company to meet its financial and business objectives. The objective of the Plan is to provide an opportunity to earn annual incentive compensation to those employees whose performance has a significant impact on the Company's short-term and longterm profitability. ADMINISTRATION AND PARTICIPATION - -------------------------------- The Plan is administered by the Nominating, Organization and Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee: a. May amend, modify or discontinue the Plan. 1 2 b. Will approve participation in the Plan. Generally, participants will include all employees in NACCO Materials Handling Group salary grades 22 and above. However, the Committee may select any employee who has contributed significantly to the Company's profitability to participate in the Plan and receive an annual incentive compensation award. Subject to paragraphs g and h, below, no employee of NACCO Materials Handling Group shall be eligible to be a participant in the Plan, and no participant in the Plan shall be eligible to receive an award, unless such individual is employed for at least 90 calendar days during the year. c. Will determine the annual performance criteria which generate the incentive compensation pool. d. Will determine the total amount of both the target and actual annual incentive compensation pool. e. Will approve individual incentive compensation awards to officers and employees in NACCO Materials Handling Group above salary grade 29. f. May delegate to the Chief Executive Officer of the Company the approval of incentive compensation awards to NACCO Materials Handling Group employees in salary grade 29 and below. g. May consider at the end of each year the award of a discretionary bonus amount to non-participants as an addition to the regular incentive compensation pool on a special one-time basis to motivate individuals not eligible to participate in the Plan. 2 3 h. May approve a pro-rate incentive compensation award for participants in the Plan whose employment is terminated (1) due to death, disability, retirement or facility closure, such award to be determined pursuant to the provisions of subparagraphs (e) and (f) above, or (2) under other circumstances at the recommendation of the Chief Executive Officer of the Company. DETERMINATION OF CORPORATE INCENTIVE COMPENSATION POOL - ------------------------------------------------------ Each participant in the Plan will have an individual target incentive compensation percentage which is determined by the participant's salary grade. This percentage is multiplied by the mid-point of the participant's salary grade to determine his individual target incentive compensation award. The total of the target incentive compensation awards of all participants equals the target corporate incentive compensation pool ("Target Pool"). The Target Pool is approved each year by the Committee. The actual corporate incentive compensation pool ("Actual Pool") is determined at the end of each year based on the Company's actual performance against specific criteria established in the beginning of the year by the Committee. The Target Pool is adjusted upwards or downwards by corporate performance adjustment factors to determine the Actual Pool. In no event will the Actual Pool exceed 150% of the Target Pool, except to the extent that the Committee elects to increase the Actual Pool by up to 110%, as described below. 3 4 The Target and Actual Pools may consist of the sum of two or more subpools, provided the subpools have individual objectives. It is the intent of the Plan that the Actual Pool, as determined above, will be the final total corporate incentive compensation pool. However, the Committee, in its sole discretion, may increase or decrease by up to 10% the Actual Pool or may approve an incentive compensation pool where there would normally be no pool due to Company performance which is below the criteria established for the year. The Actual and Target Pools exclude the Marketing Incentive Plan for regional parts, service, sales and national account managers. However, total compensation or employees covered by the Marketing Incentive Plan will be based on competitive levels. DETERMINATION OF INDIVIDUAL INCENTIVE COMPENSATION AWARDS - --------------------------------------------------------- Salary grades and the corresponding target incentive percentages for each participant in the Plan will be established at the beginning of each year and approved by the Committee. Individual target incentive compensation will then be adjusted by the appropriate pool or subpool factor. Such adjusted individual incentive compensation will then be further modified based on the team performance to which an individual belongs compared to the team goals for the year, and may be further 4 5 modified based on a Participant's performance as compared to their individual goals for the year. The total of all individual incentive compensation awards must not exceed Actual Pool for the Year. Below are examples of actual pool and individual award calculations. a. Example calculation for determination actual pool: INTENTIONALLY LEFT BLANK 6 b. Example calculation for determination of individual incentive compensation award: INTENTIONALLY LEFT BLANK 6 EX-10.XC 8 EXHIBIT 10(XC) 1 Exhibit 10(xc) AMENDMENT NO. 1 TO THE HAMILTON BEACH/PROCTOR-SILEX, INC. UNFUNDED BENEFIT PLAN (AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1997) --------------------------------------------------- Hamilton Beach/Proctor-Silex, Inc. hereby adopts this Amendment No. 1 to the Hamilton Beach/Proctor-Silex, Inc. Unfunded Benefit Plan (as amended and restated effective January 1, 1997)(the "Plan"). The provisions of this Amendment shall be effective January 1, 1998. Words and phrases used herein with initial capital letters which are defined in the Plan are used herein as so defined. SECTION 1 --------- The second sentence of Section 3.3(b) of the Plan is hereby amended in its entirety to read as follows: "In the Deferral Election Form, such Participant may elect to commence payment of his Excess 401(k) Sub-Account on (i) the date on which he ceases to be an Employee of a Controlled Group Member, (ii) January lst of the year following the date on which he ceases to be an Employee of a Controlled Group Member, (iii) the date on which he attains an age specified in the Deferral Election Form, or (iv) the earlier or later of any of such dates." SECTION 2 --------- Section 6.1(c)(i) of the Plan is hereby amended in its entirety to read as follows: "(i) TIMING. A Participant's Account shall be paid or commence to be paid to the Participant 30 days after the date specified in the Participant's Deferral Election Form pursuant to Section 3.3(b)." Executed this 29th day of December, 1997. HAMILTON BEACH/PROCTOR-SILEX, INC, By: /s/ George P. Manson, Jr. ------------------------------- Title: Vice President, General Counsel and Secretary EX-10.CXVIII 9 EXHIBIT 10(CXVIII) 1 Exhibit 10(cxviii) PLEDGE AGREEMENT PLEDGE AGREEMENT (this "AGREEMENT") dated as of November 30,1995 between Hamilton Beach/Proctor-Silex, Inc. a Delaware corporation (the "PLEDGOR") and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) (in such capacity, together with its successors and assigns in such capacity, herein called the "PLEDGEE"), as agent for the banks and other financial institutions party to the below-referenced Credit Agreement (the "BANKS"). Hamilton Beach/Proctor-Silex, Inc. (the "Pledgor"), the other Obligors named therein, the Banks named therein and the Pledgee, as U.S. Agent and the Canadian Agent named therein are parties to a Credit Agreement dated as of October 11, 1990 amended and restated as of April 18, 1995 (as further amended, modified and supplemented and in effect from time to time, herein called the "CREDIT AGREEMENT") providing for Loans to be made by the Banks to the Pledgor and its Subsidiary, Proctor-Silex Canada Inc. (or issuance of letters of credit by the Issuing Bank for the account of the Pledgor) in an aggregate principal (or face) amount not to exceed U.S. $135,000,000 (or a U.S. Dollar Equivalent). Unless otherwise specified, capitalized terms defined in the Credit Agreement shall have their defined meanings when used herein. The Pledgor has agreed to pledge, and to cause its Subsidiaries to pledge, all of the issued and outstanding shares of capital stock of HB/PS El Paso, Inc. (HB/PS) from time to time owned by the Pledgor with the Pledgee hereunder for the benefit of the Banks and the issuing Bank. Certain provisions of this Agreement are subject to Section 3.02 of the Override Agreement to the extent, and with the effect, set forth in Section 3.02 of the Override Agreement. As collateral security for the prompt payment in full by the Pledgor when due (whether at stated maturity, by acceleration or otherwise) of (i) any and all obligations of any Obligor in respect of the Loans or Letters of Credit (including, without limitation, Letter of Credit Obligations) under Section 2 of the Credit Agreement, the Notes, the Security Documents, the Letter of Credit Documents and any other note or notes from time to time evidencing such Loans or such Letter of Credit Obligations, (ii) any and all other amounts from time to time payable by the Pledgor, NACCO or any Obligor to the Banks, the Issuing Bank or either Agent under the Credit Agreement, the Security Documents, the Supplemental Security Documents (including this Agreement), the Letter of Credit Documents or the Notes, (iii) any and all obligations of the Pledgor in respect of Bank Financial Accommodations (including, without limitation, Bank Letter of Credit Obligations) and (iv) any and all other amounts from time to time payable by the 2 2 Pledgor to any Bank under the Bank Financial Accommodation Documents (the obligations referred to in clauses (i), (ii), (iii) and (iv) above herein called collectively, the "OBLIGATIONS"), the Pledgor hereby pledges to the Pledgee and grants to the Pledgee a security interest in, for the equal and ratable benefit of the Banks and the Issuing Bank, (a) all of the shares of issued and outstanding capital stock of HB/PS from time to time owned by the Pledgor together with the certificates evidencing the same (herein called the "PLEDGED SHARES"), (b) all dividends, distributions and other amounts payable under or in respect of the Pledged Shares and (c) the proceeds of the foregoing (the items described in clauses (a) through (c) and any other property or assets from time to time pledged to the Pledgee as collateral security hereunder, other than cash hereafter paid to or retained by the Pledgee under A(2) and (4), being herein collectively called the "SECURITY"); and the Pledgor shall concurrently deliver the Pledged Shares against a receipt in the form of Exhibit A hereto to the Pledgee for the purposes aforesaid, and deliver to the Pledgee, in form transferable by delivery, the certificates representing the Pledged Shares accompanied by undated stock powers duly executed in blank, to be held by the Pledgee as collateral security as aforesaid. In furtherance thereof, the parties hereto agree as follows: A. Transfer, Voting Power, Dividends, etc. (1) If an Event of Default shall occur and be continuing (or if the Pledgee is required to do so by any bank regulatory authority or otherwise), the Pledgee may have any of the Security registered in its name or in the name of its nominee. Such Security as so registered shall remain subject to this Agreement. (2) Unless and until an Event of Default shall occur and be continuing (the period during which any Event of Default shall so continue being herein called a "DEFAULT PERIOD") and, in the case of clause (a) below, the Pledgee shall have notified the Pledgor of its election to exercise its rights under A(3)(a): (a) The Pledgor shall be entitled to exercise all powers of voting and/or consent pertaining to the Security owned by it or any part thereof, for all purposes not inconsistent with the terms of this Agreement or the Credit Agreement. (b) The Pledgor shall be entitled to receive and retain any dividends on shares included in the Security which are legally payable. All other payments, distributions and/or dividends, in securities, property or cash, including without limitation, dividends representing stock or liquidating dividends or a distribution or return of capital upon or in respect of the Security or any part thereof or resulting from a split-up, revision or reclassification of the Security or any part thereof or received in exchange for the Security or any part thereof as a result of a merger, consolidation or otherwise, shall be paid or delivered directly to the Pledgee immediately upon receipt thereof by the Pledgor, (accompanied by appropriate undated stock powers duly executed in blank), and/or shall be retained by the Pledgee as part of the Security. 3 3 (c) In case any money shall be paid to the Pledgor on account of any payment, dividend or other distribution upon or in respect of the Security or any part thereof, other than a payment which the Pledgor is entitled to receive and retain under clause (b) above, such money shall be immediately paid to the Pledgee and upon receipt by the Pledgee shall, if requested by the Pledgor, be applied by the Pledgee (prior to any sale of the Security thereunder) to the payment of the Obligations in accordance with C(2). (d) In order to permit the Pledgor to exercise such powers of voting and/or consent under clause (a) above, the Pledgee shall, if necessary, upon the written request of any Pledgor, from time to time execute and deliver to the Pledgor appropriate proxies. (e) In order to permit the Pledgee to receive all payments and distributions to which it may be entitled under clauses (b) and (c) above, the Pledgor shall, if necessary, upon the written request of the Pledgee, from time to time execute and deliver to the Pledgee appropriate dividend or payment orders. (3) During any Default Period: (a) If the Pledgee so notifies the Pledgor, the Pledgee or its nominee or nominees shall have the sole and exclusive right to exercise all powers of voting and/or consent pertaining to the Security or any part thereof. (b) All payments and other distributions made upon or in respect of the Security or any part thereof shall be paid directly to and shall be retained by the Pledgee and held by it as stated in subsection (4) immediately below. (4) All cash and other property paid to and/or retained by the Pledgee pursuant to this A shall be held by it for the benefit of the Banks, until applied as herein provided, as additional collateral security pledged under and subject to the terms of this A. B. REMEDIES. (1) REALIZATIONS. ETC. If an Event of Default shall occur and be continuing, in addition to any rights and remedies which may be available to a secured party under the Uniform Commercial Code as in effect at the time in New York, the following provisions shall apply: (a) The Pledgee may, without being required to give any notice except as hereinafter provided, apply the cash, if any, then held by it as collateral security hereunder to the payment of the Obligations and, if there shall be no such cash or the cash so applied shall be insufficient to pay in full all such Obligations, sell the Security, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or 4 4 for future delivery, and at such price or prices as the Pledgee may deem satisfactory, and the Pledgee or any Bank may be the purchaser of any or all of the Security so sold and thereafter hold the same absolutely, free from any right or claim of whatsoever kind. (b) The Pledgee is authorized, at any such sale, if it deems it advisable so to do, to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account, for investment, and not with a view to the distribution or sale of any of the Security. (c) Upon any such sale the Pledgee shall have the right to deliver, assign and transfer to the purchaser thereof the Security so sold. As permitted at law or in equity, each purchaser (including the Pledgee, any of the Banks and any other holder of any of the Notes) at any such sale shall hold the property sold absolutely, free from any claim or right of whatsoever kind, including any equity or rights of redemption, of the Pledgor, who hereby specifically waives as against any such purchaser all rights of redemption, stay or appraisal which it has or may have under any rule of law or statute now existing or hereafter adopted. (d) The Pledgee shall give the Pledgor at least 10 days written notice by mail and telegram (or by hand delivery) of intention to make any such public or private sale or sale at broker's board or on a securities exchange, which notice shall specify, to the extent known by the Pledgee, the terms of sale intended. Such notice, in case of public sale, shall state the time and place fixed for such sale, and, in case of sale at broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Security, or that portion thereof so being sold, will first be offered for sale at such board or exchange. (e) Any such public sale shall be held at such time or times within ordinary business hours and at such place or places in the Borough of Manhattan, City of New York, or elsewhere in the United States, as the Pledgee may fix in the notice of such sale. At any such sale the Security may be sold in one lot as an entirety or in separate parcels, as the Pledgee may determine. (f) The Pledgee shall not be obligated to make any sale pursuant to any such notice. The Pledgee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. (g) In case of any sale of all or any part of the Security for future delivery, the Security so sold must be retained by the Pledgee until the selling price is paid by the purchaser thereof, but the Pledgee shall not incur any liability in case of the failure of such purchaser to take up and pay for the Security so sold 5 5 and, in case of any such failure, such Security may again be sold upon like notice. (h) The Pledgee, however, instead of, or in addition to, exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the pledge and sell the Security, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. (2) REGISTRATION. ETC. (a) If the Pledgee determines to exercise its right to sell all or any of the Pledged Shares and if in the opinion of counsel to the Pledgee it is necessary, or if in the opinion of the Pledgee it is advisable, to have such Security registered under the provisions of the Securities Act of 1933, as amended (the "ACT"), the Pledgor and the Subsidiaries whose shares of the capital stock are Pledged Shares shall, at the Pledgor's own expense: (i) Execute and deliver (and cause the directors and officers thereof to execute and deliver), all such instruments and documents, and to do or cause to be done all other such acts and things as may be necessary or, in the reasonable opinion of the Pledgee, advisable to register such Security under the provisions of the Act. (ii) Use its reasonable efforts to cause the registration statement relating to such registration to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments thereto and/or to the related prospectus which, in the reasonable opinion of the Pledgee, are necessary or desirable, all in conformity with the requirements of the Act and the rules and regulations of the Securities and Exchange Commission ("SEC") applicable thereto. (iii) Use reasonable efforts to qualify such Security under state Blue Sky or securities laws and to obtain the approval of any governmental authorities to the sale of such Security, all as reasonably requested by the Pledgee. (b) In the event that the Pledgor at any time or from time to time during a Default Period shall determine to register any of its or its Subsidiaries' securities (other than a registration on Form S-8, or other form for similar purposes then in use, of its securities to be distributed solely to employees of the Pledgor and of its Subsidiaries), the Pledgor shall, at its own expense: (i) furnish prompt written notice thereof (which shall include a list of the jurisdictions in which the Pledgor intends to register such securities under applicable securities or state Blue Sky laws of such jurisdiction) to the Pledgee and the Banks; and 6 6 (ii) at the request of the Pledgee or the Majority Banks use its best efforts to include among the securities that the Pledgor registers, all or any part of the Pledged Shares. (c) In the case of registrations pursuant to B(2) (a) and B(2) (b), the Pledgor shall, at the request of the Pledgee or the Banks, indemnify and hold harmless the Pledgee and the Banks from and against any loss, liability, claim, damage and expense (and reasonable counsel fees incurred in connection therewith) under the Act or otherwise insofar as such loss, liability, claim, damage or expense arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in such registration statement or prospectus or in any preliminary prospectus or any amendment or omission or alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading, such indemnifications to remain operative regardless of any investigation made by or on behalf of the Pledgee; provided that the Pledgor shall not be liable in any case to the extent that any such loss, liability, claim, damage or expense arises out of or is based on any untrue statement or alleged untrue statement or an omission or an alleged omission made in reliance upon and in conformity with written information furnished by the Pledgee or the Banks. (3) INFORMATION. If the Pledgee determines to exercise its right to sell all or any of the Security, upon written request, the Pledgor shall from time to time furnish to the Pledgee all such information as the Pledgee may reasonably request in order to determine the number of shares included in the Security which may be sold by the Pledgee as exempt transactions under the Act and rules of the SEC thereunder, as the same are from time to time in effect. Without limitation of the foregoing, if the Pledgee determines to exercise its right to sell all or any of the Pledged Shares, the Pledgor (and the directors and officers thereof) shall upon written request from the Pledgee, in order to enable the Pledgee to qualify such sales as exempt transactions under Section 4(1) of the Act and Rule 144 of the SEC thereunder (or any statutory provisions or rules in effect in lieu thereof), as the same are from time to time in effect (a) make publicly available the information required by Rule 144(c) (or any provision in effect in lieu thereof) and (b) furnish to the Pledgee all such information as the Pledgee may reasonably request in order to determine the number of shares included in such Pledged Shares, if any, which may be sold under Rule 144(e) (or any provision in effect in lieu thereof). C. GENERAL PROVISIONS. The following general provisions shall apply to the Security and this Agreement generally: (1) PRIVATE SALE. The Pledgee shall incur no liability as a result of the sale of the Security, or any part thereof, at any private sale permitted by this Agreement or under applicable law, provided that the Pledgee shall act in a commercially 7 7 reasonable manner within the intendment of the Uniform Commercial Code. The Pledgor hereby waives, to the fullest extent permitted by law, any claims against the Pledgee or the Banks arising by reason of the fact that the price at which any security may have been sold at such a private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Pledgee accepts the first offer received and does not offer such Security to more than one offeree. (2) APPLICATION OF PROCEEDS. The proceeds of any sale of all or any part of the Security, and any other cash at the time held by the Pledgee under this Agreement, shall be applied by the Pledgee: FIRST, to the payment of the costs and expenses of such sale, including reasonable compensation to the Pledgee and its agents and counsel, and all expenses, liabilities and advances made or incurred by the Pledgee in connection therewith. NEXT, to the payment of the Obligations ratably according to the respective amounts (which in the case of Obligations other than the Loans or the Notes shall mean the amount due to a Bank or an Agent on the date of distribution) of such Obligations. FINALLY, after payment in full of all Obligations (including, without limitation, those not yet due and payable at the time of the application referred to above), to the payment to the Pledgor, or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. As used in this Agreement, "PROCEEDS" of the Security shall mean cash, securities and other property realized in respect of, and distributions in kind of, the Security, including any thereof received under any reorganization, liquidation or adjustment of debt of the Pledgor or any issuer of securities included in the Security. (3) ATTORNEY-IN-FACT. The Pledgee is hereby appointed the attorney-in-fact of the Pledgor (effective upon notice by the Pledgee to the Pledgor) (i) for any period not a Default Period, for the purpose of signing documents and taking other action to perfect, promote and protect its security interest in the Security consistent with the terms of this Agreement and (ii) during a Default Period, for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments which the Pledgee may reasonably deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, during a Default Period, the Pledgee shall have the right and power to receive, endorse and collect all checks made payable to 8 8 the order of the Pledgor representing any payment in respect of the Security or any part thereof and to give full discharge for the same. (4) REPRESENTATIONS, WARRANTIES AND COVENANTS. The Pledgor hereby represents and warrants to each Bank and the Pledgee that: (a) the Pledgor has full power, authority and legal right and capacity to incur and perform its obligations hereunder, (b) this Agreement constitutes the legal, valid and binding obligation of the Pledgor, enforceable in accordance with its terms, (c) the making and performance by the Pledgor of this Agreement and the pledge of the Security hereunder have been duly authorized by all necessary corporate action, and do not and will not violate the provisions of any applicable law or applicable regulation, the Pledgor's or any its Subsidiary's articles of incorporation or by-laws and do not and will not result in a breach of, or constitute a default under, or require any consent (other than consents which have been obtained which are in full force and effect and copies of which have been delivered to the Banks and the Pledgee) or create any lien, charge or encumbrance under, any agreement, instrument or document or the provisions of any order, writ, judgment, injunction, decree, determination or award of any court, government or governmental agency or instrumentality, applicable to the Pledgor or to any of the assets of the Pledgor may be bound or affected, (d) so long as the Obligations remain outstanding, the Pledgor at all times will be the sole direct or indirect beneficial owner of the Security pledged by it hereunder, and (e) this Agreement grants to the Pledgee a first priority lien upon and first priority perfected security interest in the Security from time to time in the Pledgee's possession hereunder subject to no other lien or security interest except Permitted Parent Liens. (5) NO WAIVER. No failure on the part of the Pledgee to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Pledgee of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law. (6) TERMINATION; RELEASE OF SECURITY, ETC. When all Obligations shall have been paid in full, and the Commitments shall have been terminated and all Letters of Credit shall have expired or terminated, this Agreement shall terminate, and the Pledgee shall forthwith assign, transfer and deliver, against receipt, any remaining Security and money received in respect thereof, to or on the order of the Pledgor. Except during the occurrence and continuance of an Event of Default, Security shall be released to the Pledgor in conjunction with a transaction permitted by Section 9.13 of the Credit Agreement and otherwise upon the written consent of the Banks. The Pledgee shall execute and deliver to the Pledgor such UCC-3 termination statements or other instruments reasonably requested and prepared by the Pledgor in form and substance satisfactory to the Pledgee to effect the foregoing. 9 9 (7) EXPENSES. The Pledgor shall pay to the Pledgee all reasonable costs and expenses (including reasonable expenses for legal services of every kind) of, or incident to, the enforcement of any of the provisions of this Agreement, or the performance by the Pledgee of any obligations of the Pledgor in respect of the Security which the Pledgor has failed or refused to perform, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Security, and for the care of the Security and defending or asserting rights and claims of the Pledgee in respect thereof, by litigation or otherwise, including expenses of insurance; and all such expenses shall be Obligations to the Pledgee secured under this Agreement. (8) FURTHER ASSURANCES. The Pledgor agrees that, from time to time upon the written request of the Pledgee, it will execute and deliver such further documents and do such other acts and things as the Pledgee may reasonably request in order fully to effect the purposes of this Agreement. (9) DEFICIENCY. If the proceeds of sale, collection or other realization of or upon the Security are insufficient to cover the costs and expenses of such realization and the payment in full of the Obligations, the Obligors shall remain liable for any deficiency in accordance with the Credit Agreement. The liability of the Pledgor with respect to the payment of the Obligations as the same relate to any Person other than the Pledgor, shall be limited to the security and all proceeds of any sale (including any foreclosure sale or any other realization upon the Security) or other disposition of the Security; provided, however, that the Pledgor will be liable for (and the Pledgee will have full recourse against the Pledgor and all of its property and assets for) the payment of Obligations of the Pledgor under this Agreement and any other Majority Interest Document to which the Pledgor is a party. (10) UCC. Unless the context otherwise requires, terms used in this Agreement which are defined in the Uniform Commercial Code shall have such defined meanings in this Agreement. (11) NOTICES. All notices and other communications provided for herein (including, without limitation, any waivers or consents under this Agreement) shall be given or made by telex, telecopy, telegraph, cable or otherwise in writing (each communication given by any of such means to be deemed to be "in writing" for purposes of this Agreement) and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof, or, as to any party in a notice to the address as shall be designated by such party in a notice to the Pledgee and the Pledgor. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier, delivered to the telegraph or cable office or 10 10 personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. (12) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Pledgor may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Pledgee. (13) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. (14) AMENDMENT, ETC. This Agreement may not be amended, modified or waived except with the written consent of the Pledgor, the Pledgee and the Majority Banks, provided that the provisions of B (2) (c), C (2) and C (6) hereof and this C (14) may be amended, modified or waived, and Security may be released other than as otherwise permitted under C (6) hereof, only with the written consent of the Pledgor, and the Pledgee and each Bank. (15) COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, all of which taken together will constitute one agreement, and any one of the parties hereto may execute this Agreement by signing any such counterpart. (16) HEADINGS. Section and subsection headings used herein have been inserted for convenience of reference only and do not constitute matters to be considered in interpreting this Agreement. (17) THE PLEDGEE. The Pledgee has been appointed as agent hereunder by the Banks, and shall be entitled to the benefits of Section 11 of the Credit Agreement. The Pledgee shall act or be required to act only in accordance with this Agreement and Section 11 of the Credit Agreement. (18) WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PLEDGOR HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THE AGREEMENT OR ANY OTHER DOCUMENT TO WHICH THE PARTIES HERETO ARE A PARTY OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. 11 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. HAMILTON BEACH/PROCTOR-SILEX, INC. By /s/ James H. Taylor ----------------------------------- Vice President - Treasurer Address for Notices: Hamilton Beach/Proctor-Silex, Inc. 4421 Waterfront Drive Glen Allen, VA 23060 Facsimile No.: (804) 527-7357 Telephone No.: (804) 273-9777 Attention: James H. Taylor THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as U.S. Agent By /s/ Carol A. Ulmer ------------------------------------------ Address for Notices: The Chase Manhattan Bank (National Association), as U.S. Agent 4 Chase Metrotech Center - 13th Floor Brooklyn, New York 11245 Facsimile No.: (718) 242-6909 Telephone No.: (718) 242-7969 Attention: Christine Gould 12 12 With a copy to: The Chase Manhattan Bank (National Association) 1 Chase Manhattan Plaza Diversified Industries Dept., Fifth Floor New York, New York 10081 Telecopier No.: (212) 552-4112 Telephone No.: (212) 552-7075 Attention: Carol Ulmer EX-10.CXIX 10 EXHIBIT 10(CXIX) 1 Exhibit 10(cxix) PLEDGE AGREEMENT (re: 66% of Plasticos SoTec S.A. de C.V.) PLEDGE AGREEMENT (this "AGREEMENT") dated as of November 30,1995 between HB/PS El Paso, Inc. a Delaware corporation (the "PLEDGOR") and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) (in such capacity, together with its successors and assigns in such capacity, herein called the "PLEDGEE"), as agent for the banks and other financial institutions party to the below-referenced Credit Agreement (the "BANKS"). Hamilton Beach-Proctor-Silex, Inc., the other Obligors named therein, the Banks named therein and the Pledgee, as U.S. Agent and the Canadian Agent named therein are parties to an amended and restated Credit Agreement dated as of October 11, 1990 amended and restated April 18, 1995 (as further modified and supplemented and in effect from time to time, herein called the "CREDIT AGREEMENT") providing for loans to be made by the Banks to the Pledgor and its Wholly-Owned Subsidiary, Proctor-Silex Canada Inc. ("PSC") (or issuance of letters of credit by the Issuing Bank for the account of the Pledgor) in an aggregate principal (or face) amount not to exceed U.S. $135,000,000 (or a U.S. Dollar Equivalent). Unless otherwise specified, capitalized terms defined in the Credit Agreement shall have their defined meanings when used herein. The Pledgor has agreed to pledge 6,666 Series "B" shares of common stock, approximately 66% (the "REQUIRED Percentage") of the issued and outstanding shares of capital stock of Plasticos SoTec S.A. de C.V. (SoTec), a corporation duly organized and existing under the laws of the United Mexican States ("Mexico") owned by the Pledgor on the Closing Date and the Required Percentage of any issued and outstanding shares of capital stock of So Tec from time to time thereafter issued by Proctor-Silex, S.A. de C.V. ("PSM") and acquired by the Pledgor with the Pledgee hereunder for the benefit of the Banks and the Issuing Bank. As collateral security for the prompt payment in full by the Pledgor when due (whether at stated maturity, by acceleration or otherwise) of (i) any and all obligations of any Obligor in respect of the Loans or Letters of Credit (including, without limitation, Letter of Credit Obligations) under Section 2 of the Credit Agreement (except those obligations of the Pledgor arising under Section 6.01 of the Credit Agreement with respect to Loans made to PSC), the Notes, the Security Documents (including this Agreement), the Letter of Credit Documents and any other note or notes from time to time evidencing such Loans or such Letter of Credit Obligations, (ii) any and all other amounts (except with respect to those obligations of the Pledgor arising under Section 2 2 6.01 of the Credit Agreement with respect to Loans made to PSC) from time to time payable by any Obligor to the Banks, the Issuing Bank or either Agent under the Credit Agreement, the Security Documents (including this Agreement), the Supplemental of Security Documents, the Letter of Credit Documents or the Notes, (iii) any and all obligations of the Pledgor in respect of Bank Financial Accommodations (including, without limitation, Bank Letter of Credit Obligations) and (iv) any and all other amounts form time to time payable by the Pledgor in to any Bank under the Bank Financial Accommodations Documents (the obligations referred to in clauses (i), (ii), (iii) and (iv) above herein called collectively, the "OBLIGATIONS"), the Pledgor hereby pledges to the Pledgee and grants to the Pledgee a security interest in, for the equal and ratable benefit of the Banks and the Issuing Bank, (a) (i) the Required Percentage of all of the shares of issued and outstanding capital stock of So Tec on the Closing Date and (ii) the Required Percentage of all other issued and outstanding shares of capital stock of So Tec from time to time thereafter issued by SoTec acquired by the Pledgor, together with the certificates evidencing the same (such shares of capital stock from time to time pledged hereunder herein called the "PLEDGED SHARES"), (b) all dividends, distributions and other amounts payable under or in respect of the Pledged Shares and (c) the proceeds of the foregoing (the items described in clauses (a) through (c) and any other property or assets from time to time pledged to the Pledgee as collateral security hereunder, other than cash hereafter paid to or retained by the Pledgee under A(2) and A(4), being herein collectively called the "SECURITY"); and the Pledgor shall concurrently deliver the Pledged Shares (in the amount and at the time required) against a receipt in the form of Exhibit A hereto to the Pledgee for the purposes aforesaid, and deliver to the Pledgee, in form transferable by delivery, the certificates representing the Pledged Shares according to applicable Mexican law. In furtherance thereof, the parties hereto agree as follows: A. Transfer, Voting Power, Dividends, etc. (1) If an Event of Default shall occur and be continuing (or if the Pledgee is required to do so by any bank regulatory authority or otherwise), to the extent the Security is not already held in nominee name the Pledgee may have any of the Security registered in its name or in the name of its nominee. Such Security as so registered shall remain subject to this Agreement. (2) Unless and until an Event of Default shall occur and be continuing (the period during which any Event of Default shall so continue being herein called a "DEFAULT PERIOD") and, in the case of clause (a) below, the Pledgee shall have notified the Pledgor and SoTec that an Event of Default has occurred and of its elections to exercise its rights under A(3)(a): (a) The Pledgor shall be entitled to exercise all powers of voting and/or consent pertaining to the Security owned by it or any part thereof, for all purposes not inconsistent with the terms of this Agreement or the Credit Agreement. 3 3 (b) The Pledgor shall be entitled to receive and retain any dividends on shares included in the Security which are legally payable. All other payments, distributions and/or dividends, in securities, property or cash, including without limitation, dividends representing stock or liquidating dividends or a distribution or return of capital upon or in respect of the Security or any part thereof or resulting from a split-up, revision or reclassification of the Security or any part thereof or received in exchange for the Security or any part thereof as a result of a merger, consolidation or otherwise, shall be paid or delivered directly to the Pledgee immediately upon receipt thereof by the Pledgor according to applicable Mexican law, and/or shall be retained by the Pledgee as part of the Security. (c) In case any money shall be paid to the Pledgor on account of any dividend or other distribution upon or in respect of the Security or any part thereof, other than a payment which the Pledgor is entitled to receive and retain under clause (b) above, such money shall be immediately paid to the Pledgee and upon receipt by the Pledgee shall, if requested by the Pledgor, be applied by the Pledgee (prior to any sale of the Security thereunder) to the payment of the Obligations in accordance with C(2). (d) In order to permit the Pledgor to exercise such powers of voting and/or consent under clause (a) above, the Pledgee shall, if necessary, upon the written request of the Pledgor, from time to time execute and deliver to the Pledgor appropriate proxies in accordance with Article 192 of the "LEY GENERAL DE SOCIEDADES MERCANTILES" and Article Seventeen, Paragraph (f) of the "ESTATUTOS" of PSM. (e) In order to permit the Pledgee to receive all payments and distributions to which it may be entitled under clauses (b) and (c) above, the Pledgor shall, if necessary, upon the written request of the Pledgee, from time to time execute and deliver to the Pledgee appropriate dividend or payment orders. (3) During any Default Period: (a) If the Pledgee so notifies the Pledgor, the Pledgee or its nominee or nominees shall have the sole and exclusive right to exercise all powers of voting and/or consent pertaining to the Security or any part thereof. (b) All payments and other distributions made upon or in respect of the Security or any part thereof shall be paid directly to and shall be retained by the Pledgee and held by it as stated in subsection (4) immediately below. (4) All cash and other property paid to and/or retained by the Pledgee pursuant to this A shall be held by it for the benefit of the Banks, until applied as herein provided, as additional collateral security pledged under and subject to the terms of this A. 4 4 B. REMEDIES. (1) REALIZATIONS, ETC. If an Event of Default shall occur and be continuing, in addition to any rights and remedies which may be available to a secured party under the Uniform Commercial Code as in effect at the time in New York, the following provisions shall apply: (a) The Pledgee may, without being required to give any notice except as hereinafter provided, apply the cash, if any, then held by it as collateral security hereunder to the payment of the Obligations and, if there shall be no such cash or the cash so applied shall be insufficient to pay in full all such Obligations, sell the Security, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery, and at such price or prices as the Pledgee may deem satisfactory, and the Pledgee or any Bank may be the purchaser of any or all of the Security so sold and thereafter hold the same absolutely, free from any right or claim of whatsoever kind. (b) The Pledgee is authorized, at any such sale, if it deems it advisable so to do, to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account, for investment, and not with a view to the distribution or sale of any of the Security. (c) Upon any such sale the Pledgee shall have the right to deliver, assign and transfer to the purchaser thereof the Security so sold. As permitted at law or in equity, each purchaser (including the Pledgee, any of the Banks and any other holder of any of the Notes) at any such sale shall hold the property sold absolutely, free from any claim or right of whatsoever kind, including any equity or rights of redemption, of the Pledgor, who hereby specifically waives as against any such purchaser all rights of redemption, stay or appraisal which it has or may have under any rule of law or statute now existing or hereafter adopted. (d) The Pledgee shall give the Pledgor at least 10 days written notice by mail and telegram (or by hand delivery) of intention to make any such public or private sale or sale at broker's board or on a securities exchange, which notice shall specify, to the extent known by the Pledgee, the terms of sale intended. Such notice, in case of public sale, shall state the time and place fixed for the sale, such sale, and, in case of sale at broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Security, or that portion thereof so being sold, will first be offered for sale at such board or exchange. (e) Any such public sale shall be held at such time or times within ordinary business hours and at such place or places in the Borough of Manhattan, 5 5 City of New York, Mexico D. F., Mexico or elsewhere in the United States or Mexico, as the Pledgee may fix in the notice of such sale. At any such sale the Security may be sold in one lot as an entirety or in separate parcels, as the Pledgee may determine. (f) The Pledgee shall not be obligated to make any sale pursuant to any such notice. The Pledgee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. (g) In case of any sale of all or any part of the Security for future delivery, the Security so sold must be retained by the Pledgee until the selling price is paid by the purchaser thereof, but the Pledgee shall not incur any liability in case of the failure of such purchaser to take up and pay for the Security so sold and, in case of any such failure, such Security may again be sold upon like notice. (h) The Pledgee, however, instead of, or in addition to, exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the pledge and sell the Security, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. (2) Notwithstanding the foregoing, if any Event of Default shall occur and be continuing and the Pledgee proceeds to sell, assign, transfer or otherwise convey the Security, or any part thereof, such sale, assignment, transfer or conveyance shall be subject to the provisions of the "LEY GENERAL DE TITULOS Y OPERACIONES DE CREDITO" as applicable from time to time. C. GENERAL PROVISIONS. The following general provisions shall apply to the Security and this Agreement generally: (1) PRIVATE SALE. The Pledgee shall incur no liability as a result of the sale of the Security, or any part thereof, at any private sale permitted by this Agreement or under applicable law, provided that the Pledgee shall act in a commercially reasonable manner within the intendment of the Uniform Commercial Code. The Pledgor hereby waives, to the fullest extent permitted by law, any claims against the Pledgee or the Banks arising by reason of the fact that the price at which any security may have been sold at such a private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Pledgee accepts the first offer received and does not offer such Security to more than one offeree. (2) APPLICATION OF PROCEEDS. The proceeds of any sale of all or any part of the Security, and any other cash at the time held by the Pledgee under this Agreement, shall be applied by the Pledgee: 6 6 FIRST, to the payment of the costs and expenses of such sale, including reasonable compensation to the Pledgee and its agents and counsel, and all expenses, liabilities and advances made or incurred by the Pledgee in connection therewith. NEXT, to the payment of the Obligations ratably according to the respective amounts (which in the case of Obligations other than the Loans or the Notes shall mean the amount due to a Bank or an Agent on the date of distribution) of such Obligations. FINALLY, after payment in full of all Obligations, the payment to the Pledgor, or its successors or assigns, or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. As used in this Agreement, "PROCEEDS" of the Security shall mean cash, securities and other property realized in respect of, and distributions in kind of, the Security, including any thereof received under any reorganization, liquidation or adjustment of debt of the Pledgor or any issuer of securities included in the Security. (3) ATTORNEY-IN-FACT. The Pledgee is hereby appointed the attorney-in-fact of the Pledgor (effective upon notice by the Pledgee to the Pledgor) (i) for any period not serving an Event of Default (SPECIAL DEFAULT PERIOD), for the purpose of signing documents and taking other action to perfect, promote and protect its security interest in the Security consistent with the terms of this Agreement and (ii) during a Special Default Period, for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments which the Pledgee may reasonably deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and couple with an interest. Without limiting the generality of the foregoing, during a Special Default Period, the Pledgee shall have the right and power to receive, endorse and collect all checks made payable to the order of the Pledgor representing any payment in respect of the Security or any part thereof and to give full discharge for the same. (4) REPRESENTATIONS, WARRANTIES AND COVENANTS. The Pledgor hereby represents and warrants to each Bank and the Pledgee that: (a) the Pledgor has full power, authority and legal right and capacity to incur and perform its obligations hereunder, (b) this Agreement constitutes the legal, valid and binding obligation of the Pledgor, enforceable in accordance with its terms, (c) the making and performance by the Pledgor of this Agreement and the pledge of the Security hereunder have been duly authorized by all necessary corporate action, and do not and will not violate the provisions of any applicable law or applicable regulation, the Pledgor's or any of its Subsidiary's articles of incorporation or by- 7 7 laws and do not and will not result in a breach of, or constitute a default under, or require any consent (other than consents which have been obtained which are in full force and effect and copies of which have been delivered to the Banks and the Pledgee) or create any lien, charge or encumbrance under, any agreement, instrument or document or the provisions of any order, writ, judgment, injunction, decree, determination or award of any court, government or governmental agency or instrumentality, applicable to the Pledgor or to any of the assets of the Pledgor to which the Pledgor is a party or by which the Pledgor or any of the assets of the Pledgor may be bound or affected, (d) so long as the Obligations remain outstanding, the Pledgor at all times will be the sole direct or indirect beneficial owner of the Security pledged by it or to be pledged by it hereunder, and (e) this Agreement grants to the Pledgee a first priority lien upon and first priority perfected security interest in the Security from time to time in the Pledgee's possession hereunder subject to no other lien or security interest. (5) NO WAIVER. No failure on the part of the Pledgee to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Pledgee of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law. (6) TERMINATION; RELEASE OF SECURITY, ETC. When all Obligations shall have been paid in full, and the Commitments shall have been terminated and all Letters of Credit shall have expired or terminated, this Agreement shall terminate, and the Pledgee shall forthwith assign, transfer and deliver, against receipt, any remaining Security and money received in respect thereof, to or on the order of the Pledgor. Except during the occurrence and continuance of an Event of Default, Security shall be released to the Pledgor in conjunction with a transaction permitted by Section 9.13 of the Credit Agreement and otherwise upon the written consent of the Banks. The Pledgee shall execute and deliver to the Pledgor such UCC-3 termination statements or other instruments reasonably requested and prepared by the Pledgor in form and substance satisfactory to the Pledgee to effect the foregoing. (7) EXPENSES. The Pledgor shall pay to the Pledgee all reasonable costs and expenses (including reasonable expenses for legal services of every kind) of, or incident to, the enforcement of any of the provisions of this Agreement, or the performance by the Pledgee of any obligations of the Pledgor in respect of the Security which the Pledgor has failed or refused to perform, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Security, and for the care of the Security and defending or asserting rights and claims of the Pledgee in respect thereof, by litigation or otherwise, including expenses of insurance; and all such expenses shall be Obligations to the Pledgee secured under this Agreement. 8 8 (8) FURTHER ASSURANCES. The Pledgor agrees that, from time to time upon the written request of the Pledgee, it will execute and deliver such further documents and do such other acts and things as the Pledgee may reasonably request in order fully to effect the purposes of this Agreement. (9) DEFICIENCY. If the proceeds of sale, collection or other realization of or upon the Security are insufficient to cover the costs and expenses of such realization and the payment in full of the Obligations, the Obligors shall remain liable for any deficiency in accordance with the Credit Agreement. The liability of the Pledgor with respect to the payment of the Obligations as the same relate to any person other than the Pledgor shall be limited to the Security and all proceeds of any sale (including any foreclosure sale or any other realization upon the Security) or other disposition of the Security; provided, however, that the Pledgor will be liable for (and the Pledgee will have full recourse against the Pledgor and all of its property and assets for) the payment of Obligations of the Pledgor under this Agreement and any other Majority Interest Document to which the Pledgor is a party. (10) UCC. Unless the context otherwise requires, terms used in this Agreement which are defined in the Uniform Commercial Code shall have such defined meanings in this Agreement. (11) NOTICES. All notices and other communications provided for herein (including, without limitation, any waivers or consents under this Agreement) shall be given or made by telex, telecopy, telegraph, cable or otherwise in writing (each communication given by any of such means to be deemed to be "in writing" for purposes of this Agreement) and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof, or, as to any party in a notice to the address as shall be designated by such party in a notice to the Pledgee and the Pledgor. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. (12) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Pledgor may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Pledgee. (13) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. 9 9 (14) AMENDMENT, ETC. This Agreement may not be amended, modified or waived except with the written consent of the Pledgor, the Pledgee and the Majority Banks, provided that the provisions of B(2)(c), C(2) and C(6) hereof and this C (14) may be amended, modified or waived, and Security may be released other than as otherwise permitted under C(6) hereof, only with the written consent of the Pledgor, and the Pledgee and each Bank. (15) COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, all of which taken together will constitute one agreement, and any one of the parties hereto may execute this Agreement by signing any such counterpart. (16) HEADINGS. Section and subsection headings used herein have been inserted for convenience of reference only and do not constitute matters to be considered in interpreting this Agreement. (17) THE PLEDGEE. The Pledgee has been appointed as agent hereunder by the Banks, and shall be entitled to the benefits of Section 11 of the Credit Agreement. The Pledgee shall act or be required to act only in accordance with this Agreement and Section 11 of the Credit Agreement. (18) APPROVALS. Any provision contained herein to the contrary notwithstanding, no action shall be taken hereunder by the Pledgee with respect to any Pledged Shares unless and until all applicable requirements (if any, as determined by the rules and regulations thereunder and thereof, as well as any other laws, rules and regulations or other regulatory or governmental bodies applicable to, or having jurisdiction over, PSC (if any, as determined by the Pledgee) have been satisfied with respect to such action and there have been obtained such consents, approvals and authorizations (if any, as determined by the Pledgee) as may be required to be obtained under any thereof. It is the intention of the parties hereto that the Pledged Shares shall in all relevant aspects be subject to, and governed by, said applicable statutes, rules and regulations. The Pledgor agrees that upon request from time to time by the Pledgee it will, and will cause PSC to, use its best efforts to obtain any governmental, regulatory or other consents, approvals or authorizations referred to in this C(18). (19) WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PLEDGOR HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THE AGREEMENT OR ANY OTHER DOCUMENT TO WHICH THE PARTIES HERETO ARE A PARTY OR ANY MATTER ARISING HEREUNDER OR THEREUNDER. 10 10 HB/PS El Paso, INC By /s/ James H. Taylor ----------------------------------- Vice President - Treasurer Address for Notices; Hamilton Beach/Proctor-Silex, Inc. 4421 Waterfront Drive Glen Allen, VA 23060 Facsimile No.: (804) 527-7357 Telephone No.: (804) 273-9777 Attention; James H. Taylor THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), as U.S. Agent By /s/ Carol A. Ulmer ----------------------------------- Address for Notices: The Chase Manhattan Bank (National Association), as U.S. Agent 4 Chase Metrotech Center - 13th Floor Brooklyn, New York 11245 Facsimile No.: (718) 242-6909 Telephone No.: (718) 242-7969 Attention: Christine Gould 11 11 With a copy to: The Chase Manhattan Bank (National Association) 1 Chase Manhattan Plaza Diversified Industries Dept, Fifth Floor New York, New York 10081 Facsimile No.: (212) 552-4112 Telephone No.: (212) 552-7075 Attention: Carol Ulmer EX-10.CXX 11 EXHIBIT 10(CXX) 1 Exhibit 10(cxx) HAMILTON BEACH/PROCTOR-SILEX, INC. ANNUAL INCENTIVE COMPENSATION PLAN - 1998 ----------------------------------------- GENERAL - ------- Hamilton Beach/Proctor-Silex, Inc. (the "Company") has established an Annual Incentive Compensation Plan (the "Plan") as part of a competitive compensation program for the Officers and key management employees of the Company and its Subsidiaries. PLAN OBJECTIVE - -------------- The Company desires to attract and retain talented employees to enable the Company to meet its financial and business objectives. The objective of the Plan is to provide an opportunity to earn annual incentive compensation to those employees whose performance has a significant impact on the Company's short-term and long-term profitability. ADMINISTRATION AND PARTICIPATION - -------------------------------- The Plan is administered by the Nominating, Organization and Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee: a. May amend, modify, or discontinue the Plan. b. Will approve participation in the Plan. Generally, participants will include all employees in Hay Salary Job Grades 14 and above. Employees who voluntarily terminate their employment prior to year-end are not entitled to an award, and employees joining the Company after August of any year will not be entitled to an award. However, the Committee may select any employee who has contributed significantly to the Company's profitability to participate in the Plan and receive an annual incentive compensation award. c. Will determine the annual performance criteria which generates the incentive compensation pool. d. Will determine the total amount of both the target and actual annual incentive compensation pool. e. Will approve individual incentive compensation awards to Officers and employees above Hay Salary Job Grade 17. f. May delegate to the Chief Executive Officer of the Company the power to approve incentive compensation awards to employees in and below Hay Salary Job Grade 17. g. May consider at the end of each year the award of a discretionary bonus amount to nonparticipants as an addition to the regular incentive compensation pool on a special one-time basis to motivate individuals not eligible to participate in the Plan. h. May approve a pro rata incentive compensation award for participants in the Plan whose employment is terminated (1) due to death, disability, retirement or facility closure, such award to be determined pursuant to the provisions of subparagraphs e. and f. above or (2) under other circumstances at the recommendation of the Chief Executive Officer of the Company. 2 DETERMINATION OF CORPORATE INCENTIVE COMPENSATION POOL - ------------------------------------------------------- Each participant in the Plan will have an individual target incentive compensation percentage which is determined by the participant's Salary Job Grade. This percentage is multiplied by the midpoint of the participant's Salary Job Grade to determine his individual target incentive compensation award. The total of the target incentive compensation awards of all participants equals the target corporate incentive compensation pool (the "Target Pool"). The Target Pool is approved each year by the Committee. The actual corporate incentive compensation pool (the "Actual Pool") is determined at the end of each year based on the Company's actual performance against specific criteria established in the beginning of the year by the Committee. The Target Pool is adjusted upwards or downwards by corporate performance adjustment factor to determine the Actual Pool. In no event will the Actual Pool exceed 150% of the Target Pool, except to the extent that the Committee elects to increase the Actual Pool by up to 10%, as described below. It is the intent of the Plan that the Actual Pool, as determined above, will be the final total corporate incentive compensation pool. However, the Committee, in its sole discretion, may increase or decrease by up to 10% the Actual Pool or may approve an incentive compensation pool where there would normally be no pool due to Company performance which is below the criteria established for the year. The Actual and Target Pools exclude commission personnel as salespersons, regional general manager and manufacturing representatives. DETERMINATION OF INDIVIDUAL INCENTIVE COMPENSATION AWARDS - --------------------------------------------------------- Salary Job Grades and the corresponding target incentive percentage for each participant in the Plan will be established at the beginning of each year and approved by the Committee. Individual target incentive compensation will then be adjusted by the appropriate pool factor. Such adjusted individual incentive compensation will then be further modified based on a participant's performance as compared to his individual goals for the year. The total of all individual incentive compensation awards must not exceed the Actual Pool for the year. PERFORMANCE TARGETS - See Plan Summary. - ------------------- EX-13 12 EXHIBIT 13 1 Exhibit 13 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2), AND ITEM 14(d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1997 NACCO INDUSTRIES, INC. MAYFIELD HEIGHTS, OHIO F-1 2 FORM 10-K ITEM 14(a)(1) AND (2) NACCO INDUSTRIES, INC. AND SUBSIDIARIES LIST FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of NACCO Industries, Inc. and Subsidiaries are included in Item 8: Report of Independent Public Accountants--Year ended December 31, 1997, 1996 and 1995. Consolidated Statements of Income--Year ended December 31, 1997, 1996 and 1995. Consolidated Balance Sheets--December 31, 1997 and December 31, 1996. Consolidated Statements of Cash Flows--Year ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity--Year ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. NACCO Industries, Inc. Report of Management The following consolidated financial statement schedules of NACCO Industries, Inc. and Subsidiaries are included in Item 14(d): Schedule I Condensed Financial Information of the Parent Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-2 3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of NACCO Industries, Inc.: We have audited the accompanying consolidated balance sheets of NACCO Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the schedules referred to below 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 financial statements referred to above present fairly, in all material respects, the financial position of NACCO Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14(a)(1) and (2) and Item 14(d) of Form 10-K are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Cleveland, Ohio February 10, 1998 F-3 4 CONSOLIDATED STATEMENTS OF INCOME NACCO INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended December 31 -------------------------------------------------- 1997 1996 1995 ---------------- --------------- --------------- (In millions, except per share data) Revenues $ 2,246.9 $ 2,273.2 $ 2,204.5 Cost of sales 1,825.9 1,874.1 1,809.4 --------------- --------------- --------------- GROSS PROFIT 421.0 399.1 395.1 Selling, general and administrative expenses 265.2 252.5 232.7 Amortization of goodwill 15.8 15.4 13.7 Restructuring charge 8.0 --- --- --------------- --------------- --------------- OPERATING PROFIT 132.0 131.2 148.7 Other income (expense) Interest expense (36.6) (45.9) (47.2) Other - net (6.3) 1.0 2.0 --------------- --------------- --------------- (42.9) (44.9) (45.2) --------------- --------------- --------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS 89.1 86.3 103.5 Provision for income taxes 26.4 34.3 34.7 --------------- --------------- --------------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEMS 62.7 52.0 68.8 Minority interest (.9) (1.4) (3.3) --------------- --------------- --------------- INCOME BEFORE EXTRAORDINARY ITEMS 61.8 50.6 65.5 Extraordinary gain, net-of-tax --- --- 32.3 Extraordinary charges, net-of-tax --- --- (3.4) --------------- --------------- --------------- NET INCOME $ 61.8 $ 50.6 $ 94.4 =============== =============== =============== BASIC EARNINGS PER SHARE: Income Before Extraordinary Items $ 7.56 $ 5.67 $ 7.31 Extraordinary gain, net-of-tax --- --- 3.61 Extraordinary charges, net-of-tax --- --- (.38) --------------- --------------- --------------- Net income $ 7.56 $ 5.67 $ 10.54 =============== =============== =============== DILUTED EARNINGS PER SHARE: Income Before Extraordinary Items $ 7.55 $ 5.67 $ 7.30 Extraordinary gain, net-of-tax --- --- 3.60 Extraordinary charges, net-of-tax --- --- (.38) --------------- --------------- --------------- Net income $ 7.55 $ 5.67 $ 10.52 =============== =============== ===============
See Notes to Consolidated Financial Statements. F-4 5 CONSOLIDATED BALANCE SHEETS NACCO INDUSTRIES, INC. AND SUBSIDIARIES
December 31 ---------------------------------- 1997 1996 ---------------- ---------------- (In millions) ASSETS CURRENT ASSETS Cash and cash equivalents $ 24.1 $ 47.8 Accounts receivable, net of allowance of $14.1 and $12.5 240.8 212.2 Inventories 302.9 309.6 Prepaid expenses and other 31.8 22.2 ---------------- ---------------- 599.6 591.8 PROPERTY, PLANT AND EQUIPMENT, NET 541.7 550.3 DEFERRED CHARGES Goodwill, net 449.3 461.0 Deferred costs and other 63.5 59.6 Deferred income taxes 24.1 7.9 ---------------- ---------------- 536.9 528.5 OTHER ASSETS 50.9 37.5 ---------------- ---------------- TOTAL ASSETS $ 1,729.1 $ 1,708.1 ================ ================
F-5 6 CONSOLIDATED BALANCE SHEETS NACCO INDUSTRIES, INC. AND SUBSIDIARIES
December 31 ---------------------------------- 1997 1996 ---------------- ---------------- (In millions) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 244.7 $ 186.3 Revolving credit agreements 23.5 45.8 Current maturities of long-term debt 18.9 21.4 Income taxes 12.8 5.9 Accrued payroll 36.4 30.8 Accrued warranty obligations 27.9 21.5 Other current liabilities 142.3 104.3 ---------------- ---------------- 506.5 416.0 LONG-TERM DEBT - not guaranteed by the parent company 230.2 333.3 OBLIGATIONS OF PROJECT MINING SUBSIDIARIES - not guaranteed by the parent company or its NACoal subsidiary 328.0 341.5 SELF-INSURANCE RESERVES AND OTHER 222.7 223.9 MINORITY INTEREST 16.6 14.1 STOCKHOLDERS' EQUITY Common stock: Class A, par value $1 per share, 6,477,414 shares outstanding (1996 - 6,492,059 shares outstanding) 6.5 6.5 Class B, par value $1 per share, convertible into Class A on a one-for-one basis, 1,676,146 shares outstanding (1996 - 1,694,336 shares outstanding) 1.7 1.7 Capital in excess of par value .1 .1 Retained earnings 412.9 359.2 Foreign currency translation adjustment and other 3.9 11.8 ---------------- ---------------- 425.1 379.3 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,729.1 $ 1,708.1 ================ ================
See Notes to Consolidated Financial Statements. F-6 7 CONSOLIDATED STATEMENTS OF CASH FLOWS NACCO INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended December 31 --------------------------------------------------- 1997 1996 1995 ---------------- ---------------- --------------- (In millions) OPERATING ACTIVITIES Net income $ 61.8 $ 50.6 $ 94.4 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary gain, net-of-tax --- --- (32.3) Extraordinary charges, net-of-tax --- --- 2.2 Depreciation, depletion and amortization 88.6 85.3 79.3 Deferred income taxes (24.3) (3.2) 1.4 Other non-cash items (.1) (3.7) 2.1 Working capital changes: Accounts receivable (35.1) 90.0 (38.6) Inventories (1.3) 87.3 (85.6) Other current assets (3.1) (.6) 2.4 Accounts payable and other liabilities 122.6 (64.3) 6.8 ---------------- ---------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 209.1 241.4 32.1 ---------------- ---------------- --------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (68.4) (79.4) (73.1) Proceeds from the sale of other assets 3.4 1.1 1.3 Acquisitions of businesses (14.0) (45.1) (7.3) Other-net 1.0 .6 .7 ---------------- ---------------- --------------- NET CASH USED FOR INVESTING ACTIVITIES (78.0) (122.8) (78.4) ---------------- ---------------- --------------- FINANCING ACTIVITIES Additions to long-term debt and revolving credit agreements 45.2 115.9 328.2 Reductions of long-term debt and revolving credit agreements (169.1) (157.4) (276.5) Additions to obligations of Project Mining Subsidiaries 58.1 68.8 93.0 Reductions of obligations of Project Mining Subsidiaries (79.1) (74.5) (102.1) Financing of other short-term obligations (.5) (10.6) 10.8 Stock repurchases (2.8) (40.4) --- Cash dividends paid (6.3) (6.7) (6.4) Capital grants .7 4.2 4.0 Other-net .9 (2.8) 5.6 ---------------- ---------------- --------------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (152.9) (103.5) 56.6 ---------------- ---------------- --------------- Effect of exchange rate changes on cash (1.9) 1.8 1.1 ---------------- ---------------- --------------- CASH AND CASH EQUIVALENTS Increase (decrease) for the year (23.7) 16.9 11.4 Balance at the beginning of the year 47.8 30.9 19.5 ---------------- ---------------- --------------- BALANCE AT THE END OF THE YEAR $ 24.1 $ 47.8 $ 30.9 ================ ================ ===============
See Notes to Consolidated Financial Statements. F-7 8 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY NACCO INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended December 31 ---------------------------------------------------- 1997 1996 1995 ---------------- ---------------- ---------------- (In millions) CLASS A COMMON STOCK Beginning balance $ 6.5 $ 7.3 $ 7.2 Purchase of treasury shares (.1) (.8) --- Other .1 --- .1 ---------------- ---------------- ---------------- 6.5 6.5 7.3 ---------------- ---------------- ---------------- CLASS B COMMON STOCK 1.7 1.7 1.7 ---------------- ---------------- ---------------- CAPITAL IN EXCESS OF PAR VALUE Beginning balance .1 3.6 2.8 Shares issued under stock option and compensation plans 1.0 1.1 .8 Purchase of treasury shares (1.0) (4.6) --- ---------------- ---------------- ---------------- .1 .1 3.6 ---------------- ---------------- ---------------- RETAINED EARNINGS Beginning balance 359.2 350.3 262.3 Net income 61.8 50.6 94.4 Purchase of treasury shares (1.8) (35.0) --- Cash dividends on Class A and Class B common stock: 1997 $.773 per share (6.3) 1996 $.743 per share (6.7) 1995 $.710 per share (6.4) ---------------- ---------------- ---------------- 412.9 359.2 350.3 ---------------- ---------------- ---------------- FOREIGN CURRENCY TRANSLATION ADJUSTMENT AND OTHER Beginning balance 11.8 7.2 5.4 Foreign currency translation adjustment and other (7.9) 4.6 1.8 ---------------- ---------------- ---------------- 3.9 11.8 7.2 ---------------- ---------------- ---------------- TOTAL STOCKHOLDERS' EQUITY $ 425.1 $ 379.3 $ 370.1 ================ ================ ================
See Notes to Consolidated Financial Statements. F-8 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NACCO INDUSTRIES, INC. AND SUBSIDIARIES (TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE AND PERCENTAGE DATA) NOTE 1--PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS The Consolidated Financial Statements include the accounts of NACCO Industries, Inc. ("NACCO," the parent company) and its majority owned subsidiaries (NACCO Industries, Inc. and Subsidiaries - the "Company"). Intercompany accounts and transactions are eliminated. The Company has four operating subsidiaries which function in distinct business environments; forklift truck manufacturing and service parts distribution, small electric appliance manufacturing, mining and retail. NACCO Materials Handling Group, Inc. ("NMHG"), 98 percent-owned by NACCO, designs, manufactures and markets forklift trucks and related service parts under the Hyster(R) and Yale(R) brand names. NMHG's manufacturing plants are located primarily in the United States and Europe. In addition, NMHG has manufacturing facilities in Japan through its 50 percent-owned Japanese joint venture, Sumitomo-NACCO Materials Handling Group ("S-N"). While NMHG's market position is strongest in North America, it also has a significant presence in Europe and a growing position in Asia-Pacific. Hamilton Beach*Proctor-Silex, Inc. ("HB*PS") designs, manufactures and markets small electric appliances covering approximately 80 percent of the small kitchen electric appliance market. Effective October 18, 1996, HB*PS became a wholly owned subsidiary when NACCO purchased the remaining 20 percent minority interest from the previous minority shareholder. The effect of this transaction was not material to NACCO's financial position or results of operations. HB*PS manufactures the majority of its products at its plants located in North America and also sources some of its products from the Far East. HB*PS primarily sells its products to retailers and distributors in North America. The North American Coal Corporation ("NACoal"), wholly owned by NACCO, mines and markets lignite for use primarily as fuel for power generation by electric utilities. NACoal operates five surface lignite mines, two in North Dakota, two in Texas and one in Louisiana. Three of NACoal's subsidiaries (the "Project Mining Subsidiaries") operate lignite mines under long-term contracts to sell lignite at a price based on actual costs plus an agreed pretax profit per ton, while two other NACoal subsidiaries operate lignite mines under long-term contracts to sell lignite at a fixed price per ton. In addition, NACoal provides dragline mining services at a limerock quarry in Florida. The Kitchen Collection, Inc. ("KCI"), wholly owned by NACCO, is a national specialty retailer of kitchenware, tableware, small electric appliances and related accessories with stores located primarily in factory outlet malls. NOTE 2--ACCOUNTING POLICIES USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if any) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less. F-9 10 NOTE 2-- ACCOUNTING POLICIES - Continued INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined under the last-in, first-out (LIFO) method for manufacturing inventories in the United States and under the first-in, first-out (FIFO) method with respect to all other inventories. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost. Depreciation, depletion and amortization are provided in amounts sufficient to amortize the cost of the assets, including assets recorded under capital leases, over their estimated useful lives using the straight-line method. The units-of-production method is used to amortize certain coal-related assets based on estimated recoverable tonnages. GOODWILL: Goodwill represents the excess purchase price paid over the fair value of the net assets acquired. The amortization of goodwill is provided on a straight-line basis over a 40-year period. Accumulated amortization of goodwill was $122.0 million and $106.2 million at December 31, 1997 and 1996, respectively. Management regularly evaluates its accounting for goodwill considering such factors as historical and future profitability and believes that the asset is realizable and the amortization period remains appropriate. REVENUE RECOGNITION: Revenues are recognized when customer orders are completed and shipped. Accruals for the cost of product warranties are maintained for anticipated future claims. ADVERTISING COSTS: Advertising costs are expensed as incurred and amounted to $36.8 million, $33.6 million and $32.6 million in 1997, 1996 and 1995, respectively. PRODUCT DEVELOPMENT COSTS: Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. These costs amounted to $27.9 million, $27.0 million and $27.5 million in 1997, 1996 and 1995, respectively. FOREIGN CURRENCY: Assets and liabilities of foreign operations are translated into U.S. dollars at the fiscal year-end exchange rate. The related translation adjustments are recorded as a separate component of Stockholders' Equity. Revenues and expenses are translated using the monthly average exchange rates prevailing during the year. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS: Financial instruments held by the Company include cash and cash equivalents, accounts receivable, accounts payable, revolving credit agreements, long-term debt, interest rate swap agreements and forward foreign currency exchange contracts. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes. NMHG and HB*PS operate internationally and enter into transactions denominated in foreign currencies. As a result, the Company is subject to the transaction exposures that arise from exchange rate movements between the dates foreign currency transactions are recorded and the dates they are consummated. NMHG and HB*PS use forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies. These contracts usually have maturities of one to twelve months and generally require the companies to buy or sell Japanese yen, Australian dollars, Canadian dollars or various European currencies for the U.S. dollar at rates agreed to at the inception of the contracts. Generally, gains and losses from changes in the market value of these contracts are recognized in Cost of sales and offset the foreign exchange gains and losses on the underlying transactions. Gains and losses on contracts designated as hedges of firm commitments denominated in foreign currencies are deferred and included in the measurement of the related transaction. F-10 11 NOTE 2--ACCOUNTING POLICIES - Continued NMHG and HB*PS have entered into interest rate swap agreements for portions of their floating rate revolving credit facilities. NACoal (on behalf of its Project Mining Subsidiaries) and KCI have entered into interest rate swap agreements for portions of their long-term debt. These interest rate swap agreements allow the subsidiaries to enter into long-term financing arrangements that have performance-based, floating rates of interest, and then exchange them for fixed rates of interest, as opposed to entering into higher-cost fixed-rate credit arrangements. Terms of the interest rate swap agreements generally require the subsidiaries to receive a variable interest rate and pay a fixed interest rate. Variable rates for both the floating rate financing and the interest rate swap agreements are predominately linked to three-month LIBOR (London Interbank Offered Rate). The common link promotes the effectiveness of interest rate swaps as hedging instruments. Amounts to be paid or received under the interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreement as an adjustment to Interest expense. The related amounts payable to, or receivable from, the counterparties are included in Other current liabilities. Changes in the market value of the interest rate swap agreements are not recognized in Net Income. However, in the event of extinguishment of the underlying debt, changes in the market value of interest rate swap agreements that could not be designated as hedges of other assets, liabilities or anticipated transactions would be recognized in Net Income over the remaining life of the contract or upon termination of the contract. RECLASSIFICATIONS: Certain amounts in the prior periods' Consolidated Financial Statements have been reclassified to conform to the current period's presentation. NOTE 3--EXTRAORDINARY ITEMS EXTRAORDINARY GAIN - UMWA OBLIGATION: The extraordinary gain of $32.3 million recognized in 1995, net of $19.8 million in taxes, relates to a downward revision in the obligation to the United Mine Workers of America Combined Benefit Fund ("UMWA"). This obligation was recognized by The Bellaire Corporation ("Bellaire," a wholly owned non-operating subsidiary of NACCO) as an extraordinary charge in 1992 to accrue for the estimated costs associated with the Coal Industry Retiree Health Benefit Act of 1992 ("Coal Act"), which is discussed in more detail in Note 12. It is the Company's policy to periodically review the estimates and assumptions upon which various reserves are based. As a result of this review, the Company reduced the reserve for the UMWA obligation in 1995. Management believes that the estimated future cost of this obligation has been adequately accrued. EXTRAORDINARY CHARGES - EARLY EXTINGUISHMENT OF DEBT: The extraordinary charge recognized in 1995 related to the write-off of premiums and unamortized financing fees. This extraordinary charge included a $1.3 million charge, net of taxes, for unamortized financing fees on NMHG's former revolving credit facility and senior term loan which were replaced by a long-term revolving credit facility. In addition, the retirement of $78.5 million face-value Hyster-Yale 12 3/8% debentures in 1995 resulted in a charge of $2.1 million, net of taxes, due to the write-off of premiums and unamortized financing fees. F-11 12 NOTE 4--SPECIAL CHARGES RESTRUCTURING CHARGE: During the fourth quarter of 1997, the board of directors approved a plan to restructure certain activities at NMHG and, accordingly, the Company recognized a charge of $8.0 million ($4.8 million after effective tax provision). In order to improve customer service, increase productivity and thereby reduce costs, the Company decided to consolidate certain functions within the NMHG organization. The restructuring plan involves combining certain engineering, marketing and administrative functions, which will result in the construction of two new engineering and marketing facilities on Company-owned property, the addition of one new leased administrative building and the closing of one owned and four leased facilities. In addition, the plan includes the termination of approximately 309 engineering, marketing and administrative employees which will result in a net reduction of approximately 130 employee positions after considering staffing requirements at remaining facilities. The fourth quarter 1997 charge to earnings of $8.0 million represents severance payments of $1.1 million to approximately 52 employees and a $6.9 million accrual consisting of $5.9 million for severance and other employee benefits and $1.0 million for lease termination costs. The Company anticipates completion of the restructuring plan by the end of 1998 and no material incremental costs are expected to be recognized in future periods. SPECIAL CHARGE: In addition to the restructuring charge and in connection with the restructuring plan, the Company recognized a charge to earnings of $8.3 million ($5.0 after effective tax provision) classified as Selling, general and administrative expenses relating to commitments to provide relocation benefits to certain employees. Of this amount, $0.1 million was paid to employees in the fourth quarter of 1997 and the remaining $8.2 million has been accrued. The Company anticipates that employee relocations will be completed by the end of 1998 and no material incremental costs are expected to be recognized in future periods. NOTE 5--ACCOUNTS RECEIVABLE SECURITIZATION In 1997, NMHG entered into a one-year agreement to sell all of its domestic accounts receivable, on a revolving basis, to Lift Truck Funding Company, LLC ("LTF"), a wholly owned subsidiary of NMHG. LTF was formed prior to the execution of this agreement for the purpose of buying and selling accounts receivable and is designed to be bankruptcy remote. Also in 1997, NMHG and LTF entered into a one year agreement with a financial institution whereby LTF can sell, on a revolving basis, an undivided percentage ownership interest in certain eligible accounts receivable, as defined, up to a maximum of $60.0 million. This two-step transaction is accounted for as a sale of receivables. Accordingly, the Company's Consolidated Balance Sheets reflect the portion of receivables transferred to the financial institution as a reduction of Accounts receivable, net. The discount and any other transaction gains and losses are included in Other - net in the Consolidated Statements of Income. NMHG continues to service the receivables and maintains an allowance for doubtful accounts based upon the expected collectibility of all NMHG accounts receivable, including the portion of receivables sold by LTF. In accordance with this agreement, gross proceeds of $264.0 million were received during 1997 and the balance of accounts receivable sold at December 31, 1997 was $18.6 million, net of a discount. The proceeds from the initial sale of receivables of $33.0 million were used to retire debt outstanding under NMHG's revolving credit agreement. The net effect of the sale of receivables during 1997 was not material to the operating results of NACCO. F-12 13 NOTE 6--INVENTORIES Inventories are summarized as follows:
December 31 ---------------------------------- 1997 1996 ---------------- ---------------- Manufacturing inventories: Finished goods and service parts - NMHG $ 86.9 $ 113.6 HB*PS 31.8 34.1 ---------------- ---------------- 118.7 147.7 ---------------- ---------------- Raw materials and work in process - NMHG 135.6 120.6 HB*PS 15.1 14.0 ---------------- ---------------- 150.7 134.6 ---------------- ---------------- LIFO reserve - NMHG (13.4) (15.6) HB*PS 1.1 .3 ---------------- ---------------- (12.3) (15.3) ---------------- ---------------- Total manufacturing inventories 257.1 267.0 Coal - NACoal 10.7 8.3 Mining supplies - NACoal 19.2 18.9 Retail inventories - KCI 15.9 15.4 ---------------- ---------------- $ 302.9 $ 309.6 ================ ================
The cost of manufacturing inventories has been determined by the LIFO method for 70 percent and 62 percent of such inventories at December 31, 1997 and 1996, respectively. NOTE 7--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment includes the following:
December 31 ---------------------------------- 1997 1996 ---------------- ---------------- Coal lands and real estate: NMHG $ 9.7 $ 6.6 HB*PS 2.4 1.6 NACoal 15.5 16.1 Project Mining Subsidiaries (Note 10) 80.2 77.9 KCI --- --- NACCO and Other .2 .2 ---------------- ---------------- 108.0 102.4 ---------------- ---------------- Plant and equipment: NMHG 298.6 289.3 HB*PS 137.9 123.7 NACoal 27.8 20.7 Project Mining Subsidiaries (Note 10) 448.0 438.4 KCI 7.8 7.4 NACCO and Other 4.8 4.8 ---------------- ---------------- 924.9 884.3 ---------------- ---------------- Property, plant and equipment at cost 1,032.9 986.7 Less allowances for depreciation, depletion and amortization 491.2 436.4 ---------------- ---------------- $ 541.7 $ 550.3 ================ ================
F-13 14 NOTE 7--PROPERTY, PLANT AND EQUIPMENT - Continued Total depreciation, depletion and amortization expense on property, plant and equipment was $70.9 million, $67.7 million and $63.9 million during 1997, 1996 and 1995, respectively. Proven and probable coal reserves approximated 2.0 billion and 2.1 billion tons at December 31, 1997 and 1996, respectively. NOTE 8--REVOLVING CREDIT AGREEMENTS Financing arrangements are obtained and maintained at the subsidiary level. NACCO has not guaranteed the long-term debt or any borrowings of its subsidiaries. The following table summarizes the Company's available and outstanding borrowings. A summary of the agreements at each subsidiary follows this table.
December 31 ---------------------------------- 1997 1996 ---------------- ---------------- Available borrowings: NMHG $ 361.2 $ 385.7 HB*PS 187.9 185.0 NACoal 50.0 50.0 KCI 4.9 5.0 ---------------- ---------------- $ 604.0 $ 625.7 ================ ================ Current portion of borrowings outstanding: NMHG $ 2.2 $ 7.8 HB*PS 7.3 9.0 NACoal 14.0 29.0 KCI --- --- ---------------- ---------------- $ 23.5 $ 45.8 ================ ================ Unused availability: NMHG $ 209.0 $ 133.9 HB*PS 107.6 96.0 NACoal 36.0 21.0 KCI 4.9 5.0 ---------------- ---------------- $ 357.5 $ 255.9 ================ ================ Weighted average stated interest rate: NMHG 6.2% 6.0% HB*PS 6.4% 5.8% NACoal 6.4% 6.1% KCI 6.2% 6.0% Weighted average effective interest rate (including interest swap agreements): NMHG 7.1% 6.5% HB*PS 6.3% 6.1% NACoal N/A N/A KCI N/A N/A
F-14 15 NOTE 8--REVOLVING CREDIT AGREEMENTS - Continued NMHG: NMHG's credit agreement provides for an unsecured revolving credit facility ("NMHG Facility") that permits advances up to $350.0 million. However, this availability is reduced by the portion of domestic receivables sold. (See Note 5 for a discussion of the sale of domestic accounts receivable.) The expiration date of the NMHG Facility (which was extended to June 2002 during 1997) may be extended, on an annual basis, for one additional year upon the mutual consent of NMHG and the bank group. NMHG does not anticipate repayment of the outstanding balance in the subsequent fiscal year. As such, the outstanding balance of this credit facility has been classified as long-term. In addition, the NMHG Facility has performance-based pricing which sets interest rates based upon achievement of certain financial performance targets. The NMHG Facility currently provides for, at NMHG's option, Euro-Dollar Loans which bear interest at LIBOR plus 0.2 percent and Money Market Loans which bear interest at Auction Rates (as defined in the agreement) and requires a 0.1 percent fee on the available borrowings. NMHG also has separate facilities totaling $38.5 million and $35.7 million at December 31, 1997 and 1996, respectively, of which $27.6 million and $27.9 million was available at December 31, 1997 and 1996, respectively. Amounts available under these facilities are reduced by outstanding letters of credit. HB*PS: HB*PS's credit agreement provides for a revolving credit facility ("HB*PS Facility") that permits advances up to $160.0 million and is secured by substantially all assets of HB*PS. A portion of the outstanding balance is classified as long-term because it is not expected to be repaid during the subsequent fiscal year. The HB*PS Facility, which expires in May 2002, provides reduced interest rates if HB*PS achieves a certain interest coverage ratio and allows interest rates quoted under a competitive bid option. The HB*PS Facility currently provides for interest at LIBOR plus 0.3 percent and requires a 0.2 percent facility fee on the available borrowings. HB*PS also has separate facilities totaling $30.0 million and $25.0 million at December 31, 1997 and 1996, respectively, of which $24.7 million and $23.9 million was available at December 31, 1997 and 1996, respectively. Amounts available under these facilities are reduced by outstanding letters of credit. NACOAL: NACoal has in place a revolving credit facility ("NACoal Facility") that permits advances up to $50.0 million and requires a 0.2 percent commitment and facility fee. The expiration date of the NACoal Facility (which was extended to September 2002 during 1997) may be extended, on an annual basis, for one additional year upon the mutual consent of NACoal and the bank group. Borrowings bear interest at LIBOR plus 0.4 percent. KCI: KCI has in place a revolving credit facility ("KCI Facility") that permits advances up to $5.0 million and requires a 0.2 percent facility fee. The expiration date of the KCI Facility (which was extended to May 2000 during 1997) may be extended, on an annual basis, for one additional year upon the mutual consent of KCI and the bank. Borrowings bear interest at the bank's prime rate, money market rate or LIBOR rate plus a base rate margin of 0.4 to 1.3 percent, as determined by certain performance measures. Outstanding letters of credit reduce the amount available under this facility. F-15 16 NOTE 9--LONG-TERM DEBT Subsidiary long-term debt, less current maturities, is as follows:
December 31 ---------------------------------- 1997 1996 ---------------- ---------------- NMHG - Long-term portion of revolving credit agreement $ 150.0 $ 244.0 NMHG - Other 1.8 3.7 ---------------- ---------------- 151.8 247.7 HB*PS - Long-term portion of revolving credit agreement 73.0 80.0 HB*PS - Other .4 .5 ---------------- ---------------- 73.4 80.5 NACOAL - Other --- .1 KCI - Term note with a stated interest rate of 6.8% and an effective interest rate of 7.8% and 8.1% at December 31, 1997 and 1996, respectively, payable 1999 to 2000 5.0 5.0 ---------------- ---------------- $ 230.2 $ 333.3 ================ ================
The maturities of the subsidiary long-term debt for the next five years, including current maturities, are as follows: $3.3 million in 1998, $4.0 million in 1999 and $3.0 million in 2000, $0.1 million in 2001 and $73.1 million in 2002. Interest paid on revolving credit agreements and long-term debt was $24.9 million, $32.1 million and $38.4 million during 1997, 1996 and 1995, respectively. The credit agreements for NMHG, HB*PS, NACoal and KCI contain certain covenants and restrictions. These covenants require, among other things, some or all of the following: maintenance of certain minimum amounts of net worth and certain specified ratios of working capital, debt to capitalization, interest coverage and fixed charge coverage. These ratios are calculated at the subsidiary level. Restrictions may also include limits on capital expenditures and dividends. At December 31, 1997, the subsidiaries were in compliance with the covenants in their credit agreements. NOTE 10--OBLIGATIONS OF PROJECT MINING SUBSIDIARIES NACoal's Project Mining Subsidiaries have entered into long-term contracts with various utility customers to provide lignite at a sales price based on cost plus a profit per ton. The utility customers have arranged and guaranteed the financing for the development and operation of these subsidiary mines. The obligations of these Project Mining Subsidiaries included in the Company's Consolidated Balance Sheets do not affect the short- or long-term liquidity of the Company and are without recourse to NACCO or its NACoal subsidiary. Obligations of Project Mining Subsidiaries, less current maturities, consist of the following at December 31:
1997 1996 ---------------- ---------------- Capitalized lease obligations $ 128.9 $ 136.6 Non-interest-bearing advances from customers 175.4 184.2 Promissory notes with interest rates ranging from 6.1% to 8.7% in 1997 and 5.8% to 8.7% in 1996 23.7 20.7 ---------------- ---------------- $ 328.0 $ 341.5 ================ ================
F-16 17 NOTE 10--OBLIGATIONS OF PROJECT MINING SUBSIDIARIES - Continued Advances from customers are used to develop, operate and provide for the ongoing working capital needs of certain Project Mining Subsidiaries. The maturity schedule established by the customer is as follows: $9.1 million in 1998, $10.0 million in 1999, $10.0 million in 2000, $10.0 million in 2001, $10.0 million in 2002 and $66.6 million thereafter. A maturity schedule for the remaining portion of the advances has not been established by the customer. The annual maturities of the promissory notes are: $3.4 million in 1998, $3.2 million in 1999, $3.2 million in 2000, $2.7 million in 2001, $2.1 million in 2002 and $12.5 million thereafter. Interest paid was $12.8 million, $13.6 million and $14.3 million during 1997, 1996 and 1995, respectively. The cost of coal, which is passed through to the utility customers, includes interest expense. The Project Mining Subsidiaries' capital lease obligations for mining equipment have the following future minimum lease payments at December 31, 1997: 1998 $ 22.7 1999 22.3 2000 21.3 2001 20.8 2002 19.2 Subsequent to 2002 104.4 ---------------- Total minimum lease payments 210.7 Amounts representing interest (69.6) ---------------- Present value of net minimum lease payments 141.1 Current maturities (12.2) ---------------- $ 128.9 ================
Interest expense and amortization in excess of annual lease payments are deferred and recognized in years when annual lease payments exceed interest expense and amortization. Project mining assets recorded under capital leases are included in Property, Plant and Equipment and consist of the following at December 31:
1997 1996 ---------------- --------------- Plant and equipment $ 198.4 $ 198.7 Less accumulated amortization 94.6 87.1 ---------------- --------------- $ 103.8 $ 111.6 ================ ===============
During 1997, 1996 and 1995, the Project Mining Subsidiaries incurred capital lease obligations of $6.4 million, $1.8 million and $18.0 million, respectively, in connection with lease agreements to acquire plant and equipment. The above obligations are secured by substantially all owned assets of the respective Project Mining Subsidiary and the assignment of all rights under its coal sales agreement. F-17 18 NOTE 11--LEASE COMMITMENTS The Company leases certain office, manufacturing and warehouse facilities, retail stores and machinery and equipment under noncancellable operating leases which expire at various dates through 2009. Future minimum operating lease payments, excluding Project Mining Subsidiaries, at December 31, 1997, are as follows: 1998 $ 21.9 1999 19.7 2000 17.3 2001 14.6 2002 12.4 Thereafter 29.2 -------------- $ 115.1 ==============
Rental expense for all operating leases, excluding Project Mining Subsidiaries, amounted to $25.6 million, $23.6 million and $20.7 million during 1997, 1996 and 1995, respectively. NOTE 12--SELF-INSURANCE RESERVES AND OTHER Self-insurance Reserves and Other consisted of the following at December 31:
1997 1996 ---------------- --------------- Present value of UMWA obligation $ 30.8 $ 32.5 Reserve for future interest on UMWA obligation 59.2 61.5 ---------------- --------------- Total undiscounted UMWA obligation 90.0 94.0 Present value of other closed mine obligations 19.5 20.6 Other self-insurance reserves 113.2 109.3 ---------------- --------------- $ 222.7 $ 223.9 ================ ===============
The UMWA obligation and the other closed mine obligations relate to Bellaire's former eastern U.S. underground mining operations and the Indian Head Mine, which ceased operations in 1992. The obligation to UMWA resulted from the Coal Act, which requires Bellaire to incur additional costs for retiree medical expenses of certain United Mine Worker retirees. Annual cash payments of up to $3.0 million after tax are expected relating to this obligation and could continue for as long as 40 to 50 years. The Company has recorded this obligation on an undiscounted basis. The reserve for future interest represents the portion of this reserve comprising interest costs. The other closed mine obligations include reserves for land reclamation and site treatment at certain closed eastern underground and western surface mines, as well as reserves for workers compensation and black lung benefit costs. Other self-insurance reserves include product liability reserves, employee retirement obligations and other miscellaneous reserves. F-18 19 NOTE 13--FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. The fair values of revolving credit agreements and long-term debt were determined using current rates offered for similar obligations. The fair values of revolving credit agreements and long-term debt approximated carrying values at December 31, 1997 and 1996. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable and derivatives. Concentration of credit risk on accounts receivable is mitigated by the large number of customers comprising the Company's customer base and their dispersion across many different industries and geographies. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one institution. DERIVATIVE FINANCIAL INSTRUMENTS FOREIGN CURRENCY DERIVATIVES: NMHG and HB*PS enter into forward foreign currency exchange contracts for purposes of hedging their exposure to foreign currency exchange rate fluctuations. These contracts hedge primarily firm commitments and, to a lesser degree, forecasted transactions relating to cash flows associated with sales and purchases denominated in foreign currencies. NMHG and HB*PS had forward foreign currency exchange contracts outstanding in the amounts $75.1 million and $1.2 million, respectively, at December 31, 1997, primarily denominated in Japanese yen, British pounds sterling, French francs and Canadian dollars. At December 31, 1996, NMHG and HB*PS had forward foreign currency exchange contracts outstanding in the amounts of $61.1 million and $2.7 million, respectively, primarily denominated in Japanese yen, Australian dollars, French francs and Canadian dollars. The amount of deferred loss at December 31, 1997 and 1996 was not material. The fair market value of these contracts was estimated based on quoted market sources and approximated a net payable of $2.5 million and $2.1 million at December 31, 1997 and 1996, respectively. INTEREST RATE DERIVATIVES: The following table summarizes the notional amounts, related rates (including applicable margins) and remaining terms on interest rate swap agreements outstanding at December 31:
Notional Amount Fixed Rate Paid --------------------------- --------------------------- Remaining Term at 1997 1996 1997 1996 December 31, 1997 ----------- ------------ ------------ ----------- ------------------------------------- NMHG $205.0 $310.0 7.1% 6.4% One to Eight Years HB*PS 75.0 75.0 6.2% 6.3% One to Two Years NACoal 11.8 13.9 6.9% 6.9% One to Six Years KCI 5.0 5.0 7.8% 8.1% Two to Three Years
The fair market value of these interest rate swap agreements, which was obtained from broker quotes, was a net payable of $6.4 million and $3.8 million at December 31, 1997 and 1996, respectively. NOTE 14--CONTINGENCIES Various legal proceedings and claims have been or may be asserted against NACCO and certain subsidiaries relating to the conduct of their businesses, including product liability and environmental claims. These proceedings are incidental to their ordinary course of business. Management believes that it has meritorious defenses and will vigorously defend itself in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. Although the ultimate disposition of these proceedings is not presently determinable, management F-19 20 NOTE 14--CONTINGENCIES - Continued believes, after consultation with its legal counsel, that the likelihood that material costs will be incurred in excess of accruals already recognized is remote. NMHG is subject to recourse or repurchase obligations under various financing arrangements for certain independently owned retail dealerships. Also, certain dealer loans are guaranteed by NMHG. When NMHG is the guarantor of the principal amount financed, a security interest is usually maintained in certain assets of parties for whom NMHG is guaranteeing debt. Total amounts subject to recourse or repurchase obligations at December 31, 1997 and 1996 were $156.9 million and $125.6 million, respectively. Losses anticipated under the terms of the recourse or repurchase obligations are not significant and have been reserved for in the Consolidated Financial Statements. NOTE 15--COMMON STOCK The Class A common stock has one vote per share and the Class B common stock has 10 votes per share. The total number of authorized shares of Class A common stock and Class B common stock at December 31, 1997 was 25,000,000 shares and 6,756,176 shares, respectively. Treasury shares of Class A stock totaling 1,630,282 and 1,597,447 at December 31, 1997 and 1996, respectively, have been deducted from shares issued. STOCK REPURCHASE PROGRAM: In 1996, the board of directors authorized the repurchase of up to 1.5 million shares of the Company's Class A common stock. Pursuant to this authorization, the Company commenced an issuer tender offer (the "Offer") on November 18, 1996 for the purchase of up to 800,000 Class A common shares at prices of $43.50 to $50.00 per share. The Offer resulted in the repurchase of 800,000 shares on December 23, 1996, at $50.00 per share. The $40.4 million cost of this transaction, including fees and expenses, was financed using cash on hand and amounts available under revolving credit facilities. In addition to the Offer, the Company is authorized to purchase up to 700,000 shares of Class A common stock through an open market share repurchase program during 1997 and 1998. In 1997, the Company repurchased 53,000 Class A common shares pursuant to this share repurchase program. The following table summarizes selected unaudited pro forma financial information assuming that the 800,000 shares repurchased on December 23, 1996 pursuant to the Offer had occurred at the beginning of each period presented. (Note that diluted earnings per share approximates basic earnings per share.):
1996 1995 ------------- ------------- OPERATING RESULTS Income before extraordinary items $ 49.1 $ 63.9 Net income $ 49.1 $ 92.8 BASIC EARNINGS PER SHARE Income before extraordinary items $ 6.00 $ 7.83 Extraordinary items -- 3.54 ------------- ------------- Net income $ 6.00 $ 11.37 ============= ============= AVERAGE SHARES OUTSTANDING 8.183 8.163
STOCK OPTIONS: The 1975 and 1981 stock option plans, as amended, provide for the granting to officers and other key employees of options to purchase Class A and Class B common stock of the Company at a price not less than the market value of such stock at the date of grant. Options become exercisable over a four-year period and expire 10 years from the date of the grant. At December 31, 1997, 1996 and 1995, all stock options outstanding were exercisable. F-20 21 NOTE 15--COMMON STOCK - Continued At December 31, 1997, 1996 and 1995, there were 80,701 Class A shares and 80,100 Class B shares available for grant. In 1997, no options were granted; however, 4,000 Class A share options were exercised. No options were granted or exercised during 1996 and 1995. At December 31, 1997, 1996 and 1995, there were options outstanding relating to 1,800, 5,800 and 5,800, respectively, Class A shares with an option price of $32.00 that were granted on January 12, 1989, and 25,000 Class A shares at an option price of $35.56 granted on March 1, 1989. The Company does not presently intend to issue additional stock options. The Company applies AICPA Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for stock options. Since there have been no options granted in fiscal years 1997, 1996 and 1995, no additional pro forma disclosures are required as provided in Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." NOTE 16--EARNINGS PER SHARE Earnings per share for the years ended December 31, 1996 and 1995 have been restated to conform with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share." For purposes of calculating the basic and diluted earnings per share, no adjustments have been made to the reported amounts of Income Before Extraordinary Items, Extraordinary Items or Net Income. The share amounts used for the year ended December 31 are as follows:
1997 1996 1995 ------------ ------------ ------------ Basic common shares (weighted average) 8.171 8.920 8.963 Dilutive stock options .018 .011 .012 ------------ ------------ ------------ Diluted common shares 8.189 8.931 8.975 ============ ============ ============
NOTE 17--INCOME TAXES The components of income before income taxes and provision for income taxes for the year ended December 31 are as follows:
1997 1996 1995 ------------ ------------- ------------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS Domestic $ 74.6 $ 73.0 $ 79.3 Foreign 14.5 13.3 24.2 ------------ ------------- ------------ $ 89.1 $ 86.3 $ 103.5 ============ ============= ============ PROVISION FOR INCOME TAXES Current tax expense: Federal $ 38.5 $ 29.0 $ 28.4 State 7.4 6.2 4.9 Foreign 3.9 5.6 4.2 ------------ ------------- ------------ Total current 49.8 40.8 37.5 ------------ ------------- ------------ Deferred tax expense (benefit): Federal (24.3) (.3) (3.3) State (2.6) (.9) (.8) Foreign (2.4) (5.3) 1.3 ------------ ------------- ------------ Total deferred (29.3) (6.5) (2.8) Increase in valuation allowance 5.9 --- --- ------------ ------------- ------------ $ 26.4 $ 34.3 $ 34.7 ============ ============= ============
F-21 22 NOTE 17--INCOME TAXES - Continued Domestic income before income taxes has been reduced by substantially all of the amortization of goodwill and interest expense. The Company made income tax payments of $46.4 million, $40.2 million and $48.9 million during 1997, 1996 and 1995, respectively. During the same period, income tax refunds totaled $2.1 million, $3.3 million and $3.7 million, respectively. A reconciliation of federal statutory and effective income tax for the year ended December 31 follows:
1997 1996 1995 ------------ ------------ ------------ Income before taxes $ 89.1 $ 86.3 $ 103.5 ============ ============ ============ Statutory taxes at 35% $ 31.2 $ 30.2 $ 36.2 Unremitted foreign earnings (15.3) --- --- Valuation allowance 5.9 --- --- Amortization of goodwill 4.9 5.1 5.1 State income taxes 3.4 3.3 2.7 Tax audit settlements --- (1.2) (3.1) Export benefits (.8) (1.8) (1.1) Percentage depletion (1.6) (1.6) (1.8) Foreign statutory rate differences (2.2) (.5) (2.3) Earnings reported net of taxes (.4) (.4) (1.2) Other-net 1.3 1.2 .2 ------------ ------------ ------------ Provision for income taxes $ 26.4 $ 34.3 $ 34.7 ============ ============ ============ Effective rate 29.6% 39.7% 33.5% ============ ============ ============
A detailed summary of the total deferred tax assets and liabilities in the Company's Consolidated Balance Sheets at December 31 resulting from differences in the book and tax basis of assets and liabilities follows:
1997 1996 ------------ ----------- DEFERRED TAX ASSETS Accrued expenses and reserves $ 55.0 $ 43.7 Reserve for UMWA 33.9 34.5 Employee benefits 18.0 18.1 Net operating loss carryforwards 7.9 9.3 ------------ ----------- Total deferred tax assets 114.8 105.6 Less: Valuation allowance (5.9) --- ------------ ----------- 108.9 105.6 ------------ ----------- DEFERRED TAX LIABILITIES Depreciation & depletion 46.6 46.8 Unremitted foreign earnings --- 16.7 Inventories 12.4 12.6 Other 13.5 16.1 ------------ ----------- Total deferred tax liabilities 72.5 92.2 ------------ ----------- Net deferred tax asset $ 36.4 $ 13.4 ============ ===========
F-22 23 NOTE 17--INCOME TAXES - Continued In the fourth quarter of 1997, management determined that the earnings of NMHG's foreign subsidiaries have been and will be indefinitely reinvested in the Company's foreign operations and, therefore, concluded that the reserve for unremitted foreign earnings was no longer required. Certain 1997 events, including the release of certain covenant restrictions on the NMHG Facility, an improvement in NMHG's domestic cash flow and the identification of specific capital investment projects to be undertaken by the foreign operations allowed management to make these determinations. As a result, an income tax benefit of $17.4 million was recognized in the fourth quarter of 1997, of which $2.1 million represents the reversal of deferred taxes provided in the first three quarters of 1997, and $15.3 relates to the reversal of previously provided deferred taxes on NMHG's unremitted foreign earnings. The unremitted earnings of foreign subsidiaries are $125.0 million as of December 31, 1997. Because these earnings have been indefinitely reinvested in foreign operations, no provision has been made for US income taxes. It is impracticable to determine the amount of unrecognized deferred taxes with respect to these earnings; however, foreign tax credits would be available to reduce U.S. income taxes in the event of a distribution. The Company periodically reviews the need for a valuation allowance against certain deferred tax assets and recognizes these assets to the extent that realization of these assets is more likely than not. Based on a review of earnings history and trends, forecasted earnings and expiration of carryforwards, the Company provided a valuation allowance against certain deferred tax assets. In the fourth quarter of 1997, the Company provided a valuation allowance of $5.9 million, primarily against foreign net operating loss carryforwards for which utilization is uncertain. At December 31, 1997, the Company had $4.1 million of net operating loss carryforwards which expire, if unused, in years 1998 through 2003 and $3.8 million which are not subject to expiration. In 1996 and 1995, the Company reached agreements with various tax authorities resulting in non-recurring tax benefits of $1.2 million and $3.1 million, respectively. Additionally, the Company recognized a non-recurring tax benefit of $2.5 million in 1995 from the remittance of earnings of foreign subsidiaries subject to rates of tax in excess of the U.S. statutory rate. The Company and certain of its subsidiaries are currently under examination by various taxing authorities. The Company has not been informed of any material assessment resulting from these examinations and will vigorously contest any material assessment. Management believes that any potential adjustment would not materially affect the Company's financial condition or results of operations. F-23 24 NOTE 18--RETIREMENT BENEFIT PLANS DEFINED BENEFIT PLANS: The Company maintains various defined benefit pension plans covering most of its employees. These plans provide benefits based on years of service and average compensation during certain periods. The Company's policy is to make contributions to fund these plans within the range allowed by the applicable regulations. Contributions to the various plans were $9.6 million in 1997, $12.6 million in 1996 and $5.6 million in 1995. Plan assets consist primarily of publicly traded stocks, investment contracts and government and corporate bonds. As of December 31, 1996, pension benefits were frozen for employees covered under the NMHG and HB*PS plans, except for those NMHG employees participating in collective bargaining agreements. As a result, a curtailment gain of $1.3 million was recognized in 1996. In addition, the net periodic pension expense in 1997 and in future periods will be significantly reduced. As a result of these changes, only NACoal employees and certain NMHG employees covered under collective bargaining agreements will earn retirement benefits under defined benefit pension plans. Other employees of the Company, including NMHG and HB*PS employees whose pension benefits were frozen as of December 31, 1996, will receive retirement benefits under defined contribution retirement plans, as described below. Set forth below is a detail of consolidated worldwide net periodic pension expense and the assumptions used in accounting for the United States defined benefit plans for the year ended December 31. The United Kingdom plans used assumptions that are consistent with, but not identical to, those used by the United States plans.
1997 1996 1995 ------------ ------------ ------------- Service cost $ 5.6 $ 8.0 $ 7.9 Interest cost on projected benefit obligation 12.0 11.4 10.4 Actual gain on plan assets (37.0) (13.4) (21.2) Curtailment gain --- (1.3) --- Net amortization and deferral of actuarial losses 23.9 2.4 11.7 ------------ ------------ ------------- Net periodic pension expense $ 4.5 $ 7.1 $ 8.8 ============ ============ ============= Assumptions: Weighted average discount rates 7.5% 8.0% 7.5% Rate of increase in compensation levels 4.5% 5.0% 4.5-5.0% Expected long-term rate of return on assets 9.0% 9.0% 9.0%
F-24 25 NOTE 18--RETIREMENT BENEFIT PLANS - Continued The following sets forth the funded status of the defined benefit plans and amounts recognized in the Consolidated Balance Sheets at December 31:
1997 1996 ------------ ------------ Actuarial present value of benefit obligation: Vested accumulated benefit obligation $ 133.8 $ 124.1 Non-vested accumulated benefit obligation 8.9 7.7 ------------ ------------ Total accumulated benefit obligation 142.7 131.8 Value of future salary projections 19.9 17.2 ------------ ------------ Total projected benefit obligation 162.6 149.0 Fair value of plan assets 187.9 150.2 ------------ ------------ Plan assets in excess of projected benefit obligation 25.3 1.2 Amounts available to increase (reduce) future pension expense: Unamortized balance of the initial transition amount (8.9) (4.9) Unamortized cumulative actuarial gain (28.1) (12.4) Unamortized prior service cost 3.6 3.3 Adjustment for minimum pension liability (4.1) (4.7) Other 1.0 --- ------------ ------------ Pension liability recognized in Consolidated Balance Sheets $ (11.2) $ (17.5) ============ ============
DEFINED CONTRIBUTION PLANS: NACCO and its subsidiaries have defined contribution (401(k)) plans for substantially all employees. For NACCO and certain subsidiaries, employee contributions are matched by the Company based on plan provisions. In addition, NACCO and certain other subsidiaries have defined contribution retirement plans whereby the subsidiary's contribution to participants is determined annually based on a formula which includes the effect of actual compared to targeted operating results and the age and compensation of the participants. Total Company contributions to these plans were $8.9 million in 1997, $8.8 million in 1996 and $7.3 million in 1995. NOTE 19--BUSINESS SEGMENTS NACCO's four operating subsidiaries function in distinct business environments. Sales between subsidiaries, which are minimal, are eliminated in consolidation. NACCO and Other includes the accounts of the parent company and Bellaire. Information relating to the Company's operations at the subsidiary level is presented below. F-25 26 NOTE 19--BUSINESS SEGMENTS - Continued
1997 1996 1995 ------------ ------------ ------------ REVENUES NMHG $ 1,488.0 $ 1,560.1 $ 1,510.1 HB*PS 423.1 395.1 381.4 NACoal 262.9 249.1 248.0 KCI 79.0 74.9 69.6 NACCO and Other .2 .3 .5 Eliminations (6.3) (6.3) (5.1) ------------- ------------ ------------ $ 2,246.9 $ 2,273.2 $ 2,204.5 ============= ============ ============ GROSS PROFIT NMHG $ 264.1 $ 247.2 $ 247.8 HB*PS 70.0 68.9 62.4 NACoal 54.2 51.4 55.4 KCI 32.8 31.6 29.5 NACCO and Other (.1) --- --- ------------- ------------ ------------ $ 421.0 $ 399.1 $ 395.1 ============= ============ ============ SELLING, GENERAL AND ADMINISTRATIVE EXPENSES NMHG $ 173.9 $ 163.1 $ 153.5 HB*PS 42.7 40.8 34.6 NACoal 10.3 11.2 9.7 KCI 29.9 28.4 26.1 NACCO and Other 8.4 9.0 8.8 ------------- ------------ ------------ $ 265.2 $ 252.5 $ 232.7 ============= ============ ============ AMORTIZATION OF GOODWILL NMHG $ 11.7 $ 11.5 $ 10.8 HB*PS 4.0 3.8 2.8 KCI .1 .1 .1 ------------- ------------ ------------ $ 15.8 $ 15.4 $ 13.7 ============= ============ ============ OPERATING PROFIT NMHG $ 70.5 $ 72.5 $ 83.4 HB*PS 23.3 24.3 25.0 NACoal 43.9 40.3 45.8 KCI 2.8 3.1 3.3 NACCO and Other (8.5) (9.0) (8.8) ------------- ------------ ------------ $ 132.0 $ 131.2 $ 148.7 ============= ============ ============ OPERATING PROFIT EXCLUDING GOODWILL AMORTIZATION NMHG $ 82.2 $ 84.0 $ 94.2 HB*PS 27.3 28.1 27.8 NACoal 43.9 40.3 45.8 KCI 2.9 3.2 3.4 NACCO and Other (8.5) (9.0) (8.8) ------------- ------------ ------------ $ 147.8 $ 146.6 $ 162.4 ============= ============ ============ INTEREST EXPENSE NMHG $ (14.5) $ (25.0) $ (25.9) HB*PS (6.9) (6.6) (7.2) NACoal (2.1) (.2) (1.3) KCI (.4) (.5) (.5) NACCO and Other (2.3) (.5) (1.6) Eliminations 2.3 .5 3.3 ------------- ------------ ------------ (23.9) (32.3) (33.2) Project Mining Subsidiaries (12.7) (13.6) (14.0) ------------- ------------ ------------ $ (36.6) $ (45.9) $ (47.2) ============= ============ ============
F-26 27 NOTE 19--BUSINESS SEGMENTS - Continued
1997 1996 1995 ------------- ------------ ------------ INTEREST INCOME NMHG $ 2.2 $ .5 $ .9 HB*PS .1 --- --- NACoal 3.1 1.5 2.4 NACCO and Other --- --- 1.9 Eliminations (2.3) (.5) (3.3) ------------- ------------ ------------ $ 3.1 $ 1.5 $ 1.9 ============= ============ ============ OTHER-NET, INCOME (EXPENSE) NMHG $ (5.9) $ (2.0) $ (.2) HB*PS (.2) (.3) (.8) NACoal (5.1) 1.1 .5 KCI (.1) --- --- NACCO and Other 1.9 .7 .6 ------------- ------------ ------------ $ (9.4) $ (.5) $ .1 ============= ============ ============ PROVISION FOR INCOME TAXES NMHG $ 13.6 $ 19.6 $ 21.5 HB*PS 7.1 6.7 5.3 NACoal 8.1 9.9 10.8 KCI 1.0 1.1 1.2 NACCO and Other (3.4) (3.0) (4.1) ------------- ------------ ------------ $ 26.4 $ 34.3 $ 34.7 ============= ============ ============ NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS NMHG $ 38.7 $ 26.4 $ 36.9 HB*PS 9.2 10.7 11.8 NACoal 19.0 19.2 22.6 KCI 1.3 1.5 1.6 NACCO and Other (5.5) (5.8) (4.1) Minority interest (.9) (1.4) (3.3) ------------- ------------ ------------ 61.8 50.6 65.5 Extraordinary gain, net-of-tax --- --- 32.3 Extraordinary charges, net-of-tax --- --- (3.4) ------------- ------------ ------------ $ 61.8 $ 50.6 $ 94.4 ============= ============ ============ TOTAL ASSETS NMHG $ 942.4 $ 950.9 $ 1,052.2 HB*PS 290.8 271.8 288.0 NACoal 51.5 66.5 40.7 KCI 24.9 27.6 25.1 NACCO and Other 59.4 56.7 62.7 ------------- ------------ ------------ 1,369.0 1,373.5 1,468.7 Project Mining Subsidiaries 423.4 433.6 433.3 ------------- ------------ ------------ 1,792.4 1,807.1 1,902.0 Consolidating eliminations (63.3) (99.0) (68.2) ------------- ------------ ------------ $ 1,729.1 $ 1,708.1 $ 1,833.8 ============= ============ ============
F-27 28 NOTE 19--BUSINESS SEGMENTS - Continued
1997 1996 1995 ------------- ------------ ------------ DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE NMHG $ 35.0 $ 33.8 $ 31.8 HB*PS 19.9 19.0 15.8 NACoal 2.4 2.1 1.7 KCI 1.1 1.1 1.0 NACCO and Other .4 .2 .2 ------------- ------------ ------------ 58.8 56.2 50.5 Project Mining Subsidiaries 29.8 29.1 28.8 ------------- ------------ ------------ $ 88.6 $ 85.3 $ 79.3 ============= ============ ============ CAPITAL EXPENDITURES NMHG $ 25.3 $ 42.3 $ 39.4 HB*PS 17.7 15.1 9.7 NACoal 9.1 2.8 3.5 KCI .6 1.1 1.4 NACCO and Other --- 1.4 .1 ------------- ------------ ------------ 52.7 62.7 54.1 Project Mining Subsidiaries 15.7 16.7 19.0 ------------- ------------ ------------ $ 68.4 $ 79.4 $ 73.1 ============= ============ ============
DATA BY GEOGRAPHIC AREA
Europe, United Africa and States Middle East Other Eliminations Consolidated ---------------- ---------------- ---------------- ---------------- ---------------- 1997 ---- Sales to unaffiliated customers $ 1,725.8 $ 398.9 $ 122.2 $ --- $ 2,246.9 Transfers between geographic areas 29.5 146.8 --- (176.3) --- ---------------- ---------------- ---------------- ---------------- ---------------- Total revenues $ 1,755.3 $ 545.7 $ 122.2 $ (176.3) $ 2,246.9 ================ ================ ================ ================ ================ Operating profit $ 112.0 $ 22.6 $ (2.6) $ --- $ 132.0 ================ ================ ================ ================ ================ Total assets $ 1,325.7 $ 355.5 $ 47.9 $ --- $ 1,729.1 ================ ================ ================ ================ ================ 1996 ---- Sales to unaffiliated customers $ 1,560.6 $ 457.5 $ 255.1 $ --- $ 2,273.2 Transfers between geographic areas 53.2 129.8 --- (183.0) --- ---------------- ---------------- ---------------- ---------------- ---------------- Total revenues $ 1,613.8 $ 587.3 $ 255.1 $ (183.0) $ 2,273.2 ================ ================ ================ ================ ================ Operating profit $ 93.5 $ 32.7 $ 5.0 $ --- $ 131.2 ================ ================ ================ ================ ================ Total assets $ 1,312.1 $ 336.4 $ 59.6 $ --- $ 1,708.1 ================ ================ ================ ================ ================
F-28 29 NOTE 19--BUSINESS SEGMENTS - Continued
Europe, United Africa and States Middle East Other Eliminations Consolidated ------ ----------- ----- ------------ ------------ 1995 - ---- Sales to unaffiliated customers $ 1,568.3 $ 426.9 $ 209.3 $ --- $ 2,204.5 Transfers between geographic areas 63.7 156.1 --- (219.8) --- ---------------- ---------------- ---------------- ---------------- ---------------- Total revenues $ 1,632.0 $ 583.0 $ 209.3 $ (219.8) $ 2,204.5 ================ ================ ================ ================ ================ Operating profit $ 106.0 $ 34.8 $ 7.9 $ --- $ 148.7 ================ ================ ================ ================ ================ Total assets $ 1,395.3 $ 374.4 $ 64.1 $ --- $ 1,833.8 ================ ================ ================ ================ ================
NACCO parent company expense reduced United States operating profit by $8.4 million, $8.9 million and $8.7 million in 1997, 1996 and 1995, respectively. The Other category above includes Canada, Mexico, South America and Asia-Pacific. This category, however, does not include the operating results or assets of S-N, which is accounted for using the equity method. NOTE 20--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) A summary of the unaudited quarterly results of operations for the year ended December 31 is as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter --------------- ---------------- ---------------- ---------------- 1997 - ---- REVENUES NMHG $ 332.3 $ 377.4 $ 352.3 $ 426.0 HB*PS 75.3 87.2 117.8 142.8 NACoal 58.4 62.4 70.2 71.9 KCI 14.6 16.6 19.6 28.2 NACCO and Other .1 --- .1 --- Eliminations (1.0) (2.5) (2.6) (.2) --------------- ---------------- ---------------- ---------------- 479.7 541.1 557.4 668.7 --------------- ---------------- ---------------- ---------------- GROSS PROFIT 82.1 100.4 105.8 132.7 --------------- ---------------- ---------------- ---------------- OPERATING PROFIT NMHG 12.2 24.7 17.6 16.0 HB*PS (2.1) 2.2 8.1 15.1 NACoal 9.0 9.4 13.2 12.3 KCI (1.0) (.5) .7 3.6 NACCO and Other (2.1) (2.0) (2.1) (2.3) --------------- ---------------- ---------------- ---------------- 16.0 33.8 37.5 44.7 --------------- ---------------- ---------------- ---------------- NET INCOME $ 2.8 $ 14.9 $ 14.5 $ 29.6 =============== ================ ================ ================ BASIC EARNINGS PER SHARE $ .35 $ 1.82 $ 1.78 $ 3.63 =============== ================ ================ ================ DILUTED EARNINGS PER SHARE $ .35 $ 1.82 $ 1.78 $ 3.62 =============== ================ ================ ================
F-29 30 NOTE 20--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - Continued
First Second Third Fourth Quarter Quarter Quarter Quarter --------------- ---------------- ---------------- ---------------- 1996 - ---- REVENUES NMHG $ 420.8 $ 407.6 $ 349.5 $ 382.2 HB*PS 67.9 82.7 109.0 135.5 NACoal 59.1 56.7 61.2 72.1 KCI 12.9 14.6 19.5 27.9 NACCO and Other .1 .1 --- .1 Eliminations (1.3) (.8) (2.2) (2.0) --------------- ---------------- ---------------- ---------------- 559.5 560.9 537.0 615.8 --------------- ---------------- ---------------- ---------------- GROSS PROFIT 99.4 99.9 91.3 108.5 --------------- ---------------- ---------------- ---------------- OPERATING PROFIT NMHG 26.0 24.7 9.4 12.4 HB*PS (1.0) 4.7 7.0 13.6 NACoal 9.8 7.8 10.5 12.2 KCI (1.2) (.6) 1.0 3.9 NACCO and Other (2.5) (2.6) (1.9) (2.0) --------------- ---------------- ---------------- ---------------- 31.1 34.0 26.0 40.1 --------------- ---------------- ---------------- ---------------- NET INCOME $ 12.9 $ 14.0 $ 7.6 $ 16.1 =============== ================ ================ ================ BASIC EARNINGS PER SHARE $ 1.44 $ 1.56 $ 0.85 $ 1.83 =============== ================ ================ ================ DILUTED EARNINGS PER SHARE $ 1.44 $ 1.56 $ 0.85 $ 1.82 =============== ================ ================ ================
Gross profit has been restated for each of the quarters in 1996 to conform to 1997 presentation. See Note 4 and Note 17 for a discussion of significant adjustments made in the fourth quarter of 1997. F-30 31 NOTE 21--PARENT COMPANY CONDENSED BALANCE SHEETS The condensed balance sheets of NACCO, the parent company, at December 31 are as follows:
1997 1996 ------------ ------------ ASSETS Current assets $ --- $ .3 Current intercompany accounts receivable, net 12.4 9.1 Other assets .5 .5 Investment in subsidiaries NMHG 375.8 361.0 HB*PS 127.1 117.8 NACoal 15.1 15.1 KCI 10.8 13.3 Bellaire .8 .9 ------------ ------------ 529.6 508.1 Property, plant and equipment, net 1.9 2.2 Deferred income taxes 21.2 20.0 ------------ ------------ Total Assets $ 565.6 $ 540.2 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 15.2 $ 8.8 Reserve for future interest on UMWA obligation 59.2 61.5 Note payable to Bellaire 39.3 40.5 Notes payable to other subsidiaries 22.6 45.6 Deferred income and other 4.2 4.5 Stockholders' equity 425.1 379.3 ------------ ------------ Total Liabilities and Stockholders' Equity $ 565.6 $ 540.2 ============ ============
The credit agreements at NMHG, HB*PS and KCI allow the transfer of assets to NACCO under certain circumstances. The amount of NACCO's investment in NMHG, HB*PS and KCI that was restricted at December 31, 1997 totals approximately $417.3 million. There are no restrictions on the transfer of assets from NACoal. Dividends and advances from subsidiaries are the primary sources of cash for NACCO. F-31 32 NACCO INDUSTRIES, INC. TO THE STOCKHOLDERS OF NACCO INDUSTRIES, INC. The management of NACCO Industries, Inc. is responsible for the preparation, content and integrity of the financial statements and related information contained within this report. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on informed judgments and estimates. The Company's code of conduct, communicated throughout the organization, requires adherence to high ethical standards in the conduct of the Company's business. NACCO Industries, Inc. and each of its subsidiaries maintains a system of internal controls designed to provide reasonable assurance as to the protection of assets and the integrity of the financial statements. These systems are augmented by the selection of qualified financial management personnel. In addition, an internal audit function periodically assesses the internal controls. Arthur Andersen LLP, independent certified public accountants, audits NACCO Industries, Inc. and its subsidiaries' financial statements. Its audits are conducted in accordance with generally accepted auditing standards and provide an objective and independent assessment that helps ensure fair presentation of the Company's operating results and financial position. The independent accountants have access to all financial records and related data of the Company, as well as to the minutes of stockholders' and directors' meetings. The Audit Committee of the Board of Directors, composed of independent directors, meets regularly with the independent auditors and internal auditors to review the scope of their audit reports and to discuss any action to be taken. The independent auditors and the internal auditors have free and direct access to the Audit Committee. The Audit Committee also reviews the financial reporting process and accounting policies of NACCO Industries, Inc. and each of its subsidiaries. /s/ Alfred M. Rankin, Jr. /s/ Kenneth C. Schilling ------------------------- ------------------------ Alfred M. Rankin, Jr. Kenneth C. Schilling Chairman, President and Vice President and Chief Executive Officer Controller F-32 33 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE PARENT NACCO INDUSTRIES, INC. AND SUBSIDIARIES PARENT COMPANY CONDENSED BALANCE SHEETS
December 31 --------------------------------- 1997 1996 ------------- ------------- (In millions) Current assets $ - $ 0.3 Net amounts receivable from subsidiaries 12.4 9.1 Other assets 0.5 0.5 Investment in subsidiaries NMHG 375.8 361.0 HB*PS 127.1 117.8 NACoal 15.1 15.1 KCI 10.8 13.3 Bellaire 0.8 0.9 ------------- ------------- 529.6 508.1 Property, plant and equipment, net 1.9 2.2 Deferred income taxes 21.2 20.0 ------------- ------------- Total Assets $ 565.6 $ 540.2 ============= ============= Current liabilities $ 15.2 $ 8.8 Reserve for future interest on UMWA obligation 59.2 61.5 Note payable to Bellaire 39.3 40.5 Notes payable to other subsidiaries 22.6 45.6 Deferred income and other 4.2 4.5 Stockholders' equity 425.1 379.3 ------------- ------------- Total Liabilities and Stockholders' Equity $ 565.6 $ 540.2 ============= =============
See Notes to Parent Company Financial Statements. F-33 34 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE PARENT NACCO INDUSTRIES, INC. AND SUBSIDIARIES PARENT COMPANY STATEMENTS OF INCOME
Year Ended December 31 ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (In millions) Income (expense): Intercompany interest income $ - $ 0.1 $ 0.2 Intercompany interest expense (2.3) (0.5) (2.7) Other - net 1.9 0.4 2.1 ------------- ------------- ------------- (0.4) -- (0.4) Administrative and general expenses 8.4 8.9 8.7 ------------- ------------- ------------- Loss before income taxes (8.8) (8.9) (9.1) Income tax benefit (3.4) (3.1) (4.5) ------------- ------------- ------------- Net loss before equity in earnings of subsidiaries and extraordinary items (5.4) (5.8) (4.6) Equity in earnings of subsidiaries before extraordinary items 67.2 56.4 70.1 Extraordinary gain, net-of-tax -- -- 32.3 Extraordinary charge, net-of-tax -- -- (3.4) ------------- ------------- ------------- Net income (loss) $ 61.8 $ 50.6 $ 94.4 ============= ============= =============
See Notes to Parent Company Financial Statements. F-34 35 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE PARENT NACCO INDUSTRIES, INC. AND SUBSIDIARIES PARENT COMPANY STATEMENTS OF CASH FLOWS
Year Ended December 31 ------------------------------------------ 1997 1996 1995 ------------- ------------- ------------ (In millions) Operating activities Net income (loss) $ 61.8 $ 50.6 $ 94.4 Equity in earnings of subsidiaries (67.2) (56.4) (70.1) Extraordinary gain, net-of-tax - - (32.3) Extraordinary charge, net-of-tax - - 3.4 ------------- ------------- ------------ Parent company only net loss (5.4) (5.8) (4.6) Deferred income taxes (1.3) 1.9 (23.6) Income taxes net of intercompany tax payments 6.0 (0.9) (7.1) Working capital changes (1.3) 0.8 1.1 Changes in current intercompany amounts (1.8) 1.9 2.3 Changes in reserve for future interest on UMWA obligation (2.3) (2.8) 64.5 Items of income or expense not requiring cash outlays 0.4 - 0.5 ------------- ------------- ------------ Net cash provided by (used for) operating activities (5.7) (4.9) 33.1 Investing Activities Capital contributions to subsidiaries NMHG - (1.8) - Bellaire - - (69.3) Dividends and advances received from subsidiaries 14.8 55.9 10.3 Notes payable to Bellaire (1.3) (2.7) 27.4 Reduction of investment in Hyster-Yale 12 3/8% debentures - - 4.4 Expenditures for equipment (0.1) (1.4) (0.1) ------------- ------------- ------------ Net cash provided by (used for) investing activities 13.4 50.0 (27.3) Financing Activities Cash dividends (6.3) (6.7) (6.4) Purchases of treasury stock (2.8) (40.4) Treasury stock sales under stock option and directors' compensation plans - net 1.0 1.1 0.8 Other - net 0.1 1.2 (0.2) ------------- ------------- ------------ Net cash used for financing activities (8.0) (44.8) (5.8) ------------- ------------- ------------ Cash and cash equivalents Increase (decrease) for the period (0.3) 0.3 - Balance at the beginning of the period 0.3 - - ------------- ------------- ------------ Balance at the end of the period $ - $ 0.3 $ - ============= ============= ============
See Notes to Parent Company Financial Statements. F-35 36 SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF THE PARENT NACCO INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO PARENT COMPANY FINANCIAL STATEMENTS For The Years Ended December 31, 1997, 1996 and 1995 The Notes to Consolidated Financial Statements, included elsewhere in this Form 10-K, are hereby incorporated by reference into these Notes to Parent Company Financial Statements. NOTE A - LONG-TERM OBLIGATIONS AND GUARANTEES NACCO Industries, Inc. ("NACCO" the parent company) is a holding company which owns four operating subsidiaries. It is NACCO's policy not to guarantee the debt of such subsidiaries. NOTE B - CASH DIVIDENDS AND ADVANCES TO NACCO Dividends received from the subsidiaries were $37.7 million in 1997, $27.2 million in 1996 and $22.6 million in 1995. NOTE C - CAPITAL CONTRIBUTIONS TO SUBSIDIARIES The 1995 capital contribution to Bellaire of $69.3 million includes a note payable of $27.4 million and the assumption of a reserve for future interest on UMWA obligation, net of deferred taxes, of $41.9 million. NOTE D - UNRESTRICTED CASH The amount of unrestricted cash available to NACCO, included in Investment in and advances from subsidiaries, net was $24.1 million at December 31, 1997. F-36 37 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS NACCO INDUSTRIES, INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------------------ COL A. COL B. COL C. COL D. COL E. - ------------------------------------------------------------------------------------------------------------------------------------ Additions (D) ------------------------------------- Balance at Charged to Charged to Balance at Beginning of Costs and Other Accounts Deductions End of Description Period Expenses --Describe --Describe Period - ------------------------------------------------------------------------------------------------------------------------------------ (In millions) 1997 Reserves deducted from asset accounts: Allowance for doubtful accounts $ 5.0 $ 2.0 $ (0.1) (C) $ 0.6 (A) $ 6.3 Allowance for discounts, adjustments and returns $ 7.5 $ 16.7 -- $ 16.4 (B) $ 7.8 Valuation allowance against deferred tax assets $ - $ 5.9 -- -- $ 5.9 1996 Reserves deducted from asset accounts: Allowance for doubtful accounts $ 4.4 $ 1.9 -- $ 1.3 (A) $ 5.0 Allowance for discounts, adjustments and returns $ 6.9 $ 15.2 -- $ 14.6 (B) $ 7.5 1995 Reserves deducted from asset accounts: Allowance for doubtful accounts $ 4.5 $ 1.6 $ 0.1 (C) $ 1.8 (A) $ 4.4 Allowance for discounts, adjustments and returns $ 6.2 $ 17.3 -- $ 16.6 (B) $ 6.9 Note A - Accounts receivable balances written off, net of recoveries. Note B - Payments. Note C - Subsidiary's foreign currency translation adjustments and other. Note D - Balances which are not required to be presented and those which are immaterial have been omitted.
F-37 EX-21 13 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF NACCO INDUSTRIES, INC. As of the date of the Annual Report on Form 10-K to which this is an Exhibit, the subsidiaries of NACCO Industries, Inc. were as follows:
NAME INCORPORATION - ---- ------------- Bellaire Corporation Ohio The Coteau Properties Company Ohio The Falkirk Mining Company Ohio Hamilton Beach/Proctor-Silex, Inc. Delaware Hamilton Beach/Proctor-Silex de Mexico, S.A. de C.V. Mexico Housewares Holding Company Delaware HB/PS El Paso, Inc. Delaware HB*PS Foreign Sales Corp. Virgin Islands HB-PS Holding Company, Inc. Delaware NACCO Materials Handling Group, Pty., Ltd. Australia NACCO Materials Handling, B.V. Netherlands NACCO Materials Handling, S.r.l. Italy Hyster Europe Limited United Kingdom NACCO Materials Handling Limited United Kingdom Hyster-Yale Materials Handling, Inc. Delaware(1) The Kitchen Collection, Inc. Delaware NACCO Materials Handling Group, Inc. Delaware The North American Coal Corporation Delaware North American Coal Royalty Company Delaware Powhatan Corporation Delaware Proctor-Silex Canada, Inc. Ontario (Canada) Proctor-Silex, S.A. de C.V. Mexico The Sabine Mining Company Nevada
The Company has omitted the names of its subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary" within the meaning of Rule 1-02 contained in Regulation S-X. 1. NACCO Industries, Inc. owns 98% of the voting securities of Hyster-Yale Materials Handling Group, Inc. EX-23.I 14 EXHIBIT 23(I) 1 Exhibit 23(i) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Board of Directors of NACCO Industries, Inc. As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement (No. 33-3422) on Form S-4 and Registration Statement (No. 33-52660) on Form S-8. ARTHUR ANDERSEN LLP Cleveland, Ohio March 27, 1998 EX-24.I 15 EXHIBIT 24(I) 1 Exhibit 24(i) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Owsley Brown II ------------------------------------ Owsley Brown II Date: February 11, 1998 ---------------------- EX-24.II 16 EXHIBIT 24(II) 1 Exhibit 24(ii) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ John J. Dwyer --------------------------------- John J. Dwyer Date: February 10, 1998 --------------------- EX-24.III 17 EXHIBIT 24(III) 1 Exhibit 24(iii) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Robert M. Gates -------------------------------- Robert M. Gates Date: February 11, 1998 --------------------- EX-24.IV 18 EXHIBIT 24(IV) 1 Exhibit 24(iv) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Leon J. Hendrix, Jr. ---------------------------------- Leon J. Hendrix, Jr. Date: February 11, 1998 -------------------- EX-24.V 19 EXHIBIT 24(V) 1 Exhibit 24(v) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Dennis W. LaBarre -------------------------------- Dennis W. LaBarre Date: February 11, 1998 --------------------- EX-24.VI 20 EXHIBIT 24(VI) 1 Exhibit 24(vi) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Ian M. Ross -------------------------------- Ian M. Ross Date: February 11, 1998 --------------------------- EX-24.VII 21 EXHIBIT 24(VII) 1 Exhibit 24(vii) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ John C. Sawhill ------------------------------------- John C. Sawhill Date: February 11, 1998 ---------------------- EX-24.VIII 22 EXHIBIT 24(VIII) 1 Exhibit 24(viii) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ Britton T. Taplin ---------------------------------- Britton T. Taplin Date: February 11, 1998 ------------------------ EX-24.IX 23 EXHIBIT 24(IX) 1 Exhibit 24(ix) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ David F. Taplin --------------------------------- David F. Taplin Date: February 11, 1998 ----------------------- EX-24.X 24 EXHIBIT 24(X) 1 Exhibit 24(x) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of NACCO Industries, Inc. hereby constitutes and appoints Charles A. Bittenbender, Kenneth C. Schilling and Constantine E. Tsipis, and each of them, as the true and lawful attorney or attorneys-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as Director of NACCO Industries, Inc., a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K for the fiscal year ended December 31, 1997, and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorneys-in-fact, and each of them, full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorneys-in-fact or any of them or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. /s/ John F. Turben -------------------------------------- John F. Turben Date: February 11, 1998 ---------------------- EX-27.1 25 EXHIBIT 27.1
5 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 24 0 241 14 303 600 542 491 1,729 507 0 0 0 8 417 1,729 2,247 2,247 1,826 2,115 0 0 37 89 26 62 0 0 0 62 7.56 7.55
EX-27.2 26 EXHIBIT 27.2
5 1,000,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 48 0 212 13 310 592 550 436 1,708 416 0 0 0 8 371 1,708 2,273 2,273 1,874 2,142 0 0 46 86 34 51 0 0 0 51 5.67 5.67
EX-27.3 27 EXHIBIT 27.3
5 1,000,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 31 0 284 11 389 722 534 386 1,834 524 0 0 0 9 361 1,834 2,205 2,205 1,809 2,056 0 0 47 104 35 69 0 29 0 94 10.54 10.52
EX-99.I 28 EXHIBIT 99(I) 1 Exhibit 99(i) NACCO MATERIALS HANDLING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 TOGETHER WITH AUDITORS' REPORT 2 Report of Independent Public Accountants To the Board of Directors and Stockholders of NACCO Materials Handling Group, Inc.: We have audited the accompanying consolidated balance sheets of NACCO Materials Handling Group, Inc. (an indirect majority-owned subsidiary of NACCO Industries, Inc.) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. 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 financial position of NACCO Materials Handling Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon January 30, 1998 3 NACCO MATERIALS HANDLING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (in thousands of dollars except share amounts)
ASSETS ------ 1997 1996 -------- ------ CURRENT ASSETS: Cash and cash equivalents $ 17,125 $ 42,789 Accounts receivable, net of allowance for doubtful accounts of $5,460 in 1997 and $4,073 in 1996 143,587 126,663 Inventories 209,165 218,644 Prepaid expenses and other 3,788 5,221 Deferred income taxes 15,346 5,390 -------- -------- 389,011 398,707 -------- -------- PROPERTY, PLANT AND EQUIPMENT, net 166,383 169,687 DEFERRED CHARGES: Goodwill, net 353,254 360,882 Other 11,674 9,054 -------- -------- 364,928 369,936 OTHER ASSETS 22,092 12,556 -------- -------- Total assets $942,414 $950,886 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $191,003 $148,283 Revolving credit agreements 2,196 7,772 Current maturities of long-term debt 2,756 3,433 Accrued warranty obligation 27,740 21,506 Other current liabilities 105,417 69,786 Accrued income taxes 5,400 801 -------- -------- 334,512 251,581 -------- -------- LONG-TERM DEBT, net 151,790 247,717 OTHER LIABILITIES 66,301 64,443 DEFERRED INCOME TAXES 4,870 17,385 STOCKHOLDERS' EQUITY: Common stock, par value $1 per share; 10,000 shares authorized; 5,599 shares outstanding 6 6 Capital in excess of par value 198,205 198,205 Retained earnings 181,720 158,330 Foreign currency translation adjustment 6,600 15,006 Pension liability adjustment (1,590) (1,787) -------- -------- 384,941 369,760 -------- -------- Total liabilities and stockholders' equity $942,414 $950,886 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 4 NACCO MATERIALS HANDLING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (in thousands of dollars) 1997 1996 ---- ---- NET SALES $1,488,032 $1,560,092 COST OF SALES 1,223,861 1,312,952 ---------- ---------- Gross Profit 264,171 247,140 ---------- ---------- OPERATING EXPENSES: Selling, general and administrative expenses 173,977 163,109 Goodwill amortization 11,683 11,517 Restructuring charge 7,973 - ---------- ---------- 193,633 174,626 ---------- ---------- Operating profit 70,538 72,514 OTHER INCOME (EXPENSE): Interest income 2,239 590 Interest expense (14,545) (24,994) Other, net (5,910) (2,088) ---------- ---------- (18,216) (26,492) ---------- ---------- Income before income taxes 52,322 46,022 PROVISION FOR INCOME TAXES 13,632 19,579 ---------- ---------- Net income $ 38,690 $ 26,443 ========== ========== The accompanying notes are an integral part of these consolidated statements. 5 NACCO MATERIALS HANDLING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (in thousands of dollars) 1997 1996 ---- ---- OPERATING ACTIVITIES: Net income $ 38,690 $ 26,443 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 35,025 33,785 Deferred income taxes (23,756) (5,089) Other 4,786 2,766 Changes in working capital: Accounts receivable (23,192) 82,029 Inventories 1,530 75,540 Prepaid expenses and other 666 404 Accounts payable and other liabilities 88,904 (65,274) Accrued income taxes 4,781 (1,594) --------- -------- Net cash provided by operating activities 127,434 149,010 --------- -------- INVESTING ACTIVITIES: Expenditures for property, plant and equipment (25,557) (42,294) Acquisitions of businesses (11,290) (11,537) Other, net (25) 2,646 --------- -------- Net cash used for investing activities (36,872) (51,185) --------- -------- FINANCING ACTIVITIES: Additions to long-term debt 112 1,880 Reduction of long-term debt (96,588) (2,533) Revolving credit agreements, net (3,910) (4,378) Short-term obligations, net - (72,465) Dividends paid (15,300) - Financing of other short-term obligations (521) (10,603) Capital grants 741 4,154 Other, net 811 1,274 --------- -------- Net cash used for financing activities (114,655) (82,671) --------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,571) 1,858 --------- -------- CASH AND CASH EQUIVALENTS: Increase (decrease) for the year (25,664) 17,012 Balance at the beginning of the year 42,789 25,777 --------- -------- BALANCE, at the end of the year $ 17,125 $ 42,789 ========= ======== The accompanying notes are an integral part of these consolidated statements. 6 NACCO MATERIALS HANDLING GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (in thousands of dollars) 1997 1996 ---- ---- COMMON STOCK $ 6 $ 6 -------- -------- CAPITAL IN EXCESS OF PAR VALUE 198,205 198,205 -------- -------- RETAINED EARNINGS: Beginning balance 158,330 131,887 Net income 38,690 26,443 Dividends paid (15,300) - -------- -------- 181,720 158,330 -------- -------- FOREIGN CURRENCY TRANSLATION ADJUSTMENT: Beginning balance 15,006 12,810 Foreign currency translation adjustment (8,406) 2,196 -------- -------- 6,600 15,006 -------- -------- PENSION LIABILITY ADJUSTMENT (1,590) (1,787) -------- -------- Total stockholders' equity $384,941 $369,760 ======== ======== The accompanying notes are an integral part of these consolidated statements. 7 NACCO MATERIALS HANDLING GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 1. ACCOUNTING POLICIES: Basis of Presentation The accompanying consolidated financial statements of NACCO Materials Handling Group, Inc. and subsidiaries include the accounts of NACCO Materials Handling Group, Inc. and subsidiaries and its parent Hyster-Yale Materials Handling, Inc., a holding company (collectively, the Company). Hyster-Yale Materials Handling, Inc. is a 98 percent owned subsidiary of NACCO Industries, Inc. (NACCO). NACCO Materials Handling Group, Inc. and subsidiaries is the primary operating business. Principles of Consolidation The consolidated financial statements include the accounts of Hyster-Yale Materials Handling, Inc. and NACCO Materials Handling Group, Inc. and its majority-owned domestic and international subsidiaries except for Companhia Hyster, a Brazilian subsidiary retailer. Income from this Brazilian subsidiary is recognized when cash is received in the form of a dividend. Investments in Sumitomo Yale Company, Ltd. (S-Y), a 50% owned joint venture, and Yale Financial Services, Inc. (YFS, Inc.), a 20% owned joint venture, are accounted for by the equity method. All significant intercompany accounts and transactions among the consolidated companies are eliminated in consolidation. Cash and Cash Equivalents Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less. Inventories Inventories are stated at the lower of cost or market. Cost has been determined under the last-in, first-out (LIFO) method for domestic inventories and under the first-in, first-out (FIFO) method with respect to all other inventories. Costs for inventory valuation include labor, material and manufacturing overhead. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation, including amortization of equipment acquired under capital leases, is computed using the straight-line method over the estimated useful service lives for purposes of financial reporting. For tax purposes, an accelerated method is generally used. Maintenance and repairs are expensed as incurred. Goodwill Goodwill, the excess of the purchase price paid over the fair value of the net assets acquired, relates primarily to the 1989 acquisition of Hyster Company and is amortized on a straight-line basis over 40 years. Accumulated amortization was 8 -2- $94.4 million and $82.7 million at December 31, 1997 and 1996, respectively. Management regularly evaluates its accounting for goodwill considering such factors as historical and future profitability and believes that the asset is realizable and the amortization period is appropriate. 9 -3- Product Development Costs Expenditures associated with the development of new products and improvements to existing products are expensed as incurred. These costs amounted to $23.5 and $23.3 million in 1997 and 1996, respectively. Advertising Costs Advertising costs are expensed as incurred and amounted to $8.0 and $7.0 million in 1997 and 1996, respectively. Foreign Currency Translation Assets and liabilities of foreign operations are translated into U.S. dollars at the fiscal year-end exchange rate. The related translation adjustments are recorded as a separate component of stockholders' equity. Revenues and expenses are translated using average exchange rates prevailing during the year. Financial Instruments and Derivative Financial Instruments Financial instruments held by the Company include cash and cash equivalents, accounts receivable, accounts payable, revolving credit agreements, long-term debt, interest rate swap agreements and forward foreign currency exchange contracts. The fair values of these financial instruments have been determined using quoted market sources and management estimates. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes. The Company operates internationally and enters into transactions denominated in foreign currencies. As a result, the Company is subject to the transaction exposures that arise from exchange rate movements between the dates foreign currency transactions are recorded and the dates they are consummated. The Company uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies. Generally, gains and losses from changes in the market value of these contracts are recognized in cost of sales and offset the foreign exchange gains and losses on the underlying transaction. Gains and losses on contracts designated as hedges of firm commitments denominated in foreign currencies are deferred and included in the measurement of the related transaction. In addition, the Company has entered into interest rate swap agreements for portions of its floating rate revolving credit agreement and its domestic asset securitization program. These interest rate swap agreements allow the Company to enter into long-term financing arrangements that have performance-based floating rates of interest, and then exchange them for fixed rates of interest. Variable rates for both the floating rate financing and the interest rate swap agreements are predominantly linked to three-month LIBOR (London Interbank Offered Rate). This common index promotes effectiveness of the interest rate swap agreements as a hedging instrument. Amounts to be paid or received under the interest rate swap agreements are accrued as interest rates change and are recognized over the life of the swap agreements as an adjustment to Interest expense. Changes in the market value of the interest rate swap agreements are not recognized in net income. Use of Estimates 10 -4- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. 11 -5- Reclassifications Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period's presentation. 2. NATURE OF OPERATIONS: The Company designs, manufactures and markets material handling machinery and equipment. Its product offerings cover all categories of forklift trucks, with electric rider and internal combustion engine (ICE) forklift trucks being the major product lines. The Company also derives significant revenue from the sale of service parts for its own and competitors' forklift trucks. The Company's manufacturing operations are primarily located in the United States and Europe. Products are differentiated between the Hyster(R) and Yale(R) brands and each brand is distributed worldwide through separate dealer networks. Both brands are also sold directly to certain national accounts customers. The Company's market position is strongest in North America; it also has significant presence in Europe although its competitive position varies from country to country. The Company's market share in Asia-Pacific is relatively low. The forklift truck industry is highly competitive and the Company has established alliances with a limited number of suppliers to secure sources of competitively priced materials and components. If the supply of key components or materials were disrupted, or if major price increases were imposed that could not be passed onto end customers, there could be an adverse impact on the Company's operating results. 3. RESTRUCTURING AND OTHER CHARGES: During the fourth quarter of 1997, management authorized and committed the Company to undertake the restructuring of certain operating activities. This plan entails the relocation and consolidation of certain engineering and marketing functions with the goals of improving customer service and raising productivity, thereby reducing costs. A restructuring charge of approximately $8.0 million, representing primarily accruals for employee severance costs, was recorded in the fourth quarter and is shown as Restructuring charge in the Consolidated Statements of Income. No significant incremental charges are expected to be recognized in future periods as a result of this restructuring plan. This restructuring plan involves combining certain engineering, marketing and administrative functions, which will result in the construction of two new engineering marketing facilities on Company owned property, the addition of one new leased administrative facility and the closing of one owned and four leased facilities. In addition, the plan includes the termination of approximately 309 engineering, marketing and administrative employees which management estimates will result in a net reduction of approximately 130 employee positions after considering staffing requirements at remaining facilities. The Company anticipates completion of the restructuring plan by the end of 1998. The accrual for restructure charges, net of amounts paid, consists of the following: 12 -6-
December 31, 1997 ---- (in thousands) Employee severance and benefits $5,902 Lease termination/asset impairment 985 ------ $6,887 ======
13 -7- In addition, selling general and administrative expenses in 1997 included a charge of $8.3 million recorded in the fourth quarter arising from commitments made prior to the year ended 1997 to provide relocation benefits to certain employees resulting from the reorganizations. 4. SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental cash flow information is as follows:
Year Ended December 31, ------------------- 1997 1996 ------- ----- (in thousands) Interest paid $15,345 $25,794 Income taxes paid 36,312 32,900 Income tax refunds received 2,300 6,152
5. ACCOUNTS RECEIVABLE: In 1997, the Company entered into a one-year agreement to sell all of its domestic accounts receivable, on a revolving basis, to Lift Truck Funding Company, LLC ("LTF"), a wholly owned subsidiary of the Company. LTF was formed prior to the execution of this agreement for the purpose of buying and selling accounts receivable and is designated to be bankruptcy remote. Also, in 1997, the Company and LTF entered into a one-year agreement with a financial institution whereby LTF can sell, on a revolving basis, an undivided percentage ownership interest in certain eligible accounts receivable, as defined, up to a maximum of $60.0 million. This two-step transaction is accounted for as a sale of receivables in accordance with Statement of Financial Accounting Standards No. 125. Accordingly, the Company's Consolidated Balance Sheet reflects the portion of receivables transferred to the financial institution as a reduction in accounts receivable, net. The proceeds from the initial sale of receivables of $33.0 million were used to retire debt outstanding under the Company's revolving credit agreement. In addition to the domestic program discussed above, the Company also has agreements which allow for the sale, without recourse, of undivided interests in revolving pools of its foreign trade accounts receivable. The maximum allowable amount of foreign trade receivables to be sold was $72.9 and $75.6 at December 31, 1997 and 1996, respectively. The Company continues to service the receivables and maintains an allowance for doubtful accounts based upon the expected collectibility of all the Company's accounts receivable, including the portion of receivables sold. The servicing liability incurred in connection with these transactions is not material. Gross proceeds of $543.5 million were received during 1997 and the balance of accounts receivable sold at December 31, 1997 and 1996 was $33.5 million and $56.3 million, respectively, under all agreements. In the Consolidated Statement of Income the discount and any other transaction gains and losses are included in Other, net. The net effect of the sale of receivables during 1997 and 1996 was not material to the operating results of the Company. 14 -8- 6. INVENTORIES: Inventories are summarized as follows:
December 31, ------------------ 1997 1996 -------- ------ (in thousands) Finished goods and service parts $ 86,947 $113,644 Raw materials and work in process 135,613 120,620 LIFO reserve (13,395) (15,620) -------- -------- $209,165 $218,644 ======== ========
The cost of inventories has been determined by the last-in first-out (LIFO) method for 61% and 55% of such inventories as of December 31, 1997 and 1996, respectively. 7. INVESTMENTS: The Company owns a 50% interest in Sumitomo Yale, Ltd. (S-Y). The joint venture operates a facility in Japan from which the Company purchases certain components, internal combustion engines and electric forklift trucks. Following is S-Y's unaudited condensed financial information on a separate company basis, before elimination of intercompany profits.
November 30, ------------------ Condensed Balance Sheets 1997 1996 - ------------------------ ---- ---- (in thousands) (unaudited) Assets: Current assets $ 94,643 $122,333 Other assets 59,118 49,922 -------- -------- $153,761 $172,255 ======== ======== Liabilities and stockholders' equity: Notes payable $ 43,871 $73,121 Other current liabilities 63,986 59,484 -------- -------- Total current liabilities 107,857 132,605 Long-term debt 32,738 23,850 Other liabilities 538 2,701 Stockholders' equity 12,628 13,099 -------- -------- $153,761 $172,255 ======== ========
15 -9-
Twelve Months Ended November 30, ------------------- Condensed Statements of Income 1997 1996 - ------------------------------ ---- ---- (in thousands) (unaudited) Net sales $176,719 $221,160 Gross profit 46,887 54,115 Net income 5,270 1,554
16 -10- The Company's purchases from S-Y in 1997 and 1996 were $72.7 million and $108.3 million, respectively. Trade terms on certain payables to S-Y range from 180 to 210 days and the Company pays interest at market rates on all amounts owing after 60 days. Payables to S-Y with terms greater than 60 days are shown as financing of other short-term obligations in the Consolidated Statements of Cash Flows. The Company's accounts receivable and accounts payable balances with S-Y are as follows:
December 31, ------------------- 1997 1996 ------- ----- (in thousands) Accounts receivable $ 288 $ 578 Accounts payable 31,668 32,398
The Company reimbursed S-Y $1.2 million for engineering assistance during 1996. 8. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment includes the following:
December 31, ----------------------- 1997 1996 ------ ---- (in thousands) Land $ 9,665 $ 6,546 Buildings 72,181 70,496 Machinery, tools and equipment 226,447 218,780 --------- --------- 308,293 295,822 Less: Accumulated depreciation (141,910) (126,135) --------- --------- $ 166,383 $ 169,687 ========= =========
Depreciation charged to income was $23.0 and $22.0 million in 1997 and 1996, respectively. 9. OTHER CURRENT LIABILITIES: The components of other current liabilities are summarized as follows:
December 31, --------------------- 1997 1996 -------- ------ (in thousands) Wages, commissions and bonuses $ 14,895 $13,417 Employee benefits 18,591 4,859 Miscellaneous taxes 4,147 5,158 Interest 1,385 2,307 Restructuring 6,887 - Self insurance 8,000 8,000 Sales discounts 9,593 10,605 Other 41,919 25,440 -------- ------- $105,417 $69,786 ======== =======
17 -11- 10. REVOLVING CREDIT AGREEMENTS AND LONG-TERM DEBT: The Company has entered into a long-term revolving credit agreement (the Credit Agreement) with a group of banks which provides the Company with an unsecured $350 million revolving line of credit. Borrowing capacity under this Credit Agreement is reduced by the amount of trade accounts receivable sold under the Company's domestic accounts receivable sales agreement (Note 5). The Credit Agreement expires in the year 2002 and has annual extension options. It is the Company's intention to either exercise the annual extension options or replace outstanding borrowings with similar financing vehicles at term. As such, borrowings under the Credit Agreement of $150 million and $230 at December 31, 1997 and 1996, respectively, have been classified as long-term debt. As of December 31, 1997 and 1996, the Company had $181.4 million and $120.0 million available under the Credit Agreement. A facility fee, which is based upon the total $350 million commitment of the Credit Agreement, is currently .10% per annum. This facility bears interest under a variety of borrowing options with premiums on each option subject to reductions based on favorable performance. The weighted average interest rate, including interest rate swaps, at December 31, 1997 and 1996 was 7.03% and 6.50%, respectively. The Credit Agreement contains covenants related to minimum net worth, debt to capitalization and debt of subsidiaries. It also provides that certain covenants will be released if the Company attains certain financial targets. During 1997, the Company attained these financial targets, and as such, covenants limiting dividends, capital spending, and investments were released. As of December 31, 1997, the Company was in compliance with all the covenants in the Credit Agreement. In addition to the Credit Agreement discussed above, the Company has arrangements with lenders that allow for borrowings on an uncommitted basis at current market rates. At December 31, 1997, there were no borrowings outstanding under these arrangements, however, at December 31, 1996 borrowings under these arrangements amounted to $14.0 million and were classified as long-term debt. The weighted average interest rate on these borrowings at December 31, 1996 was 6.875%. As further discussed in Note 15 to the consolidated financial statements, the Company has entered into unsecured interest rate swap agreements. The interest rate swap agreements mature at varying lengths from eighteen months to seven years and effectively change the majority of the Company's floating interest rate exposure on the Credit Agreement to fixed rates. The Company evaluates its exposure to floating rate debt on an ongoing basis. Long-term debt, exclusive of current maturities, consists of the following:
December 31, ------------------ 1997 1996 ---- ---- (in thousands) Revolving credit agreements $150,000 $244,000 Capital leases and other 1,790 3,717 -------- -------- Total long-term debt $151,790 $247,717 ======== ========
18 -12- To the extent allowed under the restrictive covenants of the Credit Agreement, foreign subsidiaries had credit lines at December 31, 1997 and 1996 with an unused amount of $27.6 million and $27.9 million, respectively. Borrowings under these credit lines are classified as short-term and amounted to $2.2 million and $7.8 million at December 31, 1997 and 1996, respectively. These credit lines are denominated in various currencies and the weighted average interest rate at December 31, 1997 and 1996 on outstanding balances was 8.9% and 8.8% at December 31, 1997 and 1996, respectively. 19 -13- 11. INCOME TAXES: The Company is included in the consolidated federal income tax return of NACCO. The Company and NACCO are parties to an income tax sharing agreement providing for the allocation of federal income tax liabilities. Under this arrangement, the Company will pay to NACCO an amount equal to the income taxes that would be payable by the Company if it were a corporation filing a separate return. Therefore, the currently payable federal portion of the provision for income taxes is payable to NACCO. The Company files separate state income tax returns. The components of income before income taxes and provision for income taxes for the year ended December 31 are as follows:
1997 1996 ---- ---- (in thousands) Income before income taxes Domestic $ 40,476 $32,635 Foreign 11,846 13,387 -------- ------- $ 52,322 $46,022 ======== ======= Provision for income taxes Current tax expense: Federal $ 28,839 $18,494 State 5,047 3,489 Foreign 3,127 5,073 -------- ------- Total current 37,013 27,056 Deferred tax expense (benefit): Federal (24,345) (1,883) State (2,209) (571) Foreign (2,753) (5,023) -------- ------- Total deferred (29,307) (7,477) Increase in valuation allowance 5,926 - -------- ------- $ 13,632 $19,579 ======== =======
20 -14- A reconciliation of federal statutory and effective income tax for the year ended December 31 follows:
1997 1996 ---- ---- (in thousands) Income before taxes $ 52,322 $46,022 ======== ======= Statutory taxes at 35% $ 18,313 $16,108 Foreign rate differences (2,055) - Unremitted foreign earnings (15,382) - Valuation allowance 5,926 - Amortization of goodwill 3,777 4,085 State income taxes 2,015 1,638 Tax audit settlements - (1,288) Export benefits (683) (1,670) Other nondeductible items 477 (90) Earnings reported net of taxes (405) (404) Other, net 1,649 1,200 -------- ------- $ 13,632 $19,579 ======== ======= Effective rate 26.0% 42.5% ======== =======
A detailed summary of the total deferred tax assets and liabilities in the Company's consolidated balance sheets at December 31 resulting from differences in the book and tax basis of assets and liabilities follows:
1997 1996 ------- ------ (in thousands) Deferred Tax Assets Accrued expenses and reserves $31,356 $ 21,493 Product liability 20,510 18,907 Net operating loss carryforwards 6,041 6,757 Less- Valuation allowance (5,926) - Tax credit carryforwards - 436 Other 3,055 23 ------- -------- Total deferred tax assets $55,036 $ 47,616 ======= ========
21 -15- Deferred Tax Liabilities - ------------------------ Depreciation and depletion $20,134 $ 20,238 Unremitted foreign earnings - 16,663 Inventories 13,292 13,161 Pension 4,024 3,330 Other 7,110 6,219 ------- -------- Total deferred tax liabilities $44,560 $ 59,611 ======= ======== Net deferred tax assets (liabilities) $10,476 $(11,995) ======= ========
22 -16- In the fourth quarter of 1997, management determined that the earnings of the Company's foreign subsidiaries have been and will be indefinitely reinvested in the Company's foreign operations and, therefore, concluded that the tax accrual for unremitted foreign earnings was no longer required. Certain 1997 events, including the release of certain covenant restrictions on the Company's debt facility, an improvement in the Company's domestic cash flow and the identification of specific capital investment projects to be undertaken by the foreign operations allowed management to make this determination. As a result, an income tax benefit of $17.4 million was recognized in the fourth quarter of 1997 of which $2.1 million represents the reversal of deferred taxes provided in the first three quarters of 1997 and $15.3 million relating to the reversal of previously provided deferred taxes on the Company's unremitted foreign earnings. The unremitted earnings of foreign subsidiaries are $123 million as of December 31, 1997. Since these earnings have been or are to be indefinitely reinvested in foreign operations, no provision has been made for U.S. income taxes. It is impracticable to determine the amount of unrecognized deferred taxes with respect to these earnings; however, foreign tax credits would be available to reduce U.S. income taxes in the event of a distribution. The Company periodically reviews the need for a valuation allowance against certain deferred tax assets and recognizes these assets to the extent that realization of these assets is more likely than not. Based on a review of earnings history and trends, forecasted earnings and expiration of carryforwards, in the fourth quarter of 1997, the Company provided a valuation allowance of $5.9 million against certain foreign net operating loss carryforwards and deferred tax assets for which utilization is uncertain. At December 31, 1997, the Company has $2.2 million of foreign net operating loss carryforwards which expire, if unused, in years 1998 through 2002 and $3.8 million which are not subject to expiration. In 1996, the Company reached agreements with various tax authorities resulting in nonrecurring tax benefits of $1.3 million. The Company and certain of its subsidiaries are currently under examination by various taxing authorities. The Company ahs not been informed of any material assessment resulting from these examinations and will vigorously contest any material assessment. Management believes that any potential adjustment would not materially affect future earnings. 12. PENSION BENEFITS: The Company maintains a variety of pension plans covering a majority of its employees. A portion of the employees are participants in the defined benefit plans discussed below. Most of the remaining covered employees participate in the profit sharing portion of the Company's defined contribution plan also described below. In addition, all eligible employees are included in the 401(k) portion of the defined contribution plan. Total pension and postretirement expense for the Company was $14.3 million and $11.0 million for the years 1997 and 1996, respectively. Included in these amounts is the expense associated with government sponsored plans in which the Company's international subsidiaries participate. Cash contributions under the above plans were $12.9 million in 1997 and $16.5 million in 1996. During 1996, the Company recognized a curtailment gain of $1.3 million which is included in pension expense for the year. This gain resulted from the suspension of the U.S. defined benefit plan for salaried and non-union employees effective December 31, 1996. Future benefits to the participants of this plan will be earned under the profit sharing portion of the Company's defined contribution plan described below. 23 -17- The Company participates in the combined defined benefit plan of NACCO for certain employee groups. The Company also maintains a defined benefit plan for those employees that are covered under collective bargaining agreements. Each defined benefit plan has a formula which is used to determine benefits upon retirement. Most formulas take into account age, compensation, and success of the Company in meeting certain goals, although certain hourly employees' formulas are based primarily on years of service. The Company's current funding policy is to contribute annually the minimum contribution calculated by the independent actuaries. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The components of periodic pension cost and actuarial assumptions for the Company's principal defined benefit plans for the years ended December 31, 1997 and 1996 are as follows:
1997 1996 ---- ---- (in thousands) UNITED STATES PLANS: Interest accrued on projected benefit obligation $ 3,392 $ 3,633 Service cost-benefits earned during the year 1,225 2,892 Actual return on plan assets, net of plan expense (9,955) (2,284) Net amortization and deferral 6,901 27 Curtailment gain - (1,288) ------- ------- Net periodic pension cost $ 1,563 $ 2,980 ======= ======= Assumed discount rate 7.5% 8.0% Rate of compensation increase (where applicable) 4.5% 5.0% Expected long-term rate of return on plan assets 9.0% 9.0% UNITED KINGDOM PLANS: Interest accrued on projected benefit obligation $ 2,736 $ 2,279 Service cost-benefits earned during the year 2,125 1,081 Actual return on plan assets, net of plan expense (7,411) (5,959) Net amortization and deferral 3,411 2,869 ------- ------- Net periodic pension cost $ 861 $ 270 ======= ======= Assumed discount rate 8.0% 8.5% Rate of compensation increase (where applicable) 5.0% 5.5% Expected long-term rate of return on plan assets 9.0% 9.5%
24 -18- The following schedule reconciles the funded status of the Company's principal defined benefit plans with amounts reported in the consolidated balance sheets at December 31, 1997 and 1996:
1997 1996 ----------------- ----------------- United United United United States Kingdom States Kingdom Plans Plans Plans Plans ----- ----- ----- ----- (in thousands) Projected benefit obligation, based on employment service to date and current salary levels: Vested accumulated benefit obligation $43,090 $30,021 $40,517 $30,547 Nonvested accumulated benefit obligation 1,898 1,585 1,382 1,614 ------- ------- ------- ------- Total accumulated benefit obligation 44,988 31,606 41,899 32,161 Additional amounts related to projected salary increase 160 3,669 133 1,724 ------- ------- ------- ------- Total projected benefit obligation 45,148 35,275 42,032 33,885 Fair value of plan assets 51,629 49,500 39,197 42,636 ------- ------- ------- ------- Plan assets in excess of (less than) projected benefit obligation 6,481 14,225 (2,835) 8,751 Unrecognized net loss (gain) from past experience different from that assumed (3,940) - 2,799 - Unrecognized prior service cost 1,745 1,180 1,340 1,311 Unrecognized net transition obligation - (7,568) - (3,351) Additional minimum liability (4,062) - (4,006) - Contributions in fourth quarter 540 403 - - ------- ------- ------- ------- Prepaid (accrued) pension cost recognized $ 764 $ 8,240 $(2,702) $ 6,711 ======= ======= ======= =======
The Company maintains a defined contribution retirement plan for U.S. employees which includes a profit sharing portion and a 401(k) portion. Contributions to the profit sharing plan are based on a formula which takes into account age, compensation, and success of the Company in meeting certain goals. Contributions vest over a five-year period. Under the 401(k) portion, eligible employees may contribute up to 17% of their compensation and the Company matches an amount equal to 66-2/3% of the participants' initial 3% before tax contribution. Participants are at all times fully vested in their contributions and those made by the Company. 13. POSTRETIREMENT BENEFITS: The Company maintains health care and life insurance plans which provide benefits to eligible retired employees. The Company funds these benefits on a "pay as you go" basis, with the retirees paying a portion of the costs. 25 -19- Summary information on the Company's plans is as follows:
December 31, ---------------- 1997 1996 ---- ---- (in thousands) Accumulated postretirement benefit obligation (APBO): Retirees $ 4,873 $4,639 Fully eligible active plan participants 415 395 Other active plan participants 5,435 5,188 ------- ------- 10,723 10,222 Unrecognized net loss (3,032) (2,587) ------- ------- Accrued postretirement benefit $ 7,691 $7,635 ======= =======
The components of net periodic other postretirement benefit cost are as follows:
Year Ended December 31, -------------- 1997 1996 ---- ---- (in thousands) Service cost of benefits earned $ 177 $ 190 Interest cost on accumulated postretirement benefit obligation 792 814 Amortization of unrecognized loss 117 163 ------ ------ $1,086 $1,167 ====== ======
The assumed health care cost trend rate for measuring the postretirement benefit cost was 7.5% in 1997 and 8.5% in 1996, gradually reducing to 5.25% in years 2003 and after. The weighted average discount rate used to determine the benefit obligation was 7.5% in 1997 and 8.0% in 1996. If the assumed health care trend rate were increased by one percentage point, the effect would be to increase the APBO by $1.1 million and expense by an immaterial amount. 14. LONG-TERM INCENTIVE COMPENSATION PLAN: The Company has a Long-Term Incentive Compensation Plan for officers and key management employees of the Company and its subsidiaries. Awards under this plan represent book value appreciation units and entitle the recipient, subject to vesting and other restrictions, to receive cash equal to the difference between the base period price for the units and the book value price as of the quarter date coincident to or immediately preceding the date of disbursement. Awards vest and are payable ten years from date of grant or earlier under certain conditions. As of December 31, 1997, 1.8 million units have been awarded to key employees and officers. The amount charged to expense was $3.4 million and $2.4 million in 1997 and 1996, respectively. The total amount accrued at December 31, 1997 and 1996 for these awards was $10.2 million and $6.8 million, respectively, and was recorded as a long-term liability. 26 -20- 15. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS: Financial Instruments The fair value of financial instruments approximated their carrying values at December 31, 1997 and 1996. 27 -21- Interest Rate Derivatives As discussed in Note 1, the Company enters into interest rate swap agreements with major commercial banks for which the risk of credit loss from nonperformance by the banks is considered minimal. As of December 31, 1997 and 1996, respectively, the Company had $205.0 and $310.0 million notational principal amount of interest rate swaps with an average effective rate of 7.11% and 6.4%. The carrying amount of the interest rate swaps is $0 and the fair value was $6.1 million and $4.7 million as of December 31, 1997 and 1996, which reflects the amount the Company would have to pay to terminate the contracts. Foreign Currency Derivatives As also discussed in Note 1, the Company enters into forward foreign exchange contracts to hedge exposures to foreign currency exchange rate fluctuations. These contracts are with major financial institutions and the risk of credit loss from nonperformance by these institutions is considered minimal. These contracts hedge primarily firm commitments and, to a lesser degree, anticipated commitments relating to cash flows associated with sales and purchases denominated in foreign currencies. The Company enters into foreign exchange contracts in a variety of foreign currencies with maturities not exceeding one year. At December 31, 1997 and 1996, the Company had $71.3 and $61.1 million contract value of forward foreign exchange contracts, respectively. 16. LEASES: Future minimum annual lease payments under noncancelable lease obligations as of December 31, 1997 are as follows:
Capital Operating Leases Leases ------ ------ (in thousands) (in thousands) 1998 $2,128 $ 6,829 1999 1,393 6,602 2000 747 5,970 2001 255 5,273 2002 - 4,679 Subsequent to 2002 - 7,025 ------ ------- Total Future Minimum Lease Payments 4,532 $36,378 ======= Less amount representing interest 615 ------ Present value of net minimum lease payments 3,908 Less current maturities 2,128 ------ $1,780 ======
Capital leases are for manufacturing equipment. Amounts included in property, plant and equipment are as follows: 28 -22-
December 31, ----------------- 1997 1996 ------- ----- Plant & equipment $16,566 $18,152 Less accumulated amortization 9,672 9,251 ------- ------- Net leased PP&E $ 6,894 $ 8,901 ======= =======
29 -23- Aggregate rental expense for operating leases included in the consolidated statements of income was $8.8 and $7.1 million in 1997 and 1996, respectively. 17. CONTINGENCIES: The Company is subject to recourse or repurchase obligations under various financing arrangements for certain independently owned retail dealerships. Also, certain dealer loans are guaranteed by the Company. Total amounts subject to recourse, guarantee or repurchase obligation at December 31, 1997 and 1996 were $156.9 million and $125.6 million, respectively. When the Company is the guarantor of the principal amount financed, a security interest is usually maintained in assets of the parties for whom the Company is guaranteeing debt. Losses anticipated under the terms of the recourse or repurchase obligations have been provided for and are not significant. The Company is the defendant in various product liability and other legal proceedings incidental to its business. The majority of this litigation involves product liability claims. The Company has recorded a reserve for potential product liability losses at December 31, 1997 of $52.7 million, of which $8.0 million is estimated to be payable in 1998. While the resolution of litigation cannot be predicted with certainty, management believes that the reserves are adequate and no material adverse effect upon the financial position or results of operations of the Company will result from such legal actions. 18. SEGMENT INFORMATION: The Company's business consists of the engineering, manufacturing and marketing of materials handling machinery and equipment, under the Hyster(R) and Yale(R) trade names. The Company's products are manufactured in plants at five locations in the United States and eight international plants located in Scotland, Northern Ireland, The Netherlands, Italy, Brazil, Australia and Japan. Service parts are distributed through parts depots located in the United States, Europe, Australia and Brazil. Generally, products assembled abroad are comprised of parts and components manufactured or purchased locally and from U.S. plants at established transfer prices. The transfer price of production parts and completed units is established by a procedure designed to equate to an arm's-length price. However, for purposes of the following financial statement disclosure, transfers between geographic areas are presented at standard cost.
Europe, Africa & Middle Asia 1997 Americas East Pacific Eliminations Consolidated --------------------------- -------- -------- ------- ------------ ------------ (in thousands) Sales to unaffiliated customers $ 894,307 $398,882 $73,666 $ - $1,366,855 Export sales to unaffiliated customers 121,177 - - - 121,177 Transfers between geographic areas 29,526 146,828 - (176,354) - ---------- -------- ------- --------- ---------- Total net sales $1,045,010 $545,710 $73,666 $(176,354) $1,488,032 ========== ======== ======= ========= ========== Operating profit (loss) $ 52,323 $ 22,595 $(4,380) $ - $ 70,538 ========== ======== ======= ========= ========== Identifiable assets $ 553,896 $355,484 $33,034 $ - $ 942,414 ========== ======== ======= ========= ==========
30 -24-
Europe, Africa & Middle Asia 1996 Americas East Pacific Eliminations Consolidated --------------------------- -------- -------- ------- ------------ ------------ (in thousands) Sales to unaffiliated customers $ 908,793 $451,776 $92,863 $ - $1,453,432 Export sales to unaffiliated customers 106,660 - - - 106,660 Transfers between geographic areas 53,214 129,779 - (182,993) - ---------- -------- ------- --------- ---------- Total net sales $1,068,667 $581,555 $92,863 $(182,993) $1,560,092 ========== ======== ======= ========= ========== Operating profit (loss) $ 44,043 $ 32,307 $(3,836) $ - $ 72,514 ========== ======== ======= ========= ========== Identifiable assets $ 570,044 $335,493 $45,349 $ - $ 950,886 ========== ======== ======= ========= ==========
In 1996, the Company had sales to a single affiliated group of customers which represented 10.3% of worldwide net sales. There were no sales to any single customer in excess of 10% of worldwide sales in 1997. EX-99.II 29 EXHIBIT 99(II) 1 Exhibit 99(ii) HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 TOGETHER WITH AUDITORS' REPORT 2 HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES TABLE OF CONTENTS PAGE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 FINANCIAL STATEMENTS Consolidated Balance Sheets 2 Consolidated Statements of Operations 3 Consolidated Statements of Changes in Stockholder's Equity 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6 - 17 3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Hamilton Beach/Proctor-Silex, Inc.: We have audited the accompanying consolidated balance sheets of Hamilton Beach/Proctor-Silex, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholder's equity and cash flows for the years then ended. 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 an 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 financial position of Hamilton Beach/Proctor-Silex, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Richmond, Virginia January 20, 1998 -1- 4 HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (Dollars in Thousands)
ASSETS 1997 1996 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,806 $ 359 Accounts receivable, net 77,284 60,054 Inventories, net 47,895 48,326 Deferred income taxes 2,955 2,368 Prepaid expenses and other 7,199 6,721 ------- ------- Total current assets 137,139 117,828 PROPERTY, PLANT, AND EQUIPMENT, NET 55,861 52,592 DEFERRED CHARGES AND INTANGIBLE ASSETS, NET 92,798 96,679 DEFERRED INCOME TAXES 5,001 4,729 OTHER ASSETS 13 14 ------- ------- Total assets $290,812 $271,842 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations $ 7,450 $ 9,211 Accounts payable 35,037 21,388 Other current liabilities 39,301 33,253 -------- -------- Total current liabilities 81,788 63,852 -------- -------- OTHER LIABILITIES 8,525 9,695 -------- -------- LONG-TERM OBLIGATIONS: Revolving credit agreements 73,000 80,000 Capital leases 374 449 -------- -------- Total long-term obligations 73,374 80,449 -------- -------- STOCKHOLDER'S EQUITY: Common stock and paid-in capital, 100 shares authorized, issued, and outstanding at $0.01 par value 155,609 155,609 Retained deficit (26,533) (35,739) Minimum pension liability - (393) Cumulative translation adjustment (1,951) (1,631) -------- -------- Total stockholder's equity 127,125 117,846 -------- -------- Total liabilities and stockholder's equity $290,812 $271,842 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. -2- 5 HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Dollars in Thousands)
1997 1996 ---- ---- NET SALES $423,007 $395,046 COST OF SALES 353,051 326,146 -------- -------- Gross profit 69,956 68,900 SELLING, ADMINISTRATIVE, AND GENERAL EXPENSES 41,378 39,502 AMORTIZATION OF GOODWILL AND INTANGIBLES 5,243 5,131 -------- -------- Operating profit 23,335 24,267 -------- -------- OTHER EXPENSE: Interest 6,736 5,959 Amortization of other deferred charges 194 584 Other, net 57 345 -- --- Total other expense 6,987 6,888 -------- -------- Income before income taxes 16,348 17,379 PROVISION FOR INCOME TAXES 7,142 6,696 -------- -------- Net income $ 9,206 $ 10,683 ======== ========
The accompanying notes are an integral part of these consolidated statements. -3- 6 HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Dollars in Thousands, Other Than Par Value)
COMMON STOCK COMMON --------------------- STOCK AND MINIMUM CUMULATIVE TOTAL SHARES PAR PAID-IN RETAINED PENSION TRANSLATION STOCKHOLDER'S OUTSTANDING VALUE CAPITAL DEFICIT LIABILITY ADJUSTMENT EQUITY ----------- ----- ------- ------- --------- ---------- ------ BALANCES, December 31, 1995 100 $1 $149,268 $ (2,816) $(2,521) $(1,597) $142,334 Minimum pension liability -- -- -- -- 2,128 -- 2,128 Dividend paid for acquisition of Glen -- -- 6,341 (33,606) -- -- (27,265) Dimplex shares Dividend -- -- -- (10,000) -- -- (10,000) Net income -- -- -- 10,683 -- -- 10,683 Translation adjustment -- -- -- -- -- (34) (34) --- --- -------- -------- ------- ------- -------- BALANCES, December 31, 1996 100 1 155,609 (35,739) (393) (1,631) 117,846 Minimum pension liability -- -- -- -- 393 -- 393 Net income -- -- -- 9,206 -- -- 9,206 Translation adjustment -- -- -- -- -- (320) (320) --- --- -------- -------- ------- ------- -------- BALANCES, December 31, 1997 100 $1 $155,609 $(26,533) $ -- $(1,951) $127,125 === === ======== ======== ======= ======= ======== - -----------------------------
The accompanying notes are an integral part of these consolidated statements. -4- 7 HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Dollars in Thousands)
1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,206 $10,683 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 14,392 13,263 Loss on disposal of fixed assets 56 224 Amortization 5,437 5,715 Deferred income taxes (924) (3,226) Changes in assets and liabilities- (Increase) decrease in: Accounts receivable, net (17,230) 10,139 Inventories, net 431 10,401 Prepaid expenses and other (3,655) 55 Increase (decrease) in: Accounts payable 13,649 (228) Other liabilities 7,243 5,118 -------- -------- Net cash provided by operating activities 28,605 52,144 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Glen Dimplex shares - (33,606) Capital expenditures (17,737) (15,129) Proceeds from sale of fixed assets 20 41 Increase in deferred charges and intangible assets (285) (315) Other - 58 -------- -------- Net cash used in investing activities (18,002) (48,951) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Reduction of long-term obligations (53,702) (59,937) Borrowings under long-term obligations 44,866 66,829 Dividend paid - (10,000) -------- -------- Net cash used in financing activities (8,836) (3,108) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (320) (34) -------- -------- Net increase in cash and cash equivalents 1,447 51 CASH AND CASH EQUIVALENTS, beginning of year 359 308 -------- -------- CASH AND CASH EQUIVALENTS, end of year $ 1,806 $ 359 ======== ========
The accompanying notes are an integral part of these consolidated statements. -5- 8 HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 (Dollars in Thousands) 1. ORGANIZATION AND BUSINESS: Hamilton Beach/Proctor-Silex, Inc., and its wholly owned subsidiaries (the "Company"), was formed on October 11, 1990, upon the merger of Hamilton Beach, Inc. and Proctor-Silex, Inc. The Company designs, manufactures, and sells small consumer electric appliances. The principal markets for the Company's products are the United States and Canada. The Company's products are sold primarily to retailers and distributors. The Company is a wholly owned subsidiary of HB/PS Holdings, Inc. ("Holdings"). Through October 17, 1996, Holdings was beneficially owned 80 percent by NACCO Industries, Inc. ("NACCO"), and 20 percent by Glen Dimplex. Effective October 18, 1996, Holdings became a wholly owned subsidiary of NACCO (see Note 3). 2. SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash in banks and highly liquid investments with initial maturities of three months or less. INVENTORIES, NET Inventories are stated at the lower of cost or market. Cost has been determined by the last-in, first-out ("LIFO") method for substantially all inventories accounted for in the United States, and under the first-in, first-out method for all other inventories. -6- 9 PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment is stated at cost. All property, plant, and equipment is depreciated on a straight-line basis over estimated useful lives of up to 40 years for buildings and 3 to 6 years for machinery and equipment. Assets recorded under capital leases and leasehold improvements are amortized over the lesser of their estimated useful lives or remaining lease terms on a straight-line basis. GOODWILL Goodwill is being amortized on a straight-line basis over periods up to 40 years. The Company continually evaluates whether events and circumstances have occurred subsequent to its acquisitions that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the Company's undiscounted cash flow over the remaining life of the goodwill in measuring whether the goodwill is recoverable. PRODUCT DEVELOPMENT COSTS Costs associated with the development of new products and changes to existing products are charged to operations as incurred. These costs amounted to $4,446 and $3,690 in 1997 and 1996, respectively. ADVERTISING COSTS Promotional or advertising costs associated with customer support programs are accrued when the related revenues are recognized. All other costs incurred in producing media advertising are expensed at the time the advertising takes place. Promotional and advertising costs charged to expense were $28,524 and $26,270 in 1997 and 1996, respectively. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign subsidiaries are translated at current exchange rates, while income and expense items are translated at average rates for the period. Translation gains and losses associated with the Company's Canadian subsidiary are reported as a component of stockholder's equity. Translation gains and losses related to the Company's subsidiaries located in Mexico are reported in the accompanying consolidated statements of operations. SELF-INSURANCE The Company is insured for product liability claims for amounts in excess of established self-insured retention limits. Costs estimated to be incurred with respect to product liability claims are accrued based on experience factors. -7- 10 The Company maintains a self-insurance program for health claims and a high deductible insurance program for workers' compensation claims of all covered employees. Losses are accrued based on the Company's estimate of future costs that will be incurred for employee losses incurred prior to the balance sheet date. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS The Company's financial instruments include cash, accounts receivable, payables, debt, interest rate agreements, and foreign currency contracts. The estimated fair values of the Company's financial instruments at December 31, 1997 and 1996, approximate their carrying value as reflected in the consolidated balance sheets (see Note 9). The estimated fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes. The Company enters into forward foreign exchange contracts in order to hedge certain foreign currency commitments. Gains and losses from these contracts are deferred and are recognized as part of the cost of the underlying transaction being hedged. The Company also enters into interest rate swap agreements with various terms and maturity dates. The differential between the floating interest rate and the fixed interest rate that is to be paid or received is recognized in interest expense on a current basis. RECLASSIFICATIONS Certain previously reported amounts have been reclassified to conform to current-year presentation. 3. ACQUISITION OF SHAREHOLDER INTEREST: On October 18, 1996, Holdings, through its parent company, Housewares Holding Company ("Housewares"), purchased Glen Dimplex's 20 percent ownership interest in Holdings for $33,606. The purchase was established based upon provisions included in the Shareholder Agreement dated October 11, 1990, among Housewares, Holdings, and Hamilton Beach, Inc. The purchase of the Glen Dimplex shares was effected via a dividend by the Company to Holdings in the amount of the purchase price. The effect of this transaction on the financial statements of the Company was an increase to retained deficit of $33,606, and an increase to goodwill and additional paid-in capital of $6,341. The addition to goodwill is being amortized on a straight-line basis over the remaining life of the goodwill acquired upon the formation of the Company. -8- 11 4. ACCOUNTS RECEIVABLE, NET: At December 31, accounts receivable consist of the following.
1997 1996 ---- ---- Accounts receivable $85,953 $68,479 Less- Allowance for returns, discounts, and adjustments (7,805) (7,498) Allowance for doubtful accounts (864) (927) ------- ------- Accounts receivable, net $77,284 $60,054 ======= =======
5. INVENTORIES, NET: At December 31, inventories consist of the following.
1997 1996 ---- ---- Raw materials and work in process $15,097 $13,976 Finished goods 31,746 34,078 LIFO allowance 1,052 272 ------- ------- Inventories, net $47,895 $48,326 ======= =======
As a result of changes in prices, and liquidation of certain LIFO inventories in 1997, operating profit increased $780 and $522 for 1997 and 1996, respectively. The cost of inventories stated under the LIFO method was 88 percent and 91 percent of the value of total inventories at December 31, 1997 and 1996, respectively. 6. PROPERTY, PLANT, AND EQUIPMENT, NET: At December 31, property, plant, and equipment (including capital leases) consists of the following.
1997 1996 ---- ---- Land, buildings, and improvements $ 27,297 $ 17,971 Machinery and equipment 106,114 97,746 Construction work in process 6,824 9,542 --------- --------- 140,235 125,259 Less- Accumulated depreciation and amortization (84,374) (72,667) --------- --------- Property, plant, and equipment, net $ 55,861 $ 52,592 ========= =========
-9- 12 7. DEFERRED CHARGES AND INTANGIBLE ASSETS, NET: Goodwill amounted to $92,494 and $96,460 at December 31, 1997 and 1996, respectively, net of accumulated amortization, and is being amortized over periods up to 40 years on a straight-line basis. Goodwill amortization expense amounted to $3,967 and $3,844 for 1997 and 1996, respectively. Patents, trademarks, and other at December 31, 1997 and 1996, amounted to $304 and $25, respectively, net of accumulated amortization, and are being amortized on a straight-line basis over their remaining lives. Total amortization of patents, trademarks and other intangible assets for 1997 and 1996 amounted to $1,276 and $1,287, respectively. Deferred financing costs at December 31, 1997 and 1996, amounted to $0 and $194, respectively, net of accumulated amortization, and have been amortized on a straight-line basis over the life of the amended and restated credit agreement (see Note 8). Amortization expense related to deferred financing costs for 1997 and 1996 was $194 and $584, respectively. 8. REVOLVING CREDIT AGREEMENTS: The Company has a bank credit facility (the "Agreement"), which includes a revolving credit line and a letter-of-credit facility of up to $160,000 through May 2002. In October 1996, the Agreement was amended to accommodate the dividend for the purchase of the Glen Dimplex shares (see Note 3). This amendment increased the amount available under the Agreement by $25,000 and modified certain required ratios. The Agreement allows borrowings to be made at either (i) the lender's prime rate plus 0.25 percent or (ii) LIBOR plus 0.75 percent. Additionally, a facility fee of 0.50 percent per annum times the committed amount of the credit facility is paid to the lender. The borrowing margins and facility fee rates are subject to reductions based upon the Company achieving certain predetermined interest coverage ratios. During 1997, the Company received an average reduction of 0.81 percent on the combined borrowing margin plus a facility fee resulting in an average margin over LIBOR paid of 0.28 percent and an average facility fee paid of 0.16 percent. The Agreement is secured by substantially all the Company's assets. The Agreement includes certain covenants requiring, among other things, maintenance of certain levels of (i) net worth, (ii) debt to total capital, and (iii) interest coverage. At December 31, 1997, the Company was in compliance with all the financial covenants of the Agreement. The Company also has in place uncommitted credit lines, which are secured through and subject to the Agreement, and which allow for borrowings of up to $30,000 on a daily basis. During 1997 and 1996, total average borrowings outstanding under all debt and credit agreements were $106,095 and $94,762, respectively. At December 31, 1997 and 1996, the weighted average interest rate on all borrowings outstanding including interest rate swaps, was 6.31 percent and 6.11 percent, respectively. Excluding interest rate swaps, the weighted average interest rate on all borrowings outstanding at December 31, 1997 and 1996, was 6.39 percent and 5.82 percent, respectively. In addition, at December 31, 1997 and 1996, outstanding obligations under letters of credit were $3,529 and $4,797, respectively. The total availability under all debt and credit agreements at December 31, 1997 and 1996, was $107,586 and $95,927, respectively. At the option of Housewares, the Company may, subject to certain terms and conditions of the Agreement, borrow up to $35,000 from Housewares. No borrowings were outstanding during 1997 or 1996 under this agreement. -10- 13 9. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS: INTEREST RATE DERIVATIVES The primary objective of interest rate risk management is to minimize the impact of interest rate fluctuations on the Company's cash flow and financial results. The Company has entered into certain interest rate swap agreements to swap floating rate for fixed rate interest payments. At December 31, 1997, the notional amount on interest rate swap agreements in effect and expiring on various dates from March 1999 through November 1999 was $75 million, with the average variable rate received and the average fixed rate paid during 1997 being 6.07 percent and 6.26 percent, respectively. At December 31, 1997, the aggregate fair market value of the Company's interest rate swap agreements, based on quoted market prices received from the Company's swap agreement counter parties, was not material to the financial statements. FOREIGN CURRENCY DERIVATIVES The Company enters into forward foreign exchange contracts for purposes of hedging its exposure to foreign currency exchange rate fluctuations. These contracts hedge primarily firm commitments and relate to the Canadian dollar and the Deutschmark. At December 31, 1997, the Company had foreign currency contracts totaling $1,247, with various expiration dates through March 16, 1998. The amount of deferred gain associated with these contracts was not material. All interest rate and foreign currency derivative agreements are with major commercial banks; therefore, the risk of credit loss from nonperformance by the banks is minimal. The Company evaluates its exposure to credit loss on an ongoing basis. 10. CONCENTRATION OF CREDIT RISK: The Company sells its products to retailers and distributors located primarily in North America and, as a result, maintains significant receivable balances with its major customers. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. In addition, the Company maintains allowances for potential credit losses. The Company's five largest customers accounted for approximately 47.9 percent and 47.1 percent of net sales in 1997 and 1996, respectively, and approximately 48.9 percent and 48.4 percent of net accounts receivable at December 31, 1997 and 1996, respectively. 11. LEASES: The Company leases certain facilities under noncancelable leases expiring at various dates through 2021. -11- 14 Plant and equipment under capital leases has been recorded as property, plant, and equipment in the consolidated balance sheets, and the related amortization is included with depreciation expense. At December 31, 1997 and 1996, property, plant, and equipment includes the following amounts relating to capital leases.
1997 1996 ---- ---- Plant and equipment $9,239 $9,303 Less- Accumulated amortization (4,732) (4,282) ------ ------ $4,507 $5,021 ====== ======
Future minimum lease payments for capital leases as of December 31, 1997, are as follows: 1998 - $125; 1999- $107; 2000 - $90; 2001 - $83; 2002 - $60 and thereafter - $283, and have a net present value of $499. Future minimum lease payments for operating leases as of December 31, 1997, are as follows: 1998 - $3,596; 1999- $2,828; 2000 - $2,263; 2001 - $2,013; 2002 - $1,952 and thereafter - $2,234. Rental expense for operating leases amounted to $3,887 and $5,593 for 1997 and 1996, respectively. 12. INCOME TAXES: The Company is included in the consolidated Federal income tax return filed by NACCO. The Company's tax sharing agreement with NACCO provides that Federal income taxes are computed by the Company on a separate return basis, except that net operating loss and tax credit carryovers that benefit the consolidated tax return are advanced to the Company and are repaid as utilized on a separate return basis. To the extent that these carryovers are not used on a separate return basis, the Company is required, under conditions pursuant to the tax sharing agreement, to refund to NACCO the balance of carryovers advanced and not used by the Company. The provision for income taxes consists of the following amounts.
1997 1996 ---- ---- Current: Federal $6,434 $8,208 State 1,143 1,143 Foreign 774 538 ------ ------ Total current provision 8,351 9,889 ------ ------ Deferred: Federal (1,140) (2,663) State (391) (250) Foreign 322 (280) ------ ------ Total deferred benefit (1,209) (3,193) ------ ------ Total provision for income taxes $7,142 $6,696 ====== ======
-12- 15 A reconciliation of Federal statutory to effective income tax provision follows.
1997 1996 ---- ---- Statutory taxes at 35% $5,722 $6,083 Effect of: State taxes 484 580 Foreign taxes 170 131 Acquisition accounting adjustments 1,076 1,028 Foreign tax credit (49) (615) Other (261) (511) ------ ------ Provision for income taxes $7,142 $6,696 ====== ====== Effective rate 43.7% 38.5% ====== ======
The foreign tax credit of $49 realized in 1997 resulted from repatriation of the prior year earnings of a Mexican subsidiary. The foreign tax credit of $615 realized in 1996 resulted from repatriation of virtually all prior earnings of a Mexican subsidiary, and additional foreign tax credit realized from the 1995 repatriation of earnings of the Canadian subsidiary. The degree of benefits earned in 1996 is not expected to recur in future years. A summary of the deferred tax assets and (liabilities) that comprise the net deferred tax balances in the accompanying consolidated balance sheets resulting from differences in the book and tax bases of assets and liabilities is as follows.
1997 1996 ---- ---- Deferred tax assets: Employee benefits $ 3,207 $ 3,365 Environmental reserve 2,038 2,195 Product liability reserve 2,344 1,906 Net operating loss and tax credit carryovers 3,298 5,289 Other 931 344 ------- ------- Total deferred tax assets 11,818 13,099 ------- ------- Deferred tax liabilities: Advertising, sales, and inventory related reserves (1,959) (2,428) Accelerated depreciation (963) (2,462) Other (940) (1,112) ------- ------- Total deferred tax liabilities (3,862) (6,002) ------- ------- Net deferred tax assets $ 7,956 $ 7,097 ======= =======
-13- 16 As of December 31, 1997, the Company had Federal net operating loss carryovers of approximately $5,283, related to Hamilton Beach, Inc., and foreign tax credit carryovers of $1,449. For Federal tax purposes, the utilization of acquired net operating loss carryovers is limited to $1,953 on an annual basis, with any unused limitation available for carryover to subsequent years. The Company utilized $1,953 of the net operating loss carryovers related to Hamilton Beach, Inc., in 1997 and 1996. Loss carryovers are scheduled to expire in the years 2002 and 2003, and foreign tax credit carryovers are scheduled to expire in the year 2000. As of December 31, 1997, the Company has recorded a deferred tax asset of $3,298 associated with these carryforwards. Realization of the asset is dependent on generating sufficient taxable and foreign source income prior to expiration of the carryforwards. The amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Although realization is not assured, the Company fully expects to realize its deferred tax assets. As a result, the Company has no valuation allowances as of December 31, 1997 and 1996. No provision has been made for Federal income taxes on undistributed earnings of foreign subsidiaries of approximately $2,177 as of December 31, 1997, as any future remittances are expected to be substantially tax free. 13. RETIREMENT BENEFIT PLANS: The Company maintains a variety of pension plans covering a majority of its employees. A portion of the employees are participants in the defined benefit plans discussed below. Most of the remaining covered employees participate in the profit sharing portion of the Company's defined contribution plan also described below. In addition, all eligible employees are included in the 401k portion of the defined contribution plan. Total pension and postretirement expense for the Company was $2,471 and $2,016 for the years 1997 and 1996, respectively. Cash contributions under the above plans were $286 in 1997 and $2,897 in 1996. The Company participates in the combined defined benefit plan of NACCO (the "Plan"). All full-time hourly and salaried U.S. employees hired on or before January 1, 1996, are eligible to participate in the Plan. The Plan has a formula which is used to determine benefits upon retirement, taking into account age, compensation, and success of the Company in meeting certain goals. The Company's current funding policy is to contribute annually the minimum contribution calculated by the independent actuaries. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Cash contributions under the Plan were $65 and $2,693 during the plan years ended December 31, 1997 and 1996, respectively. Assets held by the Plan consist mainly of common stocks, corporate and government bonds, and cash and cash equivalents. Statement of Financial Accounting Standards No. 87 ("SFAS 87"), "Employers' Accounting for Pensions", requires the Company to recognize a minimum pension liability equal to the unfunded accumulated benefit obligation ("ABO"). At December 31, 1997 and 1996, the cumulative unfunded ABO was $241 and $1,020, respectively. The Company recorded an adjustment that recognized an additional minimum liability equal to the unfunded ABO at December 31, 1996. In accordance with SFAS 87, the portion of the unfunded ABO in excess of unrecognized prior service cost was charged directly to stockholder's equity and has been separately presented in the consolidated statements of changes in stockholder's equity. No minimum liability adjustment was required at December 31, 1997. -14- 17 Effective December 31, 1996, the Company froze benefit accruals under the Plan and established a new participant retirement account under the HBPS Employees' Retirement Savings Plan (401k) effective January 1, 1997. Accordingly, the benefits accrued and obligations recorded under the Plan were frozen as of December 31, 1996. The Company also maintains a defined contribution retirement plan for all of its full-time United States employees (the "401k Plan"). Effective January 1, 1997, the Company added a profit sharing feature to the plan. Contributions under the profit sharing feature are based on a formula which takes into account age, compensation, and success of the Company in meeting certain goals. Contributions vest over a five-year period. During 1997, the Company expensed and accrued $2,415 related to the profit sharing feature of the 401k Plan. Under the 401k option, eligible employees may contribute up to 15 percent of their compensation and the Company matches an amount equal to 50 percent of the participants' initial 4 percent before tax contribution. Effective January 1, 1998, the employer match was increased to match 50 percent of the first 5 percent of employee contributions. Participants are at all times vested in their contributions and those made by the Company. The details of the components of net pension expense for the years ended December 31, 1997 and 1996, are as follows.
1997 1996 ---- ---- Service cost $ 52 $1,373 Interest cost on projected benefit obligation 2,627 2,595 Actual return on assets (9,229) (2,299) Net amortization and deferral 6,466 (287) -------- ------ Net pension (income) expense $ (84) $1,382 ======== ======
Actuarial factors used in accounting for the Plan for the years ended December 31, 1997 and 1996, are as follows.
1997 1996 ---- ---- Weighted-average discount rate 7.5% 8.0% Long-term rate of return on assets 9.0% 9.0% Rate of increase in compensation levels: Salaried 4.5% 5.0% Hourly 4.5% 5.0%
-15- 18 The funded status of the Plan and amounts recognized in the Company's consolidated balance sheets as of December 31, 1997 and 1996, are as follows.
1997 1996 ---- ---- Actuarial present value of benefit obligation: Vested accumulated benefit obligation $34,034 $32,015 Nonvested accumulated benefit obligation 1,931 1,823 ------- ------- Total accumulated benefit obligation 35,965 33,838 Value of future salary projections -- 145 ------- ------- Total projected benefit obligation 35,965 33,983 Fair value of plan assets 38,943 33,059 ------- ------- Plan assets in excess of (less than) projected benefit obligation 2,978 (924) Unrecognized net transition asset (4) (6) Unrecognized net (gain) loss (3,291) 539 Unrecognized prior service cost 18 23 Unrecognized basis change 58 -- Additional minimum liability -- (652) ------- ------- Pension liability recognized in consolidated balance sheets at December 31, 1997 and 1996 $ (241) $(1,020) ======= =======
The Company maintains a postretirement health care plan for all retirees who retired prior to October 1, 1992. In addition, the Company provides life insurance benefits to all retirees who retired prior to October 1, 1992, assuming they reached certain age and service requirements while working for the Company. Under the Company's current policy, plan benefits are funded at the time they are due to participants. The plan has no assets. 14. RELATED-PARTY TRANSACTIONS: The Company sells merchandise to The Kitchen Collection, Inc. ("Kitchen Collection"), a wholly owned subsidiary of Housewares. The Company's sales to Kitchen Collection were $6,251 and $6,201 for 1997 and 1996, respectively. Accounts receivable due from Kitchen Collection at December 31, 1997 and 1996, amounted to $257 and $146, respectively, and are included in accounts receivable. NACCO incurs certain administrative and other expenses directly related to the operation of the Company. These expenses are reimbursed to NACCO. The Company expensed and paid $514 and $743 of these administrative expenses to NACCO in 1997 and 1996, respectively. The related payable to NACCO was $62 and $48 at December 31, 1997 and 1996, respectively. -16- 19 15. CONTINGENCIES: Various legal proceedings and claims have been or may be asserted against the Company relating to the conduct of its business, including product liability and environmental claims. These proceedings and claims are incidental to the Company's ordinary course of business. Management believes that it has meritorious defenses and will vigorously defend itself in these actions. Any costs that management estimates may be paid as a result of these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated. Although the ultimate disposition of these proceedings and claims is not presently determinable, management believes, after consultation with its general counsel, the likelihood that material costs will be incurred in excess of accruals already recognized is remote. 16. SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments during 1997 and 1996 included interest of $7,048 and $5,588 and income taxes of $7,464 and $4,656, respectively. -17- EX-99.III 30 EXHIBIT 99(III) 1 Exhibit 99(iii) Audited Consolidated Financial Statements THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES As of December 31, 1997 and 1996 Report of Independent Public Accountants....................................1 Consolidated Balance Sheets.................................................2 Consolidated Statements of Income...........................................4 Consolidated Statements of Stockholder's Equity.............................5 Consolidated Statements of Cash Flows.......................................6 Notes to Consolidated Financial Statements..................................7 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of The North American Coal Corporation: We have audited the accompanying consolidated balance sheets of The North American Coal Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholder's equity and cash flows for the years then ended. 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 financial position of The North American Coal Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas, February 10, 1998 3 THIS PAGE INTENTIONALLY LEFT BLANK 4
THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1997 and 1996 (Amounts in thousands, except share data) 1997 1996 --------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,849 $ 4,310 Note receivable from Parent Company 21,938 41,952 Accounts receivable 22,236 27,753 Inventories 29,938 27,204 Other current assets 1,613 1,892 --------------- --------------- 80,574 103,111 PROPERTY, PLANT & EQUIPMENT -- at cost: Coal lands and real estate 95,707 94,017 Plant and equipment 464,390 450,153 Construction in progress 11,413 4,645 --------------- --------------- 571,510 548,815 Less allowance for depreciation, depletion and amortization (256,546) (230,453) --------------- --------------- 314,964 318,362 OTHER ASSETS: Notes receivable 2,002 2,621 Costs recoverable under sales contracts 4,006 4,895 Other investments and receivables 21,779 20,807 --------------- --------------- 27,787 28,323 DEFERRED CHARGES: Advance royalties 5,298 6,326 Deferred lease costs 37,343 36,516 Other 8,869 7,452 --------------- --------------- 51,510 50,294 --------------- --------------- $ 474,835 $ 500,090 =============== ===============
The accompanying notes are an integral part of these statements. -2- 5
1997 1996 -------------- -------------- LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable $ 16,390 $ 15,604 Accrued liabilities 29,456 26,585 Borrowings under revolving credit agreement 14,000 29,000 Current maturities of long-term obligations 16,028 17,861 -------------- -------------- 75,874 89,050 NON-CURRENT LIABILITIES: Deferred income taxes 19,727 19,852 Pension compensation and other accrued liabilities 28,725 29,138 -------------- -------------- 48,452 48,990 LONG-TERM OBLIGATIONS: Subsidiaries' liabilities--(not guaranteed by the Company or the Parent Company): Advances from customers 175,365 184,234 Notes payable 23,664 20,751 Notes payable to affiliated company - 19 Capitalized lease obligations 128,926 136,630 -------------- -------------- 327,955 341,634 MINORITY INTEREST 7,429 5,291 STOCKHOLDER'S EQUITY: Common stock, par value $1 a share: authorized 750 shares; issued and outstanding 500 shares 1 1 Capital in excess of par value 15,124 15,124 Retained income - - -------------- -------------- 15,125 15,125 -------------- -------------- $ 474,835 $ 500,090 ============== ==============
-3- 6
THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1997 and 1996 (Amounts in thousands) 1997 1996 --------------- ------------- TONS OF COAL SOLD 29,909 27,597 =============== ============= INCOME: Net sales $ 256,423 $ 245,046 Royalties, rental and other operating income 6,470 4,004 Interest, gain on sale of assets and miscellaneous income 378 4,752 --------------- ------------- 263,271 253,802 --------------- ------------- COSTS AND EXPENSES: Cost of sales 176,816 166,696 Depreciation, depletion and amortization 32,185 31,162 Selling, administrative and general expenses 10,001 10,961 Interest expense of subsidiaries 14,785 13,832 --------------- ------------- 233,787 222,651 --------------- ------------- Income before income taxes and minority interest 29,484 31,151 INCOME TAXES: Current 7,657 8,574 Deferred 457 1,312 --------------- ------------- 8,114 9,886 Minority interest in income of consolidated subsidiary 2,358 2,074 --------------- ------------- Net income $ 19,012 $ 19,191 =============== =============
The accompanying notes are an integral part of these statements. -4- 7 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY For the Years Ended December 31, 1997 and 1996 (Amounts in thousands)
Capital In Common Excess of Par Retained Stock Value Income Total ------------- -------------- ------------- ------------- Balance at January 1, 1996 $ 1 $ 15,124 $ - $ 15,125 Net income - - 19,191 19,191 Dividends - - (19,191) (19,191) ------------- ------------- ------------- ------------- Balance at December 31, 1996 1 15,124 - 15,125 Net income - - 19,012 19,012 Dividends - - (19,012) (19,012) ------------- ------------- ------------- ------------- Balance at December 31, 1997 $ 1 $ 15,124 $ - $ 15,125 ============= ============= ============= =============
The accompanying notes are an integral part of these statements. -5- 8 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997 and 1996 (Amounts in thousands)
OPERATING ACTIVITIES: 1997 1996 ---------------- ---------------- Net income $ 19,012 $ 19,191 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 32,185 31,162 Loss (gain) on sale of assets 2,408 (84) Costs recovered under sales contracts 889 890 Deferred lease costs (827) (1,580) Deferred income taxes (457) 1,312 Pensions and non-current accruals (939) 3,610 Other non-current asset 2,397 (2,495) ---------------- ---------------- 54,668 52,006 Working capital changes: (Increase) decrease in accounts receivable and other current assets 6,719 (4,114) (Increase) decrease in inventories (2,733) 2,532 Increase (decrease) in accounts payable and other current liabilities 3,141 (5,538) ---------------- ---------------- 7,127 (7,120) ---------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 61,795 44,886 INVESTING ACTIVITIES: Expenditures for property, plant and equipment (24,808) (19,534) Proceeds from sales of property 1,389 171 (Additions to) repayment of note receivable from Parent Company, net 20,014 (27,013) Receipt of notes receivable 596 574 Advance royalties (1,822) (428) Other - net (2,054) (3,216) ---------------- ---------------- NET CASH USED BY INVESTING ACTIVITIES (6,685) (49,446) FINANCING ACTIVITIES: Additions to (repayment of) lines of credit, net (15,000) 29,000 Additions to (repayment of) advances from customers, net (8,869) 7,850 Additions to long-term obligations 58,494 60,979 Repayment of long-term obligations (70,184) (74,468) Dividends (19,012) (19,191) ---------------- ---------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (54,571) 4,170 ---------------- ---------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 539 (390) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,310 4,700 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,849 $ 4,310 ================ ================
The accompanying notes are an integral part of these statements. -6- 9 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands) December 31, 1997 and 1996 NOTE A--ORGANIZATION AND PRINCIPLES OF CONSOLIDATION The North American Coal Corporation ("Company") is a wholly owned subsidiary of NACCO Industries, Inc. ("Parent Company"). The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, The Coteau Properties Company ("Coteau"), The Falkirk Mining Company ("Falkirk"), The Sabine Mining Company ("Sabine"), and North American Coal Royalty Company, its division San Miguel Lignite Mine, ("San Miguel"), and its joint venture Red River Mining Company, ("Red River Mining"). Intercompany accounts have been eliminated. The Company is principally engaged in lignite mining through the operation of surface mines in North Dakota, Texas and Louisiana. The Company also operates a dragline at a limestone quarry in Florida. Three of the Company's consolidated coal mining subsidiaries were organized to assume sales agreements with public utilities. All of the coal of these subsidiaries is sold to these public utilities pursuant to long-term contracts with terms up to 23 years and with extensions at the public utilities' option. The sales prices provided by such contracts are based on cost, plus a profit per ton. Since each mining subsidiary has a contract to provide coal to its customer, a significant portion of their revenue is derived from a single source. The financial position of the mining subsidiary and the Company could be materially impacted if the relationship with any of the customers was terminated or altered. On January 22, 1997, the Company signed a contract to mine lignite at a specified fixed price per ton over the next ten years for San Miguel Electric Cooperative. Operations began on July 1, 1997 as scheduled resulting in the delivery of 2 million tons for fiscal 1997. NOTE B--ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS: Cash equivalents are investments purchased with an original maturity of three months or less. INVENTORIES: Supply inventories are stated at average cost. Coal inventories are stated at the lower of cost or market. COSTS RECOVERABLE UNDER SALES CONTRACTS: The coal sales agreements ("Agreements") of three subsidiaries provided for selling prices which allowed a profit during the defined development period of the mines. Production costs incurred during the development period in excess of the established selling price, as set forth in the Agreements, were deferred and are being recovered as a cost of coal tonnage sold after the development period. Recoveries of these costs amounted to approximately $890,000 in 1997 and 1996, and are included in net sales in the accompanying consolidated statements of income. DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation, depletion and amortization are provided in amounts sufficient to amortize the cost of related assets (including assets recorded under capitalized lease obligations) over their estimated range of useful lives and are calculated by either the straight-line method or the units-of-production method based on estimated recoverable tonnage. -7- 10 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996 NOTE B--ACCOUNTING POLICIES--continued RECLAMATION COSTS: Under certain federal and state regulations, the Company's subsidiaries are required to reclaim land disturbed as a result of mining. Reclamation of disturbed land is a continuous process throughout the term of the related Agreements. Current reclamation costs are being recovered as a cost of coal tonnage sold. Costs to complete reclamation after mining has been completed are reimbursed under the Agreements. PRIOR YEAR FINANCIAL STATEMENTS: Certain reclassifications have been made to the 1996 consolidated financial statements to conform to the 1997 presentation. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS: The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes. For a portion of the Company's variable-rate revolving credit agreement, the Company has an interest rate swap agreement with a remaining term of six years. The term of the interest rate swap agreement requires the Company to receive a variable interest rate and pay a fixed interest rate, thereby reducing the Company's exposure to changes in the market rate of interest. The differential between the floating interest rate and the fixed interest rate which is to be paid or received is recognized in interest expense as the floating interest rate changes over the life of the agreement. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. LONG-LIVED ASSETS: During fiscal year 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement had no material effect on the Company's accompanying financial statements. CHANGE IN ACCOUNTING METHOD: In 1996, the mines converted to a new inventory/purchasing system. The conversion resulted in a change from the first-in, first-out method to the average cost method of the supply inventory valuation. As of December 31, 1996, average cost approximated first-in, first out. The cumulative effect is immaterial to the financial statements. CHANGE IN ACCOUNTING ESTIMATE: In 1996, due to the extension of Falkirk's contract with its customers, Falkirk extended the estimated useful lives of preproduction costs and fixed assets. -8- 11 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996
NOTE C--ACCOUNTS RECEIVABLE Accounts receivable are summarized as follows: December 31, ------------------------------- 1997 1996 ------------- ------------- Accounts receivable $ 18,147 $ 24,648 Accounts receivable from affiliated companies 3,815 2,327 Refundable income taxes 274 778 ------------- ------------- $ 22,236 $ 27,753 ============= =============
NOTE D--INVENTORIES Inventories are summarized as follows: December 31, ------------------------------- 1997 1996 ------------- ------------- Coal $ 10,724 $ 8,328 Mining supplies 19,214 18,876 ------------- ------------- $ 29,938 $ 27,204 ============= =============
NOTE E--ADVANCES FROM CUSTOMERS Advances from customers represent amounts advanced to Coteau and Falkirk from public utilities to develop, operate and provide working capital for the mines. These advances are secured by all owned assets and assignment of all rights under the Agreements of Coteau and Falkirk, are non interest-bearing, and are without recourse to the Company and the Parent Company. No repayment schedule has been established for the Falkirk advances due to the funding agreement with the customers. Estimated maturities for Coteau for the next five years, including current maturities, which are included in accrued liabilities in the accompanying balance sheets, are as follows: 1998 $ 9,079 1999 9,973 2000 9,973 2001 9,973 2002 9,973 Thereafter 66,724 ---------------- $ 115,695 ================
-9- 12 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996 NOTE F--NOTES PAYABLE Notes payable, less current maturities, are summarized in the following table. Neither the Company nor the Parent Company have guaranteed these borrowings. The promissory note for Sabine represents borrowings which the public utility arranged for Sabine.
December 31, --------------------------------- 1997 1996 ------------ ------------- THE SABINE MINING COMPANY Secured note payable due February 20, 2003, with semi-annual payments and an interest rate of LIBOR plus .25% on the unpaid balance (interest rate of 6.125% and 5.75% at December 31, 1997 and 1996, respectively). Under the terms of such agreement, substantially all assets are pledged and all rights under the Agreement are assigned. $ 9,643 $ 11,786 Promissory note payable to a bank under a revolving agreement providing for borrowings up to $20 million in 1997 and $10 million in 1996. Interest is based on the bank's daily cost of funds plus .25% (7% and 6.75% interest rate as of December 31, 1997 and 1996, respectively). Under the terms of such agreement, substantially all assets are pledged and all rights under the Agreement are assigned. 11,463 5,298 Secured note payable due June 1, 2001, with semi-annual payments and a fixed interest rate of 8.65% per annum on the unpaid balance. Under the terms of such agreement, substantially all assets are pledged and all rights under the Agreement are assigned. 2,500 3,500 OTHER 58 167 ------------ ------------- $ 23,664 $ 20,751 ============ =============
Note payable maturities for the next five years, including current maturities, are as follows: 1998 $ 3,850 1999 3,201 2000 3,143 2001 2,643 2002 2,143 Thereafter 12,534 ---------------- $ 27,514 ================
-10- 13 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996 NOTE F--NOTES PAYABLE--continued Commitment fees paid to banks were approximately $17,000 and $18,000 in 1997 and 1996, respectively, and are included in interest expense in the accompanying consolidated statements of income. NOTE G--REVOLVING CREDIT AGREEMENT Terms of the Company's revolving credit agreement are summarized as follows: Amount of revolving credit agreement $50,000,000 Amount available at December 31, 1997 $36,000,000 Stated interest rate LIBOR + .4375% Commitment and facility fee .20% per annum Expiration date (with annual renewal option) September 27, 2002 At December 31, 1997 and 1996, the interest rate was 6.44% and 6.06%, respectively. The Company's revolving credit agreement includes certain financial covenants. The Company was in compliance with such covenants at December 31, 1997. The Company enters into interest rate swap agreements which allow the Company to enter into long-term credit arrangements that have performance based, floating rates of interest and then swap them for fixed rates as opposed to entering into higher cost fixed-rate credit arrangements. These agreements are with major commercial banks; therefore, the risk of credit loss from nonperformance by the banks is minimal. The Company evaluates its exposure to floating rate debt on an ongoing basis. The following table summarizes the notional amount and related rate on the interest rate swap agreement outstanding at December 31:
Variable Fixed Notional Rate Rate Amount Received Paid ------ -------- ---- 1996 $13,929 5.75% 6.85% 1997 $11,786 6.13% 6.85%
NOTE H--POSTRETIREMENT PLANS The Company and its affiliates, representing the mining operations of the Parent Company, sponsor defined benefit pension plans which cover substantially all salaried employees of the Company and its subsidiaries. Benefits under the plans are based on years of service and average compensation during certain periods. The Company's funding policy is to contribute within the range allowed by the applicable regulations. Plan assets are primarily listed stocks and U.S. bonds. -11- 14 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996 NOTE H--POSTRETIREMENT PLANS--continued The following is a detail of net periodic pension expense for all mining operations of the Parent Company:
December 31, --------------------------------- 1997 1996 -------------- ------------ Service cost $ 2,179 $ 2,192 Interest cost on projected benefit obligation 3,180 2,808 Actual return on plan assets (10,223) (2,697) Net amortization and deferral 7,163 (71) -------------- -------------- Net periodic pension expense $ 2,299 $ 2,232 ============== ==============
The following sets forth the funded status of the plans: Actuarial present value of benefit obligation December 31, --------------------------------- 1997 1996 -------------- ------------ Vested accumulated benefit obligation $ 25,643 $ 20,086 Nonvested accumulated benefit obligation 3,420 2,780 -------------- ------------ Total accumulated benefit obligation 29,063 22,866 Value of future salary projections 15,785 14,948 -------------- ------------ Total projected benefit obligation 44,848 37,814 Fair value of plan assets 46,803 34,473 -------------- ------------ Plan assets in excess of (less than) projected benefit obligation 1,955 (3,341) Amounts not recognized Unrecognized net transition asset (640) (670) Unrecognized net gain (20,170) (15,288) Prior service cost 587 646 -------------- ------------ Pension obligation recognized $ (18,268) $ (18,653) ============== ============
Assumptions used in accounting for the defined benefit plans:
December 31, --------------------------------- 1997 1996 -------------- ------------ Weighted average discount rates 7.50% 8.00% Rate of increase in compensation levels 4.50% 5.00% Expected long-term rate of return on assets 9.00% 9.00%
-12- 15 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996 NOTE H--POSTRETIREMENT PLANS--continued The Company and its subsidiaries participate in a defined contribution plan sponsored by the Company which covers substantially all salaried employees. The plan provides for employee contributions to be matched, by the respective company, up to a limit of 5% of the employee's salary. Company contributions to the plan were approximately $2,901,000 and $2,773,000 in 1997 and 1996, respectively. NOTE I--OTHER POSTRETIREMENT BENEFITS The expected cost of retirement benefits other than pensions is charged to expense during the years that the employees render service. Under the provisions of the Agreements of three subsidiaries, costs will be recovered as a cost of coal tonnage sold. Because the obligation for retirement benefits other than pension is not material to the Company's results of operations and financial condition, the detailed disclosures have not been presented. Coteau and Sabine established Voluntary Employees' Beneficiary Association (VEBA) trusts in 1993 to provide for such future retirement benefits. Coteau and Sabine made cash contributions to the VEBA trusts of approximately $479,000 and $364,000 in 1997 and 1996, respectively. Contributions made to an IRS approved VEBA trust are irrevocable and must be used for employee benefits. NOTE J--COMMITMENTS Certain mining equipment leased by Coteau, Falkirk, and Sabine is capitalized for financial statement purposes. Under the provisions of the Agreements, the customer is required to pay, as part of the cost of coal purchased, an amount equal to the annual lease payments. Interest expense and amortization in excess of annual lease payments are deferred and are recognized in years when annual lease payments exceed interest expense and amortization. Interest paid on notes and capitalized lease obligations amounted to approximately $14,904,000 and $13,775,000 in 1997 and 1996, respectively. Assets recorded under capitalized lease obligations are included with property, plant and equipment and consist of the following:
December 31, ----------------------------------- 1997 1996 -------------- --------------- Plant and equipment $ 198,354 $ 198,744 Accumulated amortization (94,588) (87,077) -------------- --------------- $ 103,766 $ 111,667 ============== ===============
Capitalized lease obligations are renewable for additional periods at terms based upon fair market value of the leased items at the renewal dates. -13- 16 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996 NOTE J--COMMITMENTS --continued During 1997 and 1996, subsidiaries of the Company incurred capitalized lease obligations of approximately $6,337,000 and $1,966,000, respectively, in connection with lease agreements to acquire plant and equipment. Future minimum lease payments as of December 31, 1997, for all capitalized lease obligations are as follows: 1998 $ 22,687 1999 22,287 2000 21,262 2001 20,835 2002 19,200 Thereafter 104,379 -------------- Total minimum lease payments 210,650 Amounts representing interest (69,546) -------------- Present value of net minimum lease payments 141,104 Current maturities (12,178) -------------- $ 128,926 ==============
The Company is committed under non cancelable operating leases. The Parent Company is not obligated under operating lease agreements of the Company. Minimum lease payments as of December 31, 1997, as follows: 1998 $ 5,542 1999 4,740 2000 4,389 2001 4,280 2002 4,461 Thereafter 19,166 ----------- $ 42,578 ===========
Rental expenses for all operating leases amounted to approximately $4,430,000 and $2,000,000 during 1997 and 1996, respectively. At December 31, 1997, the unexpended portion of capital expenditures authorized by the respective boards of directors, and customers where required, of the Company and its subsidiaries approximated $49,468,000, of which $41,887,000 is being financed under the arrangements with public utilities served by the subsidiaries. -14- 17 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996 NOTE K--INCOME TAXES The Company and its subsidiaries are included in the consolidated federal income tax return filed by the Parent Company. The Company and each of its subsidiaries entered into a tax-sharing agreement with the Parent Company under which federal income taxes are computed by the Company and each of its subsidiaries on a separate return basis. The current portion of such tax is paid to the Parent Company. During 1997 and 1996, the federal and state income taxes paid by the Company were approximately $8,064,000 and $8,464,000, respectively. The Company's effective tax rate differs from the federal statutory rate primarily due to state income taxes and percentage depletion. Provision for income taxes consists of the following:
Year Ended December 31, -------------------------------- 1997 1996 -------------- -------------- Federal $ 6,656 $ 7,278 State 1,001 1,296 -------------- -------------- Total current tax expense $ 7,657 $ 8,574 ============== ============== Federal $ 424 $ 1,401 State 33 (89) -------------- -------------- Total deferred tax expense $ 457 $ 1,312 ============== ==============
A summary of components of the net deferred tax assets (liabilities) included in the accompanying consolidated balance sheets resulting from differences in the book and tax bases of assets and liabilities are as follows:
December 31, -------------------------------- 1997 1996 -------------- -------------- Deferred tax assets: Accrued expenses and reserves $ 614 $ 521 Pensions 6,402 5,527 Deferred compensation 1,826 1,700 Other - net 29 (693) -------------- -------------- Total deferred tax assets $ 8,871 $ 7,055 -------------- -------------- Deferred tax liabilities: Depreciation, depletion and amortization $ (25,657) $ (23,379) Installment sales (1,174) (1,211) Partnership investment (1,727) (1,796) Inventory (40) (40) ------------- ------------- Total deferred tax liabilities (28,598) (26,426) ------------- ------------- Net deferred tax liability $ (19,727) $ (19,371) ============= =============
-15- 18 THE NORTH AMERICAN COAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued December 31, 1997 and 1996 NOTE L--FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts for cash and cash equivalents and borrowings under the revolving credit agreement approximate fair value. The fair value of notes receivable and payable is estimated based on the discounted value of the future cash flows using borrowing rates currently available to the Company for bank loans with similar terms and maturities. The fair value of the interest rate swap agreement is based on third party quotes. The fair value compared to the carrying value is summarized as follows:
December 31, ------------------------- 1997 1996 --------- -------- Fair Value: - ----------- Notes receivable $ 3,668 $ 4,502 Notes payable $(27,608) $(27,176) Interest rate swap agreements $ (183) $ (152) Carrying Value: - --------------- Notes receivable $ 2,621 $ 3,217 Notes payable $(27,514) $(27,061) Interest rate swap agreements $ -- $ --
NOTE M--TRANSACTIONS WITH AFFILIATED COMPANIES Costs and expenses include net receipts from the Parent Company and other subsidiaries of the Parent Company. These receipts approximated $907,000 and $1,185,000 in 1997 and 1996, respectively, for intercompany interest, administrative and other services. The note receivable from the Parent Company of $21,938,000 and $41,952,000 in 1997 and 1996, respectively, is a demand note, with interest of 5.72% and 5.94% at December 31, 1997 and 1996, respectively. -16- EX-99.IV 31 EXHIBIT 99(IV) 1 Exhibit 99(iv) THE KITCHEN COLLECTION, INC. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 TOGETHER WITH AUDITORS' REPORT 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholder of The Kitchen Collection, Inc.: We have audited the accompanying balance sheets of THE KITCHEN COLLECTION, INC. (a Delaware corporation) as of December 31, 1997 and 1996, and the related statements of income, changes in stockholder's equity and cash flows for the years then ended. 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 financial position of The Kitchen Collection, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Columbus, Ohio, January 16, 1998. 3 THE KITCHEN COLLECTION, INC. BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 ------ -------------- --------------- Current assets: Cash $ 286,083 $ 140,235 Miscellaneous receivables 131,746 131,723 Accounts receivable - affiliate 700,111 3,600,000 Inventories 15,481,435 14,915,677 Import inventories in-transit 421,571 480,255 Prepaid expenses and other 2,044,916 1,886,586 ------------ ------------ Total current assets 19,065,862 21,154,476 ------------ ------------ Property, plant and equipment: Building and leasehold improvements 388,017 276,446 Furniture and fixtures 7,396,035 7,158,482 ------------ ------------ 7,784,052 7,434,928 Less: Accumulated depreciation and amortization (5,476,149) (4,559,945) ------------ ------------ Property, plant and equipment, net 2,307,903 2,874,983 Goodwill, net of accumulated amortization 3,501,313 3,616,425 ------------ ------------ Total assets $ 24,875,078 $ 27,645,884 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY ------------------------------------ Current liabilities: Accounts payable and miscellaneous accrued liabilities $ 5,851,656 $ 6,300,484 Accounts payable - affiliates 79,761 23,884 Income taxes payable to affiliate 800,000 864,576 Accrued salaries and benefits 1,527,614 1,378,280 Other accrued taxes 847,726 817,521 ------------ ------------ Total current liabilities 9,106,757 9,384,745 Long-term debt 5,000,000 5,000,000 ------------ ------------ Total liabilities 14,106,757 14,384,745 ------------ ------------ Commitments Stockholder's equity: Common stock; $.01 par value; 100,000 shares authorized; 10,500 shares issued and outstanding 105 105 Additional paid-in capital 4,999,890 4,999,890 Retained earnings 5,768,326 8,261,144 ------------ ------------ Total stockholder's equity 10,768,321 13,261,139 ------------ ------------ Total liabilities and stockholder's equity $ 24,875,078 $ 27,645,884 ============ ============
The accompanying notes to financial statements are an integral part of these statements. 4 THE KITCHEN COLLECTION, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 -------------- -------------- Net sales $78,966,257 $74,921,070 Cost of sales 46,182,100 43,306,213 ----------- ----------- Gross margin 32,784,157 31,614,857 Selling, general, administrative and other expenses 29,951,232 28,361,721 ----------- ----------- Operating income 2,832,925 3,253,136 Interest expense 387,076 511,051 Amortization expense 136,807 136,710 ----------- ----------- Income before provision for income taxes 2,309,042 2,605,375 Provision for income taxes 1,001,860 1,112,000 ----------- ----------- Net income $ 1,307,182 $ 1,493,375 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 5 THE KITCHEN COLLECTION, INC. STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Additional Total Number of Common Paid-in Retained Stockholder's Shares Stock Capital Earnings Equity ------ ----- ------- -------- ------ Balance, December 31, 1995 10,500 $105 $4,999,890 $ 6,767,769 $ 11,767,764 Net income -- -- -- 1,493,375 1,493,375 ------ ---- ---------- ----------- ------------ Balance, December 31, 1996 10,500 105 4,999,890 8,261,144 13,261,139 Dividends paid -- -- -- (3,800,000) (3,800,000) Net income -- -- -- 1,307,182 1,307,182 ------ ---- ---------- ----------- ------------ Balance, December 31, 1997 10,500 $105 $4,999,890 $ 5,768,326 $ 10,768,321 ====== ==== ========== =========== ============
The accompanying notes to financial statements are an integral part of these statements. 6 THE KITCHEN COLLECTION, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Increase (Decrease) in Cash ---------------------------------- 1997 1996 ---- ---- OPERATING ACTIVITIES: Net income $ 1,307,182 $ 1,493,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,144,504 1,100,430 Loss on the disposal of assets 91,892 10,398 (Increase) decrease in miscellaneous receivables (23) 43,456 Increase in inventories (507,074) (1,125,777) Increase in prepaid expenses and other (158,330) (277,949) Increase (decrease) in accounts payable and miscellaneous accrued liabilities (448,828) 1,047,458 Increase (decrease) in accounts payable - affiliates 55,877 (127,446) Decrease in income taxes payable to affiliate (64,576) (151,144) Increase in accrued salaries and benefits 149,334 194,677 Increase in other accrued taxes 30,205 83,889 ----------- ----------- Net cash provided by operating activities 1,600,163 2,291,367 ----------- ----------- INVESTING ACTIVITIES: Expenditures for property, plant and equipment (554,204) (1,058,127) Proceeds from disposal of assets -- 426,590 ----------- ----------- Net cash used in investing activities (554,204) (631,537) ----------- ----------- FINANCING ACTIVITIES: Dividends paid (3,800,000) -- Net (advances to) repayments on loan to affiliate 2,899,889 (1,650,000) ----------- ----------- Net cash used for financing activities (900,111) (1,650,000) ----------- -----------
(Continued on next page) 7 THE KITCHEN COLLECTION, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
Increase (Decrease) in Cash --------------------------- 1997 1996 ---- ---- NET INCREASE IN CASH $ 145,848 $ 9,830 CASH, beginning of the year 140,235 130,405 ---------- ---------- CASH, end of the year $ 286,083 $ 140,235 ========== ========== Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 421,657 $ 463,689 Income taxes $1,078,267 $1,253,554
The accompanying notes to financial statements are an integral part of these statements. 8 THE KITCHEN COLLECTION, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) ORGANIZATION The Kitchen Collection, Inc. (the Company) is a specialty retailer of kitchenware, tableware, small electrical appliances and related accessories. The Company operates a chain of 143 retail and factory outlet stores throughout the United States and is a wholly-owned subsidiary of NACCO Industries, Inc. (NII). (2) SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost or market as determined by the retail inventory method. Property, Plant and Equipment Property, plant and equipment is stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. For financial reporting purposes, depreciation and amortization is provided using the straight-line method based upon the estimated useful lives of the related assets, as follows: Leasehold improvements 5 years Furniture and fixtures 5 years 9 -2- Goodwill Goodwill represents the excess purchase price paid over the fair value of the net assets of the Company acquired by NII and is being amortized over forty years on a straight-line basis. Accumulated amortization was $1,103,157 and $988,045 at December 31, 1997 and 1996, respectively, with related amortization expense of $115,112 for each of the years ended December 31, 1997 and 1996. Management regularly evaluates its accounting for goodwill considering such factors as historical and future profitability and believes the asset is realizable and that the amortization period remains appropriate. Advertising The Company incurs advertising costs in the form of radio, newspaper and other print ads. Such costs are expensed as incurred. Advertising expense was $250,785 and $250,455 in 1997 and 1996, respectively. Fair Value of Financial Instruments The Company enters into interest rate swap agreements with terms that run concurrent with the related debt. The differential between the floating interest rate and the fixed interest rate, which is to be paid or received, is recognized in interest expense as interest rates change over the life of the related debt agreement. The fair values of financial instruments have been determined through information obtained from quoted market sources and management estimates. The fair value of the financial instruments approximated their carrying values at December 31, 1997 and 1996. The Company does not hold or issue financial instruments or derivative financial instruments (interest rate swap agreements) for trading purposes. (3) LINE-OF-CREDIT AGREEMENT The Company has an unsecured revolving line-of-credit agreement with a commercial bank for $5,000,000. Interest accrues at the bank's prime rate, money market rate or LIBOR rate plus a base rate margin of .425% to 1.25%, as determined by certain performance measures. The Company had no funds drawn against the available balance at December 31, 1997 or 1996. As of December 31, 1997, the Company had letters of credit outstanding totaling $96,663, which reduces the available balance to $4,903,337. The credit agreement expires on May 31, 2000, and it provides an option to extend the facility for one additional year on an annual basis. 10 -3- (4) LONG-TERM DEBT On May 10, 1994, the Company entered a term note agreement with a commercial bank for $5,000,000. Interest is payable quarterly at LIBOR, plus a base rate margin between .75% and 1.75%, determined by certain performance measures. The note is unsecured and annual principal payments are due on January 15 of the following years:
Year Amount ---- ------ 1998 $ - 1999 2,500,000 2000 2,500,000 =========== $5,000,000 ===========
The note contains restrictive covenants regarding maintenance of minimum net worth, interest coverage and leverage. The Company was in compliance with all covenants as of December 31, 1997 and 1996. The Company entered into an interest rate swap agreement with a six year term during 1994. The use of this agreement allowed the Company to enter into a long-term credit agreement with a performance based, floating rate of interest and then swap it for a fixed rate of 6.81% plus a base rate margin, as opposed to entering into a higher cost fixed-rate credit agreement. This agreement is with a major commercial bank; therefore, the risk of credit loss from nonperformance by the bank is minimal. The following summarizes the notional amounts and related rates on this interest rate swap agreement.
1997 1996 ---- ---- Notional amount $5,000,000 $5,000,000 Average variable rate 6.6% 6.8% (6.81% and 6.82% at received December 31, 1997 and 1996, respectively) Average fixed rate paid 7.8% 8.0% (7.81% and 8.06% at December 31, 1997 and 1996, respectively)
11 -4- (5) INCOME TAXES The provision for income taxes consists of the following:
1997 1996 ---- ---- Currently payable: Federal $ 802,860 $ 882,000 State and local 192,000 244,000 ---------- ---------- 994,860 1,126,000 ---------- ---------- Deferred: Federal 10,000 (18,000) State and local (3,000) 4,000 ---------- ---------- 7,000 (14,000) ========== ========== Total provision $1,001,860 $1,112,000 ========== ==========
Reconciliation of the Federal statutory and effective income tax rates is as follows:
1997 1996 ---- ---- Federal statutory rate 35.0% 35.0% Amortization of goodwill 1.7 1.5 State and local income tax, net of Federal income tax effect 5.4 6.2 Other 1.3 -- ---- ---- Effective tax rate 43.4% 42.7% ==== ====
A summary of the components of the net deferred tax asset balances, included in the accompanying balance sheet in prepaid expenses and other, is as follows:
1997 1996 ---- ---- Inventories $ 135,000 $ 140,000 Accrued expenses and reserves 404,000 366,000 State income taxes 9,000 (18,000) Depreciation (222,000) (226,000) --------- --------- Deferred tax asset, net $ 326,000 $ 262,000 ========= =========
12 -5- (6) RELATED PARTY TRANSACTIONS Net purchases of inventories from Hamilton Beach<>Procter Silex (HBPS), a related company, during the years ended December 31, 1997 and 1996, were $6,264,169 and $6,080,255, respectively. The purchase price of this inventory is determined by negotiations between the two companies and is comparable to market. Related inventory levels at December 31, 1997 and 1996, were approximately $1,355,000 and $1,682,000, respectively. At December 31, 1997 and 1996, the Company owed HBPS $56,812 and $415, respectively, for these purchases. The Company incurred $121,454 and $79,138 for miscellaneous services provided by NII for the years ended December 31, 1997 and 1996, respectively. The Company had payables for such services at December 31, 1997 and 1996, of $22,949 and $23,469, respectively. The Company has an agreement with NII to loan NII up to $15,000,000. Outstanding amounts are collectible on demand. Interest is payable quarterly at the applicable short-term Federal rate. The Company has a receivable due from NII at December 31, 1997 and 1996 of $700,111 and $3,600,000, respectively. The Company recorded related interest income of $28,502 during 1997 and $14,184 during 1996. The Company has a tax sharing agreement with NII, as NII and the Company are included in the same consolidated group for Federal tax purposes. The Company files separate tax returns for state and local tax purposes. The Company has recorded taxes payable to NII at December 31, 1997 and 1996, of $800,000 and $864,576, respectively. (7) LEASES The Company leases its home office, retail stores, warehouse space and equipment under noncancellable operating leases which expire at various dates through 2006. Future minimum lease payments are as follows: 1998 $ 5,750,828 1999 5,023,174 2000 4,047,974 2001 2,370,175 2002 1,308,756 Thereafter 730,985 ------------ Total minimum payments $19,231,892 ============
13 -6- The Company has leases with percentage of sales clauses in all but one of its retail store locations. Percentage of sales rent expense amounted to $626,718 for the year ended December 31, 1997 and $552,036 for the year ended December 31, 1996. The Company's total rent expense for the years ended December 31, 1997 and 1996, was $9,023,876 and $8,631,686, respectively. (8) RETIREMENT INCOME PLANS The Company maintains a defined contribution savings plan for employees who have completed one year of service and are at least 21 years of age. Employees can elect to defer and contribute a portion of their salary, following the guidelines established in the plan. The Company makes matching contributions of 50% of the employee's contribution, limited to 3% of the employee's compensation. In addition, the Company can make an annual profit sharing contribution at its discretion. Effective January 1, 1995, the Company established a deferred compensation plan for management employees. The purpose of the plan is to provide for certain employees of the Company benefits they would have received under the retirement savings plan but for certain limitations imposed by the Internal Revenue Code. The plan is administrated and the related assets are held by the Company. Earnings are accrued by the Company based upon return on equity, as defined by the plan. The assets of the plan are unsecured. The Company's matching contribution, profit sharing contribution and earnings accrued on the plans described above was $330,364 and $267,443 for the years ended December 31, 1997 and 1996, respectively. Effective December 20, 1995, the Company established a deferred compensation plan for participants in the retirement savings plan not included in the deferred compensation plan for management employees. The purpose of the plan is to provide for certain employees of the Company benefits they would have received under the retirement savings plan but for certain limitations imposed by the Internal Revenue Code. The plan is administrated and the related assets are held by the Company. Earnings shall be accrued by the Company based upon the earnings of the retirement savings plan, as defined by the plan. The assets of the plan shall be unsecured. As of December 31, 1997, there are no participants nor has the Company incurred any expense with relation to this plan. 14 -7- (9) SELF INSURANCE COVERAGE The Company is self insured for health insurance with stop loss coverage for claims which exceed $50,000 per incident. Total expense for 1997 and 1996 was approximately $501,000 and $558,000, respectively. (10) SUBSEQUENT EVENTS Through January 16, 1998, the Company made additional advances to NII of $1,200,000 and received payments of $1,100,000, for a net receivable balance of $800,111 at January 16, 1998. -----END PRIVACY-ENHANCED MESSAGE-----