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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/ x / Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended April 30, 1998, or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File No. 0-16115
IMPCO Technologies, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1039211
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(State of Incorporation) (IRS Employer ID. No.)
16804 GRIDLEY PLACE, CERRITOS, CALIFORNIA 90703
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (562) 860-6666
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock;
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
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Approximate aggregate market value of the voting stock held by
non-affiliates of the registrant as of June 30, 1998 was $108,206,166.
Number of shares outstanding of each of the registrant's classes of
common stock, as of June 30, 1998:
7,171,601 shares of Common Stock
Documents incorporated by reference:
See Item 14
Information required by Part III is incorporated by reference from the
definitive proxy statement to be filed pursuant to Regulation 14A or by an
amendment hereto, in either case, within 120 days of the end of fiscal year
1998.
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PART I
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ITEM 1 - BUSINESS
General
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IMPCO Technologies, Inc. [effective September 15, 1997, AirSensors, Inc.
changed its name to IMPCO Technologies, Inc.] (IMPCO) was incorporated in the
State of Washington in 1978 and became a Delaware corporation in 1985. IMPCO,
together with its subsidiaries, are hereinafter referred to as the "Company."
The Company designs, manufactures and markets equipment that allows internal
combustion engines to operate on alternative fuels, primarily propane and
natural gas.
ACQUISITIONS
In October 1995, the Company acquired 51% of the outstanding stock of
Technisch Bureau Media, B.V., a private company in the Netherlands, from
Centradas B.V. for 3,187,500 Dutch Guilders (U.S. $2,023,000). In May 1998,
the Company acquired the remaining 49% equity interest from Centradas B.V.
for 1,400,000 Dutch Guilders (U.S. $693,000). The company now operates as
IMPCO Technologies, B.V. (IMPCO BV). It distributes gaseous fuel
carburetion systems, components and related devices for use in internal
combustion engines along with catalytic converters for the off-highway
industrial market. IMPCO BV services the European marketplace from its
headquarters in the Netherlands and through its subsidiaries and facilities
in Germany, France and the United Kingdom. IMPCO BV's revenues totaled
approximately $11,588,000, $9,203,000 and $5,601,000 in fiscal years 1998,
1997 and 1996, respectively.
In April 1996, the Company acquired substantially all of the business
assets of Garretson Equipment Company, Inc. (Garretson) of Mt. Pleasant, Iowa
for approximately $1,041,000. Garretson is a leading manufacturer of fuel
systems, components and related devices that allow small engines of 35
horsepower or less to run on either natural gas or propane. Major product
applications include generator sets, industrial equipment and utility engines.
In July 1996, the Company through IMPCO Technologies, Pty. Ltd (IMPCO
Pty), a wholly-owned subsidiary, acquired certain assets of Ateco Automotive
Pty. Ltd. (Ateco), including a 50% ownership interest in Gas Parts (NSW)
Pty., for a purchase price of approximately $6,532,000. Ateco distributed
IMPCO's gaseous fuel carburetion systems, components and related devices for
use in internal combustion engines since 1969. IMPCO Pty services the
Australian marketplace from its offices in Melbourne and Sydney. In January
1998, IMPCO Pty acquired the remaining 50% ownership interest in Gas Parts
(NSW) Pty. for A$225,000 (U.S. $148,500) in cash. IMPCO Pty's revenues
totaled approximately $6,893,000 in fiscal year 1998 and $7,816,000 for 10
months of operations in fiscal year 1997.
In December 1997, the Company purchased certain manufacturing equipment
and inventory of the Algas Carburetion Division of PGI International at a
purchase price of $2,400,000 paid in cash. On the same day, the Company
acquired a 90% interest in Industrias Mexicanas de Productos de Combustibles,
S. de R.L. de C.V.("Grupo I.M.P.C.O. Mexicano") at a purchase price of
$961,000 paid in cash. Immediately prior to the Company's acquisition of its
interest in Grupo I.M.P.C.O. Mexicano, Grupo I.M.P.C.O. Mexicano acquired
certain assets of the carburetion division of Algas Mexicana, de R.L. de C.V.
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In December 1997, the Company purchased from the bankruptcy trustee of
EDO Canada, Ltd. certain development, testing, quality control and
manufacturing equipment used for the manufacture of storage tanks for
compressed natural gas. The US$790,000 purchase price was paid in cash.
PRODUCTS AND MARKETS
The Company's products include fuel management systems and components,
including electronic fuel control processors, carburetors, converters or
regulators, fuel lock-offs, repair kits or replacement parts and other sundry
devices. The Company's products, sold for aftermarket conversions and as
original equipment, are used in a variety of motor vehicles, forklifts and
small portable to large stationary engines. Worldwide, the products are
marketed through distributors and original equipment manufacturers (OEM)
under the brand names IMPCO (registered trademark), BEAM(registered
trademark), GARRETSON(registered trademark), J&S Carburetion (registered
trademark), and Algas. Ease of installation, consistent performance, high
quality and safety are attributes of the Company's products.
The Company's fuel management systems are designed to offer several
levels of technology to meet customer needs. The Adaptive Digital Processor
(ADP) uses advanced electronic technology to learn and store key operating
characteristics of the specific vehicle. The ADP enhancer complements the
ADP with diagnostics and spark timing modules. The Company's Advanced Clean
Fuels Technology (ACFT) uses mass sensing hot wire anemometry to calculate
the engine's air/fuel mixture. The Company's Heavy Duty Advance Fuel
Electronics (HD-AFE) uses patented hot wire anemometry mass sensing of both
fuel and air to precisely control lean burn combustion in heavy duty engines
utilized in trucks and mass transit vehicles to maximize performance at
reduced emissions. During engine operation, an on-board computer adjusts the
mixture to achieve optimum results in engine performance to reduce emissions.
The Company is also developing a fuel injection system for ultra low emission
vehicles. These injectors are designed for vaporized natural gas or
vaporized propane for use in the latest engine technologies.
The Company's carburetors are designed for use in 5 to 5,000 horsepower
engines. The Company's liquid propane gas (LPG) converter is a two stage
regulator and vaporizer that regulates the amount of fuel entering the
carburetor and then transforms the fuel from a pressurized liquid state to a
gaseous vapor by exposing the fuel to near atmospheric pressure. The
Company's vacuum and electro- mechanical fuel lock-off devices stop the flow
of fuel when engines stop running. The vacuum fuel lock-off has been a
popular product with OEM's due to its safety characteristics.
During fiscal year 1998, sales of carburetors represented approximately
30% of consolidated product sales, converters approximately 21%, fuel
lock-offs approximately 7%, repair kits approximately 17%, electronic control
systems approximately 7%, and other products and sundry devices approximately
18%. The product sales mix during fiscal year 1998 was substantially the
same as during the prior two fiscal years.
The Company's products are sold worldwide to distributors and OEMs and
as aftermarket components and/or retrofit systems. In fiscal year 1998 sales
in the United States and Canada represented 57% of the Company's consolidated
sales. Sales by region are shown below:
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Fiscal years ended April 30,
---------------------------------
1998 1997 1996
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United States and Canada 57% 66% 67%
Pacific Rim 13% 11% 10%
Europe 19% 12% 16%
Latin America 11% 11% 7%
During fiscal year 1998, sales to distributors accounted for
approximately 55% of consolidated product sales, sales to OEM customers
accounted for approximately 39% and system conversions accounted for
approximately 6% of consolidated product sales.
Distributors primarily service the aftermarket conversion business and
small-volume OEMs, and are generally specialized and privately-owned
enterprises. Many domestic distributors have been customers of IMPCO for
more than 30 years, and most export distributors have been customers for more
than 20 years.
Most OEM customers are large engine, vehicle, and forklift manufacturers
such as Caterpillar Inc., Clark Material Handling Co., Ford Motor Company,
Generac, General Motors Corporation, Kohler Company, Mitsubishi Caterpillar
Forklift America, Inc., NACCO Material Handling Group, Onan Corporation,
Toyota Industrial Equipment Mfg. Inc. and the Waukesha Engine Division of
Dresser Industries, Inc.
The Company's older products use vacuum and mechanical controls to
regulate engine air/fuel ratios. Motor vehicle carburetors, as well as some
ancillary devices, often are mechanical and operate independent of other
engine functions. In recent years in more industrially advanced countries,
electronically controlled devices have replaced some vacuum actuated
mechanical devices to improve the engine performance and to more tightly
control the emissions from internal combustion engines. The Company has
addressed this change by introducing new electronic devices designed for
gaseous fuels that interface with the OEM electronics.
To remain competitive, the Company continues to improve its older
products and is developing new products. The Company upgraded its ACFT
gaseous fuel management system that is based on its mass-sensing technology
and proprietary software. ACFT is designed to manage air/fuel ratios to
achieve optimum air/fuel mixture and other engine functions. The Company is
enhancing its on-board computer utilizing the vehicle-specific software
required for the AFE product, a mass-sensor and the necessary hardware for a
variety of vehicle types including pickup trucks, vans and passenger cars.
The Company is focusing its ACFT marketing efforts on OEMs. The Company is
also developing improved technologies including injectors, high and low
pressure regulators, on-board diagnostics, high performance 32-bit engine
control modules, fuel lockoffs and related components. The Company believes
that it will continue to satisfy the differing engine and emission control
approaches being used on engines in its domestic and foreign markets.
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MARKET AND REGULATORY ENVIRONMENT
The Company's worldwide market is influenced by environmental laws which
regulate emission standards and energy laws which strive for energy
independence. In addition, there are certain economic advantages to using
alternate gaseous fuels in many countries. Legislation has provided
incentives and programs to promote and develop infrastructures for
alternative fueled vehicles, some requiring fleet vehicle owners to phase in
alternative fueled vehicles and imposed penalties upon failure to meet
standards and guidelines.
In the United States, the Federal Energy Policy Act of 1992 mandates
that 75% of the light duty vehicles acquired by the federal, state and
municipal governments by fiscal 2002, and thereafter, be alternative fueled
vehicles, and non-government fleet operators of 20 or more vehicles will be
required to include at least 20% alternative fueled light duty vehicles in
their total vehicle purchases by fiscal 2002. Beginning 2006 and thereafter,
70% of the vehicles acquired by fleet operators of 20 or more must be
alternative fueled vehicles.
Companies that manufacture retrofit systems for use in California are
required to comply with requirements under Title XIII, which require that a
certain percentage of retrofit conversions be certified, inspected, carry a
product warranty and comply with new emission standards. For vehicle model
year 1998 and 1999, the Company will be required to certify all of its
retrofit engine families. Manufacturers are also required to conduct 100,000
mile durability tests and comply with in-service emission standards. The
Environmental Protection Agency has adopted similar requirements for the
entire United States beginning in 2002.
Several other states have adopted similar regulations and mandates which
are expected to increase the demand for alternative fuels. These include
Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Hawaii, Iowa,
Kansas, Louisiana, Massachusetts, Missouri, New Hampshire, New Mexico, New
York, Oklahoma, Oregon, Texas, Utah, Virginia, Washington and West Virginia.
In addition, legislation to foster energy independence and/or reduce
pollution is spurning growth in the use of gaseous fuels in countries such as
Australia, Mexico, Chile, China, Netherlands, Taiwan, Turkey and Venezuela.
STRATEGIC MARKETING PLAN
The Company's goal is to retain its position as one of the world's
leading suppliers of engine components and systems that allow internal
combustion engines to operate on gaseous fuels. A key element of the
Company's steady growth has been the diversity of markets that its products
serve. The increasing worldwide demand for gaseous alternative fuel
management products and systems for motor vehicle uses, material handling
equipment, and industrial and heavy duty mobile engines, provides the Company
with a broad market foundation and eliminates dependency on a single market
segment. The Company's two largest markets, motor vehicle (primarily fleet
vehicles) and material handling (primarily forklifts), accounted for
approximately 83% of the Company's consolidated product sales in the last
fiscal year. See "Products and Markets." Of these two markets, the motor
vehicle market is believed to have the greatest potential for significant
growth. The Company anticipates that this growth will result from worldwide
governmental regulations imposing more stringent emission standards to
achieve energy independence. See "Market and Regulatory Environment."
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The Company's global short-term strategy is to continue its presence in
the retrofit market for fleet vehicles and to continue introducing upgrades
to its existing products. The Company will also continue its presence in
both the retrofit and OEM market by promoting its products to meet the
expected demand for equipment which will allow motor vehicle engines to meet
the more stringent emission regulations. The Company's strategy for future
participation in the U.S. retrofit market will be limited to motor vehicle
applications which will provide large potential conversions and can be
economically justified.
In the long-term, the worldwide demand for alternative fueled vehicles
is making it feasible for OEM production. The Company has taken steps to
become a preferred OEM supplier for gaseous fuel components. During the last
fiscal year, the Company signed a five-year teaming agreement with General
Motors Corporation to develop clean gaseous fuel delivery systems for
passenger cars and medium- and light-duty trucks. Development programs and
the commercialization of OEM vehicles with IMPCO systems is on-going in
Mexico, Australia, Japan, China, and South America. In addition, the
Company's recent acquisition of EDO's tank technology and equipment will
extend the Company's capabilities from tank testing and research and
development into the next generation of fuel storage systems. Development of
fuel storage technology is an important component of the Company's long-term
strategy to be the premier Tier 1 component supplier to automotive OEMs. The
Company believes that product quality is essential for OEM recognition and it
is continually upgrading its quality assurance program.
The Company's aftermarket products are primarily marketed through a
network of specialized distributors which the Company expects to continue to
utilize for its existing product lines. However, under recent regulations in
the U.S., the Company and its installers are required to certify their
products and services. To meet these requirements, the Company is seeking new
channels of distribution to complement its existing distributor network.
The Company has expanded the marketing of its older non-electronically
controlled products in countries with less stringent emission standards than
those in the United States. This strategy is being applied in Central and
South America, Eastern Europe and the Far East. In countries such as Mexico
and Taiwan, where the level of emission standards is increasing, but is not
as stringent as in the United States, the Company's strategy is to upgrade
its older products to improve both emission levels and engine performance.
Significant changes are also occurring in the forklift industry. The
increased emphasis on emissions and durability will require engine and
equipment manufacturers to consider new fuel and engine management products
as a part of a complete, certified engine package. The Company is starting
to work closer with the OEMs in order to manage this change and meet these
new requirements. The Company expects the marketing and distribution of
forklift products to continue with a strong OEM focus.
The primary growth potential for the industrial engine and heavy duty
mobile engine business is in the power generation market and the heavy duty
mobile gas engines used in trucks and buses. North American generator set
production continues to increase in response to growing global demand. Many
of these sets are fueled by propane or natural gas. The growth in the heavy
duty mobile engine market will be supported by the increased worldwide
government mandates for clean air, such as the Clean air Act of 1990, the
Energy Policy Act of 1992 and the EURO 3 European emission standards. The
Company has been developing advanced
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electronic heavy duty fuel systems for a number of heavy duty OEMs for trucks
and buses utilizing compressed natural gas and liquefied natural gas.
COMPETITION AND OTHER MARKET FACTORS
The Company estimates there are approximately twenty-three manufacturers
of gaseous fuel delivery components and/or delivery systems. IMPCO, Landi,
Tartarini, OMVL, GFI, Koltec & Vialle are estimated to account for over 90%
of the world market. The Company has competitors in various worldwide market
segments in the motor vehicle gaseous fuel equipment industry. Landi,
Tartarini and OMVL are major competitors in the Southern Europe and South
America motor vehicle market. Vialle is a competitor in the European and
Australian markets. Koltec is a competitor in the Dutch market and the Far
East. GFI primarily serves the North American motor vehicle market.
Overall, the Company estimates that it has an approximate 35% market share of
the world market for gaseous fuel delivery components and/or systems for the
motor vehicle market.
The Company estimates that it has a greater than 80% market share in the
material handling and industrial engine market. Competitors include Nolff
Manufacturing and AISAN who combined, have less than a 5% market share.
Other competitors are mostly local manufacturers of repair kits and other
maintenance components for IMPCO products.
To be competitive into the future, the Company believes it will be
necessary to continue to enhance its gaseous fuel engine management products
utilizing mass-sensing, electronic and electro- mechanical technology. The
Company anticipates that the gaseous fuel equipment industry will be
experiencing rapid technological changes in the next ten years. This should
result in the majority of the existing competitors being limited in the market
place because of their lack of adequate capital or their lack of willingness to
develop high tech, low emission products now being required by future emissions
laws. However, the Company anticipates new competitors will enter the
alternative fuel marketplace due to the potential increase in the size of the
market. These competitors may include large motor vehicle OEMs who may adapt
their existing gasoline technology to alternative fueled vehicles.
MANUFACTURING
The Company's products are presently manufactured in the Company's
facilities in Cerritos and Irvine, California. Manufacturing operations consist
largely of mechanical assembly with light machining. A machining facility is
also operated in Mt. Pleasant, Iowa. The Company places substantial reliance on
outside vendors for parts, components and electronic assemblies. It obtains
product components from a variety of domestic motor vehicle and electronic part
suppliers and assemblers, diecasters, metal stamping and machine shops. In
fiscal year 1998, 10 suppliers accounted for approximately 55% of raw material
purchases and one supplier accounted for approximately 18% of such purchases.
Material costs represent the major component of cost of sales.
Coordination with suppliers for quality control and timely shipment is
critical to maximize the Company's inventory management. The Company uses a
computerized material requirements planning system to schedule material flow and
balance the competing demands of timely shipments, productivity and inventory
management.
8
The Company has not experienced, and does not expect to experience, any
significant difficulty in complying with environmental regulations applicable
to its manufacturing processes and facilities.
PRODUCT CERTIFICATION
The Company must obtain certification from the Environmental Protection
Agency (EPA) to sell certain of its products in the United States and from
the California Air Resources Board to market certain products in California.
In September 1997 EPA modified the phase-in program (Option 3 of EPA
Memorandum 1-A) to ease certification requirements for retrofit conversions
through model year 1999. California regulations require that all of model
year 1997, 1998, and future retrofit conversions be certified, inspected,
carry a product warranty and comply with new emission standards.
Manufacturers are also required by the EPA and California regulations to
conduct 100,000 mile durability tests for retrofit vehicles. Some other
states have similar types of regulations. The Company's continued
participation in the U.S. retrofit market will be closely monitored as the
business transitions to OEM vehicles.
The Company seeks product approval by Underwriters Laboratories, Inc.
(UL(registered trademark)), the American Gas Association, and international
approval services on certain products. While approval is not always
required, the Company believes such approval enhances the acceptability of
products in the domestic marketplace. Many foreign countries also accept
these agency approvals as satisfying "approval for sale" requirements in
their markets.
PATENTS AND TRADEMARKS
The Company holds a number of domestic and foreign patents. While the
Company believes that these patents and patent applications protect certain
proprietary rights and technologies, there can be no assurance that any
existing and future patents will provide such protection. Moreover, the
Company believes that its growth and future success are more dependent upon
technical expertise and marketing skills than on the ownership of patent
rights. Also, other technology exists which performs functions substantially
equivalent to the technology covered by the Company's patents and patent
applications, and that technology may be used by others without infringing
upon the Company's patents.
The "IMPCO", "BEAM", "GARRETSON" and "CARBURETION J&S" marks are
registered as trademarks on the United States Principal Register. They are
also registered in various other countries throughout the world.
BACKLOG
The Company's backlog consists of anticipated sales of products for
which the Company has confirmed orders scheduled for shipments over the next
90 days. Such backlog was approximately $10,894,000 and $11,500,000 at April
30, 1998 and April 30, 1997, respectively. The Company believes that backlog
as of any date is not necessarily indicative of future product sales.
EMPLOYEES
The Company employed 446 persons worldwide as of April 30, 1998. None of the
employees are represented by labor unions, and rapport with employees is
believed to be good.
9
YEAR 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of
operational systems both internally and externally. The Company has
completed its assessment of the Year 2000 issue through 1) communication with
key customers, suppliers, financial institutions and others with which it
conducts business and 2) review of its current internal computer systems to
identify potential Year 2000 issues. Based on this assessment, the Company
is not aware of any key customer, supplier, or financial institution with
inadequate solutions. The Company has developed plans to address system
modifications required by December 31, 1999 and these plans basically require
the upgrade to new versions of packaged software. The Company plans to have
all systems upgraded by December 1998. The financial impact of making the
required systems changes is not expected to be material to the Company's
consolidated financial position, results of operations or cash flows.
10
ITEM 2 - PROPERTIES
The Company's executive offices and primary manufacturing facilities are
located in Cerritos, California and occupy 105,000 square feet in two
buildings at a single 4-acre location. The Company's Technology and
Automotive OEM Center is located in Irvine, California and occupies 80,000
square feet in one building at a 3-acre location. The Company believes these
facilities are adequate for its core product manufacturing operations and OEM
development programs and production. The Cerritos site is leased until May
1999, with two 5-year renewal options. The Irvine site is leased until
August 2004, with two 5-year renewal options. The Company maintains a
research and development facility in a suburb of Seattle, Washington which
occupies approximately 10,000 square feet in a portion of an office park
building. These premises are leased until December 2000. The Company also
owns a machine shop in Mt. Pleasant, Iowa which occupies approximately 16,500
square feet at an industrial site. The Company's facility in Rijswijk,
Holland occupies approximately 16,000 square feet and is leased until October
31, 2000, with a five year renewal option. The Company's facility in
Cheltenham, Australia occupies approximately 15,000 square feet and is leased
until May 31, 2001, with a four year renewal option. The Company's facility
in Mexico City, Mexico occupies approximately 3,500 square feet and is leased
until December 1998.
ITEM 3 - LEGAL PROCEEDINGS
The Company is a party to several legal actions, but based on
discussions with legal counsel, management does not believe that any of these
actions will have a material adverse effect on its business or financial
condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year ended April 30, 1998.
FORWARD-LOOKING STATEMENTS
The statements contained in this Part I that are not historical in nature
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those identified
in "Certain Facors" at the end of Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
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PART II
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ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The Nasdaq Stock Market under the
symbol "IMCO". All common stock prices are closing prices per The Nasdaq Stock
Market.
Fiscal year 1998 Fiscal year 1997
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Quarter Ended High Low High Low
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July 31 $ 10 $ 6 7/8 $ 11 1/8 $ 8
October 31 12 5/8 9 5/8 9 7/8 6
January 31 12 3/8 9 1/4 10 7/8 5 3/4
April 30 13 1/8 11 1/4 11 7/8 7 1/2
On June 30, 1998, there were 546 holders of record of the Company's common
stock.
The Company has never paid dividends on its common stock. It intends to
retain future earnings to finance the operation and expansion of its business
and does not anticipate paying cash dividends in the foreseeable future on
common stock.
The holders of the 1993 Series 1 Preferred Stock are entitled to
cumulative cash dividends in an amount equivalent to interest at an annual rate
per share (based on a deemed value of $1,000 per share) equal to the
Seattle-First National Bank prime rate of interest, plus 1.5%, but not to exceed
$105 per share nor be less than $80 per share annually.
12
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
In thousands, except per share amounts
-----------------------------------------------------
Fiscal Years Ended April 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Statement of
operations data:
- -----------------
Net revenue(1) $ 71,083 $ 61,828 $ 51,575 $ 45,231 $ 36,410
Research and
development expense 13,337 8,480 7,171 6,197 5,103
Operating income 7,118 4,850 4,132 3,540 3,069
Financing charges 935 1,100 504 292 320
Net income(2) 4,865 3,225 4,671 2,967 2,511
Preferred stock expenses(3) 595 581 610 548 612
Net income applicable
to common stock 4,270 2,644 4,061 2,420 1,898
Net income per share(4):
Primary .67 .46 .72 .43 .34
Fully diluted .60 .43 .64 .39 .31
Number of shares used in
per share computation(4):
Basic 6,334 5,722 5,648 5,620 5,515
Diluted 8,155 6,131 7,300 6,272 6,200
Balance sheet data:
- --------------------
Total current assets $ 37,492 $ 29,904 $ 24,578 $ 13,626 $ 10,420
Total assets 57,385 47,113 37,728 22,109 17,464
Total current liabilities 11,417 11,656 9,266 5,111 4,810
Long-term obligations 10,594 12,721 8,823 1,855 334
Stockholders' equity 34,305 22,063 19,256 15,143 12,320
- ---------------------------
See accompanying notes.
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Includes contract revenue during fiscal year ended April 30, 1998, 1997,
1996, 1995 and 1994, of $8,873,554, $3,391,528, $3,087,229, $1,523,952 and
$3,880,416, respectively. See note 12 of the Notes to "Consolidated Financial
Statements."
(2) Includes an income tax benefit of $1,700,000, due to the reduction in the
valuation allowance for deferred tax assets and $318,000 net income from the
Company's European subsidiary during the year ended April 30, 1996. See note 5
of the Notes to "Consolidated Financial Statements."
(3) Includes dividends on Preferred.
(4) During fiscal year 1998, the Company adopted FAS 128, Earnings Per Share,
and all prior years have been restated. During fiscal years 1996 and 1998,
shares assumed to be issued upon conversion of the Company's preferred stock
were included in the calculation since it resulted in a reportable dilution.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not historical in nature
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those identified
in "Certain Factors" at the end of this discussion and other factors identified
from time to time in the Company's reports filed with the Securities and
Exchange Commission. All period references are to the Company's fiscal periods
ended April 30, 1998, 1997 or 1996, unless otherwise indicated.
Overview
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IMPCO Technologies, Inc. designs, manufactures and markets equipment that
allows internal combustion engines to operate on alternative gaseous fuels,
primarily propane and natural gas. The Company's products include fuel
management systems and components, and are sold for maintenance, aftermarket
conversions and as original equipment on motor vehicles, forklifts and small
portable to large stationary engines. Worldwide, the products are marketed
through distributors and original equipment manufacturers.
Results of Operations
- ----------------------
Acquisitions
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In fiscal year 1996, the Company acquired 51% of the outstanding stock of
Technisch Bureau Media, B.V. and on May 1, 1998 acquired the remaining 49%
interest. Its European subsidiary is now operated under the name IMPCO
Technologies, B.V. (IMPCO BV) and had revenues of approximately $11,588,000,
$9,203,000 and $5,601,000 in fiscal years 1998, 1997 and 1996, respectively.
In fiscal year 1996, the Company acquired substantially all of the business
assets of Garretson Equipment Company, Inc. (Garretson) of Mt. Pleasant, Iowa.
Garretson is a leading manufacturer of fuelsystems, components and related
devices that allow small engines of 35 horsepower or less to run on either
natural gas or propane. Major product applications include generator sets,
industrial equipment and utility engines.
In fiscal year 1997, the Company through IMPCO Technologies, Pty. Ltd
(IMPCO Pty), a wholly-owned subsidiary, acquired certain assets of Ateco
Automotive Pty. Ltd. (Ateco), including a 50% ownership interest in Gas Parts
(NSW) Pty. In fiscal year 1998, IMPCO Pty acquired the remaining 50% ownership
interest in Gas Parts (NSW) Pty. IMPCO Pty's consolidated revenues totaled
approximately $6,893,000 in fiscal year 1998 and $7,816,000 for 10 months of
operations in fiscal year 1997.
In fiscal year 1998, the Company purchased certain manufacturing equipment
and inventory of the Algas Carburetion Division of PGI International. On the
same day, the Company acquired a 90% interest in Industrias Mexicanas de
Productos de Combustibles, S. de R.L. de C.V. ("Grupo I.M.P.C.O. Mexicano").
Grupo I.M.P.C.O. Mexicano had revenues of approximately $823,000 in fiscal year
1998.
14
In fiscal year 1998, the Company purchased from the bankruptcy trustee of
EDO Canada, Ltd. certain development, testing, quality control and manufacturing
equipment used for the manufacture of storage tanks for compressed natural gas.
Net Revenue
- --------------
The Company's net revenue for fiscal year 1998 increased by $9,255,000 or
15% compared to a $10,253,000 or 20% increase in fiscal year 1997. For the
current year, contract revenues, primarily from the General Motors Corporation
program, represented $5,482,000 of this increase.
Product sales for fiscal year 1998 and 1997 increased by approximately 6%
and 21%, respectively. During 1998, the increase in product sales was
unfavorably reduced by $2,326,000, or 4% as a result of the negative effects of
a strengthening U.S. dollar against foreign currencies. The following table
sets forth the Company's product sales by application, (all dollars in
thousands):
Fiscal years ended April 30,
---------------------------------
1998 1997 1996
--------- --------- ---------
Motor vehicle products $ 21,870 $ 23,784 $ 17,063
Forklifts and other
material handling equipment 29,493 23,291 23,316
Small portable to
large stationary engines 10,846 11,362 8,108
--------- --------- ---------
Total product sales $ 62,209 $ 58,437 $ 48,487
--------- --------- ---------
--------- --------- ---------
During fiscal year 1998, net revenue attributable to the Company's motor
vehicle products decreased by $1,914,000, or 8%, over 1997. This decrease in
motor vehicle product sales was unfavorably impacted by the negative effects of
a strengthening U.S. dollar against foreign currencies of $817,000, or 3%.
During fiscal year 1997, sales for the motor vehicle products increased by
$6,721,000, or 39%, over 1996. The primary reason for the fiscal year 1997
increase was the addition of the Australian subsidiary which increased
consolidated revenues by $5,294,000 from 1996 to 1997. The following table sets
forth the Company's worldwide motor vehicle product sales by component parts and
upfitting systems, (all dollars in thousands):
Fiscal years ended April 30,
---------------------------------
1998 1997 1996
--------- --------- ---------
Motor vehicle component parts $ 18,152 $ 20,864 $ 13,982
Motor vehicle upfitting systems 3,718 2,920 3,081
--------- --------- ---------
Total motor vehicle products $ 21,870 $ 23,784 $ 17,063
--------- --------- ---------
--------- --------- ---------
Sales for the Company's motor vehicle component parts in 1998 decreased
$2,712,000, or 13%, as compared with 1997. Thirty percent (30%) of this
decrease was attributable to the strengthening of the U.S. dollar. Also, the
decrease resulted from lower product sales for aftermarket conversions in the
U.S. market due to new regulatory requirements shifting the automotive
15
conversion market to direct OEM upfits. Additionally, the decrease resulted
from lower product sales in Australia as a result of a general economic slowdown
and unfavorable price differentials between petroleum and alternative fuels
which unfavorably impacted the Company's component sales. These decreases were
slightly offset by $603,000 in incremental revenues generated by the newly
acquired Mexican operation. For fiscal year 1997, the increase in component
parts sales, as compared to 1996, was primarily due to incremental revenue of
$5,294,000 resulting from its Australian acquisition. Increased sales to Latin
America accounted for most of the remaining increase. Management anticipates
that revenue attributable to the Company's motor vehicle component parts will be
higher during fiscal year 1999 as compared to 1998 primarily as a result of a
full year of operations for the Mexican subsidiary and an increase in demand in
Latin America. This is a forward-looking statement. See "Certain Factors"
below.
During fiscal year 1998, revenue attributable to upfitting vehicles with
the Company's systems increased by $798,000, or 27%, compared to the previous
fiscal year. This upfitting revenue represented sales of 438 mid-year 1997 GM
pick-ups upfit with the Company's bi-fuel natural gas fuel system and sales of
880 1998 medium-duty dedicated Liquid Propane Gas (LPG) kits under a cross
license agreement with General Motors. During fiscal year 1997, a portion of
revenue attributable to upfitting vehicles for aftermarket fleet use in 1997
resulted from a program with Ford Motor Company in which the Company's bi-fuel
propane system was utilized in 1996 model year F-150 and F-250 pickup trucks.
The Ford program was materially completed during the first quarter of fiscal
year 1997. During the third quarter of fiscal year 1997, the Company began
converting postal vehicles to compressed natural gas under a $1.5 million Postal
Service contract. Deliveries were completed during the fourth quarter of fiscal
year 1997. During fiscal year 1996, upfitting revenue primarily resulted from a
Postal Service contract to convert postal vehicles to compressed natural gas and
initial shipments of the aforementioned 1996 model year F-150 and F-250 Ford
trucks utilizing the Company's bi-fuel propane system. Management anticipates
that the commercialization by General Motors Corporation of model year 1998 and
1999 Chevrolet and GMC pickup trucks, and other vehicles, with the Company's
systems will result in significantly higher upfitting revenue during fiscal year
1999. Although the current labor disputes at General Motors are not impacting
the upfit programs that are in process, the length of the disputes could impact
future delivery schedules and upfitting revenues. These are forward looking
statements. See "Certain Factors" below.
During fiscal year 1998, net revenue attributable to the Company's products
for forklifts and other material handling equipment increased by approximately
$6,202,000, or 27%, over 1997. This increase in forklift related product sales
was unfavorably impacted by the negative effects of a strengthening U.S. dollar
against foreign currencies of $1,509,000 or 6%. During fiscal year 1998, the
Company realized increased revenues of $2.4 million from its European operations
which primarily sells material handling equipment. Without the strengthening
U.S. dollar, revenues from European operations would have increased $3.9 million
for fiscal year 1998. The remaining increase in sales was derived from domestic
operations. Both the European and domestic operations realized increases as a
result of the general upswing in economic conditions. Total revenue from
forklifts and material handling equipment in fiscal year 1997 was comparable to
1996 revenue. Management anticipates that sales for forklifts and other
material handling equipment in fiscal year 1999 will be comparable to 1998.
Management projects increases in the European market but will be offset by a
decline in the Asian market. In addition, it is anticipated in the near future
that the California Air Resources Board (CARB) and the Environmental Protection
Agency (EPA) will adopt emission requirements for forklifts and other material
handling equipment that are similar to those being adopted for
16
the motor vehicle industry. These are forward-looking statements. See
"Certain Factors" below.
During fiscal year 1998, sales of small portable to large stationary
engines decreased $516,000, or 5% over sales in 1997. The decrease is
related to new EPA regulations affecting the small engine aftermarket.
During fiscal year 1997, sales of small portable to large stationary engines
increased $3,254,000, or 40%, over sales in 1996. The increase was
attributable to the Garretson product line purchased in April 1996 and to
higher demand for large and small power generation units used in power
replacement and recreational applications. Management anticipates that
revenue from industrial engines in fiscal year 1999 will be higher compared
to 1998 levels. This is a forward-looking statement. See "Certain Factors"
below.
Contract revenue was 12% of total revenue in fiscal year 1998, as compared
to 5% and 6% in 1997 and 1996, respectively. During 1998, total contract
revenue increased by approximately $5.5 million, or 162%, as compared to 1997.
During 1997, total contract revenue increased by approximately $304,000, or 10%,
as compared to 1996. These increases were due to the addition of several
gaseous fueled vehicle platforms for development under the contract with General
Motors Corporation and to development contracts obtained from various federal
and state agencies. Contract revenue is principally recognized by the
percentage of completion method. Profits expected to be realized on contracts
are based on the Company's estimates of total contract sales value and costs at
completion. These estimates are reviewed and revised periodically throughout
the lives of the contracts. Based on the expected increases in vehicle
platforms and new developmental contracts, management anticipates that contract
revenues during fiscal year 1999 will be significantly higher than 1998. This
is a forward-looking statement. See "Certain Factors" below.
During fiscal year 1998, 1997, and 1996 the Company's product revenue was
generated in the following geographic regions:
Fiscal years ended April 30,
---------------------------------
1998 1997 1996
--------- --------- ---------
United States and Canada 57% 66% 67%
Pacific Rim 13% 11% 10%
Europe 19% 12% 16%
Latin America 11% 11% 7%
Gross Profit Margin
- ---------------------
The Company's gross profit margin on product sales during fiscal year 1998
was $24,040,000 (39%) compared to $21,095,000 (36%) for the prior year. During
the current year, the Company's domestic operations contributed approximately
$2.0 million to the increase through higher sales volumes and as a result of a
higher gross margin percent realized by lower material costs. The foreign
operations contributed approximately $.9 million to the gross margin increase
due to the addition of the Mexican operation during 1998, a full year of
reporting for the Australian operation, and higher sales volumes at the European
operation. The gross profit margin percentage realized at the foreign
operations during the current year is comparable to the percentage realized
during fiscal year 1997.
The Company's gross profit margin on product sales during fiscal year 1997
was $21,095,000 (36%) compared to $16,476,000 (34%) for fiscal year
17
1996. The Company's foreign operations contributed approximately $3.2
million to this increase as a result of a full year of reporting for the
European operation and the addition of the Australian operation during fiscal
1997. Favorable market driven sales price adjustments and product mix
improvements from domestic operations translated into higher gross profit
percents and accounted for the remaining increase in margins from 1996 to
1997.
Management anticipates that percent profit margins will continue to be
favorably impacted by higher production volumes and volume purchases, but will
be offset by the higher revenue and inherently lower upfitting margins as
upfitter sales become a larger segment of the Company's business. In addition,
gross profit percentages at the foreign operations could be lower in the future
as a result of the strengthening U.S. dollar versus foreign currencies.
However, as the upfitter business and sales volumes increase, overall gross
profits are expected to increase. These are forward-looking statements. See
"Certain Factors" below.
Research and Development
- ---------------------------
Research and development (R&D) expense for fiscal year 1998 increased by
$4.9 million to $13.3 million, a 57% increase over fiscal year 1997. R&D
expense directly related to the GM program increased from $3.0 in 1997 to $4.7
million in 1998. R&D expense for fiscal year 1997 increased by $1.3 million to
$8.5 million, an 18% increase over fiscal year 1996. R&D expense directly
related to the GM program increased from $1.6 in 1996 to $3.0 million in 1997.
The remaining increase in R&D expense was primarily for internally funded
product and other contract R&D work with Perkins Technology Limited and the
Southern California Air Quality Management District. Management believes the
Company's future success depends on its ability to design, develop and market
new products that interface successfully with new engine electronic technology,
and which meet mandated emission standards. Management anticipates that R&D
expense during fiscal year 1999 will be continue to be higher than the levels
experienced during fiscal year 1998 due to internally funded development work
and new product development under the GM contract and other contract development
work. This is a forward-looking statement. See "Certain Factors" below.
Selling General and Administrative
- -------------------------------------
Selling, general and administrative (SG&A) expense for fiscal year 1998
increased by approximately $1.3 million, or 12%, as compared to the prior fiscal
year. This increase was primarily due to the addition of the Mexican
subsidiary, inclusion of IMPCO Pty's SG&A expenses for a full fiscal year versus
only ten months in the previous fiscal year, and increased administrative
expenses from the U.S. operations. These expenses included administrative
salaries, incentive compensation, and legal expenses. However, as a percentage
of net revenues, SG&A expense decreased from 18% in fiscal year 1997 to 17.5% in
the last fiscal year.
SG&A expense for fiscal year 1997 increased by approximately $2.9 million,
or 35%, as compared to fiscal year 1996. The combined SG&A expenses for the
Company's European and Australian operations in 1997 were $4,526,000, compared
to $1,357,000 for European expenses only in 1996. SG&A as a percentage of sales
increased from 16% to 18% due to the Company's foreign operations. The European
facilities distribute alternative fuel products from multiple locations in
Europe and incur higher SG&A expenses as a percentage of sales than the
Company's domestic operations.
18
Management anticipates that SG&A expense for fiscal year 1999 will be
higher than fiscal year 1998 primarily as a result of additional expenses to
support anticipated growth in revenues and including a full year of the Mexican
operation. However, as a percentage of net revenues, SG&A expense is expected
to be lower for fiscal year 1999 as compared to 1998. These are forward-looking
statements. See "Certain Factors" below.
Financing charges
- --------------------
Financing charges for fiscal year 1998 decreased by approximately 15% as
compared to 1997. The decrease is attributable to lower borrowings on the
Company's line of credit as compared to the prior year and prepayments on
long-term borrowings primarily from funds received from the Company's
redemption of its common stock purchase warrants. Financing charges for
fiscal year 1997 increased by approximately 118% over 1996 due to loans
associated with the acquisitions of IMPCO BV and IMPCO Pty, and the increased
use of the line of credit. Management anticipates that financing charges for
fiscal year 1999 will be lower as compared to the current fiscal year. This
is a forward-looking statement. See "Certain Factors" below.
Provision for income taxes
- --------------------------
The Company's effective income tax rate for fiscal years 1998, 1997, and
1996 were 14.7%, 7.0%, and (37.2%), respectively. Provision for taxes
consist primarily of federal, state and foreign income taxes which are
computed using statutory rates. The effective tax rate represents the
statutory income tax rate reduced by the use of net operating loss
carryforwards, R&D tax credits and other items. During fiscal year 1996, the
Company reduced its valuation allowance for deferred tax assets as required
by SFAS No. 109 and recorded $1,700,000 of income tax benefits primarily
related to the assumed future utilization of net operating loss
carryforwards. During fiscal year 1997, the deferred tax asset increased by
$273,000 to $1,973,000 at April 30, 1997. During fiscal year 1998, the
deferred tax asset decreased by $373,000 to $1,600,000 at April 30, 1998.
For federal income tax purposes, the Company has utilized all net operating
loss carryforwards as of the end of the 1998 fiscal year. Management has
determined, based on the Company's history of prior operating earnings and
its expectations for the future, that operating income of the Company will
more likely than not be sufficient to recognize fully these net deferred tax
assets and that the estimated effective annual rate in the future years will
approximate the statutory rate. This is a forward-looking statement. See
"Certain Factors" below.
Liquidity and Capital Resources
- --------------------------------
The Company uses cash generated from its operations and external financing
to fund capital expenditures, pay dividends on the preferred stock and invest in
and operate its existing operations and new businesses. Management believes
that such sources of funds will be sufficient to meet the needs of its business
for the foreseeable future. This is a forward-looking statement. See "Certain
Factors" below.
The Company's financial condition remains strong. The ratio of current
assets to current liabilities was 3.28 at April 30, 1998, as compared to 2.57 at
the end of fiscal year 1997. The total amount of working capital increased by
$7,827,000 to $26,075,000 at the end of fiscal year 1998. This
19
compares to $18,248,000 at the end of the prior year. Net cash provided by
operating activities was $1,508,000 during fiscal year 1998, compared to net
cash provided by operating activities of $3,708,000 and $2,578,000 in fiscal
years 1997 and 1996, respectively. The decrease in cash provided by
operating activities during the last fiscal year resulted from a $3.7 million
increase in inventory and a $3.4 million increase in accounts receivable.
The increase in inventory was primarily due to the Algas acquisition and a
temporary buildup of inventory in anticipation of future upfitter and core
product sales. The increase in accounts receivable was primarily due to
April 1998 billings on the GM program. The decrease in cash provided by
operating activities was partially offset by a $1.6 million increase in net
income during fiscal year 1998 compared to the prior fiscal year.
Net cash used in investing activities in fiscal year 1998 was approximately
$5,763,000, a decrease of approximately $623,000 from 1997. Included in this
amount is equipment purchased from EDO Canada Ltd., dies, tooling and equipment
purchased from the Algas Carburetion Division of PGI International, the
Company's normal capital expenditures for dies, molds and patterns and machinery
and equipment, and the investment in IMPCO Mexicano. Investing activities for
the prior year principally included the purchase of the Company's Australian
subsidiary, which resulted in a net use of cash of approximately $4,655,000.
Capital expenditures for dies, molds and patterns and machinery and equipment
totaled $3,220,000 in fiscal year 1998, compared to $1,702,000 in fiscal year
1997 and $1,996,000 in fiscal year 1996. Management projects capital
expenditures during fiscal year 1999, primarily relating to equipment
enhancements and facilities for the development and production of new products,
to be comparable to expenditures during the fiscal year 1998. The Company
expects to fund a major portion of these expenditures from cash generated from
operations and by use of its bank credit facility. These are forward-looking
statements. See "Certain Factors" below.
Net cash provided by financing activities in fiscal year 1998 was
approximately $5,051,000. The Company received approximately $8,454,000 from
the issuance of common stock as a result of the exercise of common stock
purchase warrants. It also received approximately $3,993,000 from the Bank
of America credit facility to fund the Algas and IMPCO BV acquisitions. The
Company decreased its borrowing under the operating line of credit by
approximately $2,407,000 and made $4,403,000 in principal repayments on term
loans and notes. Approximately $2,335,000 of the loan and note payments
represented pre-payments. Net cash provided by financing activities in fiscal
year 1997 was approximately $4,174,000, of which $3,968,000 was from a term
loan with Bank of America to finance the acquisition of the Company's
Australian subsidiary. During fiscal year 1997, the Company increased its
borrowing under the operating line of credit by approximately $2,050,000
primarily for current operations and material purchases.
The Company has a $12,000,000 revolving line of credit and a $5,525,000
capital lease facility with Bank of America. At April 30, 1998,
approximately $3,048,000 and $2,625,000 was outstanding under the revolving
line of credit and the capital lease facility, respectively. The revolving
line of credit expires on August 31, 1999, and the capital lease facility
expires on December 31, 2003. In addition, the Company's subsidiary in the
Netherlands has a 3,000,000 NLG (U.S. $1,500,000) credit facility with Mees
Pierson, a financial institution in the Netherlands.
20
Derivative Financial Instruments
- --------------------------------
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest and foreign exchange
rates. While these hedging instruments are subject to fluctuations in value,
such fluctuations are generally offset by the value of the underlying exposures
being hedged. The Company is not a party to leveraged derivatives and does not
hold or issue financial instruments for speculative purposes.
(a) Foreign Currency Management
The results and financial condition of the Company's international
operations are affected by changes in exchange rates between certain foreign
currencies and the U.S. Dollar. The Company's exposure to fluctuations in
currency exchange rates has increased as a result of the growth of its
international subsidiaries. The functional currency for all of the Company's
international subsidiaries is the local currency of the subsidiary. An
increase in the value of the U.S. dollar increases costs incurred by the
subsidiaries because most of its international subsidiaries' inventory
purchases are U.S. dollar denominated. The Company monitors this risk and
attempts to minimize the exposure through forward currency forward contracts
and the management of cash disbursements in local currencies. At April 30,
1998 the Company had currency forward contracts protecting U.S.$600,000 in
inventory purchases. At April 30, 1998 the fair value of foreign currency
forward contracts approximated contract values. On May 29, 1998 the Company
entered into six currency forward contracts to protect an additional
U.S.$1,200,000 in inventory purchases.
The Company seeks to hedge its foreign currency economic risk by
minimizing its U.S. dollar investment in foreign operations using foreign
currency term-loans to finance the operations of its foreign subsidiaries.
The term loans are denominated in local currencies and translated to U.S.
dollars at period end exchange rates.
(b) Interest Rate Management
The Company uses interest rate swap agreements with Bank of America to
manage its exposure to interest rate changes and stabilize the cost of
borrowed funds. When an agreement is executed, the swap is linked to a
specific debt instrument. At April 30, 1998, the Company had $4,160,000
secured under fixed interest rate agreements at a weighted average fixed
interest rate of 7.78%. Absent these fixed rate agreements, the weighted
average variable rate for this debt at April 30, 1998 would have been 7.38%.
At April 30, 1998 the fair value of interest rate swap agreements
approximated carrying value. On May 29, 1998 the Company secured an
additional $3,271,000 under a fixed interest rate agreement.
Year 2000
- ---------
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems both
internally and externally. The Company has completed its assessment of the Year
2000 issue through 1) communication with key customers, suppliers, financial
institutions and others with which it conducts business and 2) review of its
current internal computer systems to identify potential Year 2000 issues. Based
on this assessment, the Company
21
is not aware of any key customer, supplier, or financial institution with
inadequate solutions. The Company has developed plans to address system
modifications required by December 31, 1999 and these plans basically require
the upgrade to new versions of packaged software. The Company plans to have
all systems upgraded by December 1998. The financial impact of making the
required systems changes is not expected to be material to the Company's
consolidated financial position, results of operations or cash flows.
Certain Factors
- ----------------
The preceding discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company faces a
number of risks and uncertainties which could cause actual results or events to
differ materially from those contained in any forward-looking statement.
Factors that could cause or contribute to such differences include, but are not
limited to, the following:
DELAY IN IMPLEMENTATION OF GOVERNMENT REGULATIONS
The market for alternative fueled vehicles and the demand for the Company's
products are, to a significant degree, driven by local, state and federal
regulations in the United States related to air quality and requiring conversion
of motor vehicles to alternative fuels. The Company's international business is
also affected by similar foreign governmental regulations. Timing in the
implementation of these regulations could have an unfavorable impact on the
Company's financial performance.
DEPENDENCE ON ALTERNATIVE FUEL MARKET
Although the Company believes that there will be substantial growth in the
market for alternative fueled engines, especially among fleet vehicle owners,
there can be no assurance that such growth will materialize or, if such growth
does occur, that it will result in increased sales of the Company's products.
The Company's products are designed for gaseous alternative fueled vehicles, but
not for alternative fuels such as electricity, methanol, ethanol and hydrogen.
If the major growth in the alternative fuel market is solely for such fuels, the
Company will be adversely affected. At present, the lack of a well-developed
infrastructure for the supply of alternative fuels is limiting growth in the
alternative fuel engine market. Such an infrastructure is necessary for
widespread use of all alternate fuels.
22
DEPENDENCE ON NEW PRODUCTS
The Company believes that its future success is dependent upon its ability to
design and market new fuel management products as well as enhance its existing
products. It believes that the markets for its products will be characterized
by rapidly changing technology, new product introductions and the entry of new
competitors. The Company's ability to enhance existing products in a timely
manner and to develop and introduce new products that incorporate new
technologies, conform to increasingly stringent emission standards and achieve
market acceptance in a timely manner will significantly affect its future
performance.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results are subject to annual and quarterly fluctuations
as a result of a variety of factors, including without limitation, budget cycles
and funding arrangements of governmental agencies, purchasing cycles of fleet
operators, the uncertainty of timing of deliveries of vehicles to be upfitted,
the timing of implementation of government regulations promoting alternative
fuel vehicles, as well as general economic factors.
RISK OF INTERNATIONAL OPERATIONS
The Company operates in Europe, Australia and Mexico and markets its products
and technologies in other international markets, including both industrialized
and developing countries. The Company's international operations are subject to
various risks common to international activities, such as exposure to currency
fluctuations, the inherent difficulty of administering business abroad and the
need to comply with a wide variety of foreign import and United States export
laws. The Company's competitiveness in overseas markets may be negatively
impacted when there is a significant increase in the value of the dollar against
foreign currencies where the Company does business.
COMPETITION
The Company believes that competition in the alternative fuel engine marketplace
is increasing, particularly in the growing market for propane and natural gas
fueled vehicle products. Some of the current competitors and potential future
competitors are large, well-financed companies, with financial and marketing
resources and research and development capabilities that are substantially
larger than those of the Company.
ENTRY OF ORIGINAL EQUIPMENT MANUFACTURERS INTO MARKET
As the market for alternative fueled vehicles increases, original equipment
manufacturers may find it advantageous to develop and produce their own fuel
management equipment rather than purchasing such equipment from suppliers such
as the Company. If this occurs, the total potential demand for the Company's
products could be adversely impacted.
ABILITY TO MEET OEM SPECIFICATIONS
In 1995 the Company began to offer complete alternative fuel systems, which
include tanks, brackets, electronics and all other under-hood components
required to convert a motor vehicle to alternative fuels. Customers for such
systems require that they meet OEM standards. These requirements have resulted
in increased development, manufacturing, warranty and administrative costs. If
these costs increase significantly, the Company's profitability could be
adversely affected.
DEPENDENCE ON QUALIFIED PERSONNEL
The Company is dependent upon a limited number of key management and technical
personnel. In addition, as products become complex, the Company's future
success will depend in part upon its ability to attract and retain highly
qualified personnel.
23
INCREASED WARRANTY CLAIMS
Vehicle manufacturers are, in response to consumer demand, providing
increasingly longer warranty periods for their products. Suppliers, such as the
Company, are required to provide correspondingly longer product warranties.
Consequently, the Company could incur substantially greater warranty claims in
the future.
NEED TO COMPLY WITH GOVERNMENTAL REGULATIONS
The Company must obtain product certification from governmental agencies such as
the Environmental Protection Agency and the California Air Resources Board to
sell certain of its products in the United States automotive markets. A
substantial portion of the Company's future sales will depend upon sales of fuel
management products that are certified to meet existing and future air quality
and energy standards. Although the Company believes its technologies will
permit its existing and new products to meet these standards, there can be no
assurance that this will occur.
ABILITY TO SECURE FUTURE DEVELOPMENT CONTRACTS
The Company has obtained funding under development contracts with original
equipment manufacturers and governmental agencies to develop specified
products. There can be no assurance that such funding will be obtainable in
the future, the lack of which may significantly impact the Company's ability
to develop and market new products and technologies.
PRODUCT LIABILITY & RECALL
Although the Company carries and plans to continue to carry product liability
and recall insurance, there can be no assurance that such coverage is adequate
or that adequate coverage will continue to be available or, if available, that
it will be available at an acceptable cost.
LABOR DISPUTES AT OEM FACILITIES
As the Company enhances its automotive upfit programs with OEMs, the Company is
becoming increasingly dependent on OEM production and the associated labor
forces at OEM sites. Most of the labor force at OEM facilities are represented
by labor unions. There can be no assurance that labor disputes will not occur.
In the event of a dispute, upfit sales may be adversely impacted.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is indexed in Part IV in Item 14.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
--------
The information required in Part III (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A or by an amendment hereto, in either case, no
later than 120 days after the end of the fiscal year covered by this Form 10-K.
PART IV
-------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed As Part of This Report:
---------------------------------------
(1) Consolidated Financial Statements:
----------------------------------
Report of independent auditors
Consolidated balance sheets as of
April 30, 1998 and 1997
Consolidated income statements
for the years ended April 30, 1998,
1997 and 1996
Consolidated statements of stockholders'
equity for the years ended April 30, 1998,
1997 and 1996
Consolidated statements of cash flows
for the years ended April 30, 1998, 1997
and 1996
Notes to consolidated financial statements
(2) Supplemental Financial Statement Schedules:
-------------------------------------------
Schedule II - Valuation accounts
All other schedules are omitted because the information is not
applicable or is not material, or because the information is
included in the consolidated financial statements or the notes
thereto.
(3) Exhibits:
---------
10.12 Lease betweeen Klein Investments, Family Limited Partnership, as
lessor, and IMPCO Technologies, Inc., as lessee, dated August 18,
1997.
10.13 Amendment dated March 18, 1998 to Loan agreement
dated October 7, 1997 between Bank of America
National Trust and Savings, as lender, and IMPCO
Technologies, Inc., as borrower.
10.14 Amendment dated April 29, 1998 to Loan agreement
dated October 7, 1997 between Bank of America
National Trust and Savings, as lender, and IMPCO
Technologies, Inc., as borrower.
10.15 Loan Agreement between IMPCO Technologies, B.V. as borrower,
and Bank of America National Trust and Savings Association,
acting through its Amsterdam branch, as lender, dated
as of April 27, 1998.
22.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
Executive Compensation Plans and Arrangements.
- --------------------------------------------------------------------------------
Employment Agreement dated April 1, 1997,
between IMPCO Technologies, Inc., as the Company,
and Robert M. Stemmler, as the Employee - Exhibit 10.7.
1991 Executive Stock Option Plan dated November 5,
1991 among IMPCO Technologies, Inc., as the Company, and
Bertram R. Martin, James J. Mantras and Dale L.
Rasmussen, as Optionees - Exhibit 10.3
1989 Incentive Stock Option Plan and Amendment
to 1989 Incentive Stock Option Plan - Exhibits
10.2 and 10.6, respectively.
1996 Incentive Stock Option Plan - Exhibit 10.8.
1997 Incentive Stock Option Plan - Exhibit 10.9.
Reports on Form 8-K.
- -------------------------------------------------------------------------------
No reports were filed on Form 8-K during the last quarter of
the Company's fiscal year covered by this report.
Exhibits
- --------------------------------------------------------------------------------
2.1 Agreement of Purchase and Sale of Stock by and
among IMPCO Technologies, Inc., as buyer, and
Centradas B.V., as Shareholder, dated as of
October 31, 1995. (8)
2.2 Shareholders Agreement for Technisch Bureau Media
B.V. by and among IMPCO Technologies, Inc., and
Centradas B.V., dated as of October 31, 1995. (8)
2.3 Deed of Sale of Business by and among IMPCO Technologies
Pty. Limited, as buyer, and Ateco Automotive Pty Limited,
as seller, dated as of July 1, 1996. (9)
2.4 Deed of Release by and among IMPCO Technologies, Inc. and
Ateco Automotive Pty Limited dated as of July 1, 1996. (9)
2.5 Shareholders Agreement for Gas Parts (NSW) Pty Limited by
and among IMPCO Technologies Pty. Limited, Gas Parts Pty
Limited and Gas Parts (NSW) Pty. Limited, dated as of July
4, 1996. (9)
3.1 Articles of Incorporation and Bylaws. (1)
3.2 Amended Certificate of Designation of AirSensors,
Inc. establishing 1993 Series 1 Preferred Stock. (5)
3.3 Certificate of Amendment of Certificate of
Incorporation providing for limitation of
directors' liability. (3)
3.4 Certificate of Amendment of Certificate of
Incorporation providing for the decrease in
authorized shares of common stock from
50,000,000 to 25,000,000. (6)
10.1 Lease between L-W Income Properties and IMPCO
Technologies, Inc. dated May 10, 1989. (2)
10.2 1989 Incentive Stock Option Plan. (3)
10.3 1991 Executive Stock Option Plan dated
November 5, 1991, among AirSensors, Inc., as the
Company, and Bertram R. Martin, James J. Mantras
and Dale L. Rasmussen, as Optionees. (4)
10.4 First Amendment to Lease dated April 19, 1993,
between L-W Income Properties and IMPCO
Technologies, Inc. (6)
10.5 1993 Stock Option Plan for Nonemployee Directors (7)
10.6 Amendment to 1989 Incentive Stock Option Plan (7)
10.7 Employment Agreement dated April 1, 1997, between
IMPCO Technologies, Inc., as the Company, and Robert
M. Stemmler, as the employee. (10)
10.8 1996 Incentive Stock Option Plan (10)
10.9 1997 Incentive Stock Option Plan (11)
10.10 Loan agreement dated October 7, 1997, between
Bank of America National Trust and Savings,
as lender, and IMPCO Technologies,
Inc., as the borrower. (12)
10.11 Amendment dated February 4, 1998 to Loan agreement
dated October 7, 1997, between Bank of America
National Trust and Savings, as lender, and
IMPCO Technologies, Inc., as the borrower. (13)
10.12 Lease betweeen Klein Investments, Family Limited
Partnership, as lessor, and IMPCO Technologies, Inc.,
as lessee, dated August 18, 1997. (14)
10.13 Amendment dated March 18, 1998 to Loan agreement
dated October 7, 1998 between Bank of America
National Trust and Savings, as lender, and IMPCO
Technologies, Inc., as the borrower. (14)
10.14 Amendment dated April 29, 1998 to Loan agreement
dated October 7, 1998 between Bank of America
National Trust and Savings, as lender, and IMPCO
Technologies, Inc., as the borrower. (14)
10.15 Loan Agreement for IMPCO Technologies, B.V. as borrower,
and Bank of America National Trust and Savings Association,
acting through its Amsterdam branch, as lender, dated
as of April 27, 1998. (14)
22.1 Subsidiaries of the Company. (14)
23.1 Consent of Ernst & Young LLP. (14)
--------------------------------------
(1) Incorporated by reference from Form S-18 filed under
Registration No. 33-4013-S.
(2) Incorporated by reference from Form 10-K for fiscal year
1989.
(3) Incorporated by reference from Form 10-K for fiscal year
1990.
(4) Incorporated by reference from Form 10-K for fiscal year
1992.
(5) Incorporated by reference from Form S-2, File no. 33-56610
declared effective March 9, 1993
(6) Incorporated by reference from Form 10-K for fiscal year
1993.
(7) Incorporated by reference from Form 10-K for fiscal year
1994.
(8) Incorporated by reference from Form 8-K dated October 31,
1995, and filed as Exhibit Numbers (2.1) through (2.4)
thereunder.
(9) Incorporated by reference from 8-K/A dated July 1, 1996,
and filed as Exhibit Numbers (2.5) through (2.9) thereunder.
(10) Incorporated by reference from Form 10-K for fiscal year
1997.
(11) Incorporated by reference from Proxy Statement for fiscal
year 1997.
(12) Incorporated by reference from Form 10-Q for period ended
October 31, 1997.
(13) Incorporated by reference from Form 10-Q for period ended
January 31, 1998.
(14) Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
IMPCO Technologies, Inc.
By /s/ Robert M. Stemmler
-------------------------------------
Robert M. Stemmler,
President &
Chief Executive Officer
Dated July 27, 1998
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert M. Stemmler President, July 27, 1998
------------------------- Chief Executive Officer and
Interim Chairman of the Board
(Principal Executive Officer)
/s/ Thomas M. Costales Chief Financial Officer July 27, 1998
------------------------- and Treasurer
(Principal Financial Officer)
/s/ Brian Olson Corporate Controller July 27, 1998
-------------------------
/s/ Norman L. Bryan Director July 27, 1998
-------------------------
/s/ V. Robert Colton Director July 27, 1998
-------------------------
/s/ Paul Mlotok Director July 27, 1998
-------------------------
/s/ Christopher G. Mumford Director July 27, 1998
-------------------------
/s/ Edward L. Scarff Director July 27, 1998
-------------------------
/s/ Don Simplot Director July 27, 1998
-------------------------
/s/ Rawley F. Taplett Director July 27, 1998
-------------------------
/s/ Douglas W. Toms Director July 27, 1998
-------------------------
31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
IMPCO Technologies, Inc.
We have audited the accompanying consolidated balance sheets of IMPCO
Technologies, Inc. [formerly AirSensors, Inc.] as of April 30, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and
cash flows for each of the three years in the period ended April 30, 1998.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of IMPCO Technologies, Inc. [formerly AirSensors, Inc.] at April 30, 1998 and
1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended April 30, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Long Beach, California
June 30, 1998 except for Note 16,
as to which the date is July 27, 1998
32
IMPCO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
April 30, 1998 and 1997
-----------
ASSETS
------
1998 1997
------------ ------------
Current assets:
Cash $ 2,617,869 $ 1,975,903
Accounts receivable 14,528,000 11,456,539
Less allowance for doubtful accounts 314,794 288,111
------------ ------------
Net accounts receivable 14,213,206 11,168,428
Inventories:
Raw materials and parts 9,565,310 7,717,710
Work-in-process 1,055,411 754,576
Finished goods 7,308,190 5,711,966
------------ ------------
Total inventories 17,928,911 14,184,252
Other current assets 2,731,963 2,575,055
------------ ------------
Total current assets 37,491,949 29,903,638
Equipment and leasehold improvements:
Dies, molds and patterns 5,039,892 4,272,220
Machinery and equipment 7,074,004 4,846,940
Office furnishings and equipment 4,968,605 4,130,351
Leasehold improvements 2,288,022 1,730,174
Land and Buildings 267,000 267,000
------------ ------------
19,637,523 15,246,685
Less accumulated depreciation and
amortization 10,613,052 8,026,594
------------ ------------
Net equipment and leasehold
improvements 9,024,471 7,220,091
Intangibles arising from acquisitions 13,024,441 11,351,802
Less accumulated amortization 3,265,341 2,950,805
------------ ------------
Net intangibles arising from
acquisitions 9,759,100 8,400,997
Other assets 1,109,888 1,588,364
------------ ------------
$57,385,408 $47,113,090
------------ ------------
------------ ------------
See accompanying notes.
33
IMPCO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
April 30, 1998 and 1997
(Continued)
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
1998 1997
------------ ------------
Current liabilities:
Notes payable $ - $ 328,839
Accounts payable 5,606,922 4,538,243
Accrued payroll obligations 1,848,425 1,564,028
Income taxes payable 746,587 563,947
Other accrued expenses 1,807,032 3,144,978
Current portion of term loans 1,408,225 1,515,585
------------ ------------
Total current liabilities 11,417,191 11,655,620
Line of credit 2,650,000 5,450,000
Term loan - Bank of America NT&SA 3,799,395 3,592,013
Term loan - DEPA Holding B.V. 1,820,000 2,154,399
Other long term liabilities 2,324,971 1,524,906
Minority interest 1,068,500 673,044
Commitments and contingencies - -
Stockholders' equity:
1993 Series 1 Preferred Stock, $0.01
par value, 5,950 shares authorized,
issued and outstanding $5,950,000
liquidation value 5,650,000 5,650,000
Common stock, $.001 par value, authorized
25,000,000 shares; 7,091,601 issued and
outstanding at April 30, 1998
(5,814,587 at April 30, 1997) 7,092 5,815
Additional paid-in capital relating to
common stock 38,386,357 29,342,121
Shares held in trust (36,759) (8,814)
Accumulated deficit (8,197,885) (12,467,953)
Foreign currency translation adjustment (1,503,454) (458,061)
------------ ------------
Total stockholders' equity 34,305,351 22,063,108
------------ ------------
$57,385,408 $47,113,090
------------ ------------
------------ ------------
See accompanying notes.
34
IMPCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended April 30, 1998, 1997 and 1996
---------
1998 1997 1996
------------ ------------ ------------
Revenue:
Product sales $62,209,310 $58,436,508 $48,487,480
Contract revenue 8,873,554 3,391,528 3,087,229
------------ ------------ ------------
Net revenue 71,082,864 61,828,036 51,574,709
Costs and expenses:
Cost of sales 38,173,943 37,341,704 32,011,253
Research and development
expense 13,336,708 8,479,919 7,170,965
Selling, general and
administrative expense 12,454,253 11,156,547 8,260,778
------------ ------------ ------------
Total costs and expenses 63,964,904 56,978,170 47,442,996
Operating income 7,117,960 4,849,866 4,131,713
Financing charges 934,825 1,100,449 503,886
------------ ------------ ------------
Income before income taxes and
minority interest in income of
consolidated subsidiary and
dividends 6,183,135 3,749,417 3,627,827
Provision (benefit) for
income taxes 907,516 262,459 (1,348,616)
Minority interest in income of
consolidated subsidiary 410,554 261,667 305,568
------------ ------------ ------------
Net Income before dividends 4,865,065 3,225,291 4,670,875
Dividends on preferred stock 594,997 581,365 609,875
------------ ------------ ------------
Net income applicable to
common stock $ 4,270,068 $ 2,643,926 $ 4,061,000
------------ ------------ ------------
------------ ------------ ------------
Net income per share:
Basic $ .67 $ .46 $ .72
------------ ------------ ------------
------------ ------------ ------------
Fully diluted $ .60 $ .43 $ .64
------------ ------------ ------------
------------ ------------ ------------
Number of shares used in
per share calculation:
Basic 6,333,769 5,722,382 5,648,290
------------ ------------ ------------
------------ ------------ ------------
Fully Diluted 8,155,476 6,130,542 7,300,199
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes.
35
IMPCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended April 30, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
1993 Series 1 Preferred Stock:
Beginning balance $ 5,650,000 $ 5,650,000 $ 5,650,000
------------ ------------ ------------
Ending balance 5,650,000 5,650,000 5,650,000
Common Stock:
Beginning balance 5,815 5,655 5,641
Issuance of common stock
(57,796, 139,244, and 13,198 shares,
respectively) resulting from the
exercise of options pursuant to
the stock option plans 58 139 14
Issuance of common stock
(1,219,218 and 20,775 shares,
respectively)resulting from the
exercise of warrants 1,219 21 -
------------ ------------ ------------
Ending balance 7,092 5,815 5,655
Additional paid-in capital:
Beginning balance 29,342,121 28,746,994 28,660,181
Issuance of common stock
resulting from the exercise
of options pursuant to the
stock option plans 194,271 439,335 86,813
Issuance of common stock
resulting from the exercise
of warrants 8,453,063 155,792 -
Issuance of common stock
purchase warrant 93,000 - -
Reduction in current tax liability
related to stock options 303,902 - -
------------ ------------ ------------
Ending balance 38,386,357 29,342,121 28,746,994
Treasury stock for deferred
compensation program, at cost
(2,572 and 1,032 shares,
respectively) (36,759) (8,814) -
Accumulated Deficit:
Beginning balance (12,467,953) (15,111,879) (19,172,879)
Net income applicable
to common stock 4,270,068 2,643,926 4,061,000
------------ ------------ ------------
Ending balance (8,197,885) (12,467,953) (15,111,879)
Foreign currency translation
adjustment (1,503,454) (458,061) (34,748)
------------ ------------ ------------
Total stockholders' equity $ 34,305,351 $ 22,063,108 $ 19,256,022
------------ ------------ ------------
------------ ------------ ------------
36
See accompanying notes.
37
IMPCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30, 1998, 1997 and 1996
-----------------------------
1998 1997 1996
------------ ------------ -----------
Cash flows from operating activities:
Net income $ 4,865,065 $ 3,225,291 $ 4,670,875
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of intangibles
arising from acquisition 455,645 263,998 239,639
Depreciation and other
amortization 2,488,605 2,452,594 1,774,695
Increase in accounts receivable (3,396,372) (2,750,026) (2,578,110)
Increase in inventories (3,665,033) (385,003) (1,158,391)
Increase/(decrease)
in deferred tax asset 372,856 (272,856) (1,700,000)
Increase in accounts payable 1,178,829 58,508 978,963
Increase/(decrease) in
accrued expenses (806,387) 799,321 266,570
Minority interest in income of
consolidated subsidiaries 395,456 289,847 383,198
Other, net (381,131) 26,201 (299,517)
------------ ------------ ------------
Net cash provided by
operating activities 1,507,533 3,707,875 2,577,922
Cash flows from investing activities:
Purchase of equipment and
leasehold improvements (3,219,766) (1,702,477) (1,995,981)
Investment in IMPCO BV - - (1,965,678)
Investment in IMPCO Pty - (4,654,794) -
Investment in IMPCO Mexicano (961,000) - -
Purchase of intangible assets (1,852,197) (74,600) (327,148)
Proceeds from sale of equipment 270,001 74,319 118,172
Deferred software production costs - - (430,597)
Other, net - (28,637) (702,241)
------------ ------------ ------------
Net Cash Used in
investing activities (5,762,962) (6,386,189) (5,303,473)
Cash flow from financing activities:
Net borrowings
in lines of credit (2,407,382) 2,050,000 2,400,000
Payments on notes payable (328,839) (1,083,615) (508,833)
Proceeds from issuance of
notes payable - 558,685 643,818
Proceeds from issuance of
common stock 8,924,568 595,288 86,828
Payments on term loan (4,074,197) (1,035,454) (334,656)
Proceeds from issuance of
bank term note 3,992,521 3,968,750 2,050,000
Payments on capital lease
obligations (461,023) (297,961) (256,072)
Dividends on preferred stock (594,997) (581,365) (609,875)
------------ ------------ ------------
Net cash provided by
financing activities 5,050,651 4,174,328 3,471,210
------------ ------------ ------------
Translation Adjustment (153,256) (331,259) -
Net increase in cash 641,966 1,164,755 745,659
Cash beginning of year 1,975,903 811,148 65,489
------------ ------------ ------------
Cash at end of year $ 2,617,869 $ 1,975,903 $ 811,148
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS - The
consolidated financial statements of IMPCO Technologies, Inc. (IMPCO or the
Company) [effective September 15, 1997, AirSensors, Inc. changed its name to
IMPCO Technologies, Inc.] include the accounts of the Company and it's majority
owned subsidiary IMPCO Technologies B.V. (IMPCO BV) [Effective January 1, 1998,
IMPCO Media Europe B.V. changed its name to IMPCO Technologies B.V.], its
majority-owned subsidiary Grupo I.M.P.C.O. Mexicano, S. de R.L. de C.V.
(I.M.P.C.O. Mexicano) [Effective January 20, 1998 Industrias Mexicanas de
Productos de Combustibles, S. de R.L. de C.V. changed its name to Grupo
I.M.P.C.O. Mexicano, S. de R.L. de C.V.] and its wholly owned subsidiary IMPCO
Technologies, Pty. Limited (Impco Pty). All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company is engaged in the design, manufacturing and marketing of
gaseous fuel delivery systems and related devices that allow internal
combustion engines to operate on alternative fuels, primarily propane and
natural gas. Worldwide the Company's products are sold to distributors and
original equipment manufacturers (OEMs).
(b) INVENTORIES - Inventories are valued at the lower of cost or market.
Cost is determined by the first-in, first-out (FIFO) method while market is
determined by replacement cost for raw materials and parts and net realizable
value for work-in-process and finished goods.
(c) PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated on the basis of historical cost. Depreciation of equipment is provided
using the straight-line method over the assets' estimated useful lives, ranging
from three to seven years. Amortization of leasehold improvements, and
equipment financed by the Company's capital lease facility, is provided using
the straight-line method over the shorter of the assets' estimated useful lives
or the lease terms.
(d) INTANGIBLES ARISING FROM ACQUISITION - Intangibles arising from
acquisition are recorded based on the excess of the cost of the acquisition over
amounts assigned to tangible assets and liabilities. These intangible assets
include goodwill, product rights and trademarks. The intangible assets are
being amortized using the straight-line method over their estimated lives of
twenty years.
(e) DEFERRED COSTS - Deferred costs, included in other assets, represent
amounts paid for software and other costs incurred after the establishment of
technological feasibility. These costs are capitalized and subsequently
amortized using the straight-line method over the estimated economic life of the
related product.
(f) WARRANTY COSTS - Estimated future warranty obligations related to
certain products are provided by charges to operations in the period in which
the related revenue is recognized. Estimates are based, in part, on
historical experience.
(g) RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
charged to expense as incurred. Equipment used in research and development with
alternative future uses is capitalized.
(h) CONTRACT REVENUE RECOGNITION - Contract revenue is principally
recognized by the percentage of completion method. Profits expected to be
realized on contracts are based on the Company's estimates of total contract
sales value and costs at completion. These estimates are reviewed and revised
periodically throughout the lives of the contracts.
(i) MINORITY INTEREST IN SUBSIDIARY - In October 1995, IMPCO purchased 51
percent of IMPCO BV. In July 1996, IMPCO acquired IMPCO Pty which included a 50
percent share in a subsidiary (Gas Parts, NSW.) In January 1998, IMPCO Pty
acquired the remaining 50 percent of Gas Parts, NSW. In December 1997, IMPCO
acquired a 90 percent interest in IMPCO Mexicano. Minority interest represents
the minority shareholder's proportionate share of equity in the IMPCO BV, Gas
Parts, NSW and IMPCO Mexicano subsidiaries. The balance sheet amounts in
minority interest at April 30, 1998 represent 49 percent of the equity held by
the single minority shareholder in IMPCO BV and ten percent of the equity held
by the single minority shareholder in I.M.P.C.O. Mexicano.
(j) NET INCOME PER SHARE - In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128 "Earnings Per Share". Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic income per share is computed
by dividing net income applicable to common stock by the weighted average shares
outstanding during the period. Unlike primary earnings per share, common stock
equivalents, including outstanding stock options and warrants, are excluded from
the Basic calculation. Diluted earnings per share, similar to the fully diluted
computation, is computed based on the weighted average number of common shares,
all common stock equivalents, and if dilutive, shares issued upon conversion of
preferred stock. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
(k) STOCK BASED COMPENSATION - In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123 "Accounting of Stock Based Compensation",
which established accounting and reporting standards for stock based employee
compensation plans effective after fiscal year 1996. SFAS 123 encourages
entities to adopt the new method ("fair value based method") of accounting;
however it also allows an entity to continue to measure compensation cost
prescribed under existing rules ("intrinsic value based method") prescribed by
Accounting Principle Board No. 25. Such entities who elect to remain on the
"intrinsic value based" method must make certain pro forma disclosures as if the
new fair value method had been applied. At this time, the Company has not
adopted the recognition provision of SFAS 123, but has provided pro forma
disclosures (see note 9).
(l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF - During the first quarter of 1997, the company adopted SFAS No.
121 "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of" which established accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets. The Statement requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment
(significant decrease in market value of an asset, significant change in
extent or manner in which the asset is used or significant physical change to
the asset) are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. Since
adoption, the Company did not experience any significant changes in the
business climate or in the use of assets that would require the Company to
write down the value of the assets recorded in the balance sheet. The
adoption of SFAS No.121 did not have a material effect on the consolidated
financial position or results of operations of the Company.
(m) USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires that
management make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
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.
(n) RECLASSIFICATIONS - Certain reclassifications have been made to the
fiscal year 1996 and 1997 consolidated financial statements to conform to the
fiscal year 1998 presentation.
(o) FOREIGN CURRENCY TRANSLATION - Assets and liabilities of the Company's
foreign subsidiaries are generally translated at current exchange rates, and
related revenues and expenses are translated at average exchange rates in effect
during the period. Resulting translation adjustments are recorded as a foreign
currency component in shareholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
except those transactions which operate as a hedge of an identifiable foreign
currency commitment, or as a hedge of a foreign currency investment position,
are included in the results of operations as incurred.
(p) FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial
instruments recorded on the balance sheet include cash, short-term bank debt,
and long-term bank debt. Because of the short maturity, the carrying amount of
cash and short-term bank debt approximates fair value. Since the interest rates
on the long-term debt are reset at intervals not to exceed twelve months, the
carrying value of the Company's long-term debt approximates fair value.
At April 30, 1998, off balance sheet derivative financial instruments
include foreign currency forward contracts and interest rate swap agreements
(see note 4).
The Company enters into foreign currency forward contracts to hedge the net
receivable/payable position arising from intercompany transactions by its
foreign subsidiaries. Foreign currency contracts reduce the Company's exposure
to unfavorable fluctuations in foreign currencies versus the U.S. dollar.
Foreign currency gains and losses on intercompany transactions are not deferred.
Interest rate swap agreements are used by the Company to manage interest
rate risk on its floating rate debt portfolio. Each interest rate swap is
matched as a hedge against a specific debt instrument and has the same notional
amount and tenor as the related debt instrument principle. Fair value of these
instruments is based on estimated currency settlement cost.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued certain Statements of
Financial Accounting Standards (SFAS) which are applicable to the Company. SFAS
No. 130, "Reporting Comprehensive Income", which is effective for fiscal years
beginning after December 15, 1997; SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997; and, SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging
Activities" which is effective for fiscal years beginning after June 15, 1999.
SFAS No. 130 requires all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The changes in cumulative translation adjustments,
reported through stockholders' equity, is currently the Company's only
component of comprehensive income. The Company currently plans to adopt this
standard in fiscal 1999.
SFAS No. 131 requires a public enterprise to report financial and
descriptive information about its reportable operating segments based upon
the way management organizes segments within the enterprise for making
operating decisions and assessing performances. Adoption of this standard
will not require any material changes in current disclosures. The Company
plans to adopt the standard in fiscal 1999.
SFAS No. 133 requires all derivatives to be recorded on the balance
sheet at fair value and establishes special accounting for the following
three types of hedges: hedges of changes in the fair value of assets,
liabilities, or firm commitments (referred to as fair value hedges); hedges
of the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign
operations. Though the accounting treatment and criteria for each of the
three types of hedges is unique, they all result in offsetting changes in
value or cash flows of both the hedge and the hedged item being recognized in
earnings in the same period. Changes in fair value of derivatives that do not
meet the criteria of one of these three categories of hedges would be
included in income. As this standard was recently issued, the Company will
begin analyzing the various requirements in order to determine what impact,
if any, it will have on its disclosures, financial position, results of
operations, and cash flows. Currently, the Company does not anticipate
adopting this standard before fiscal 2001.
2. ACQUISITIONS
(a) ALGAS CARBURETION
On December 5, 1997, the Company purchased certain manufacturing equipment
and inventory of the Algas Carburetion Division of PGI International. The
purchase price of $2,400,000 was paid in cash. On the same day, the Company
acquired a 90% interest in Industrias Mexicanas de Productos de Combustibles, S.
de R.L. de C.V. Effective January 20, 1998 Industrias Mexicanas de Productos de
Combustibles, S. de R.L. de C.V. changed its name to Grupo I.M.P.C.O. Mexicano,
S. de R.L. de C.V.("Grupo I.M.P.C.O. Mexicano"). The purchase price of $961,000
was paid in cash. Immediately prior to the Company's acquisition of a 90%
ownership interest in Grupo I.M.P.C.O. Mexicano, Grupo I.M.P.C.O. Mexicano
acquired certain assets of the carburetion division of Algas Mexicana, S.A. de
C.V. These acquisitions were financed by term loans of approximately $3.3
million provided by Bank of America [See note 3(a)(iv)].
(b) EDO CANADA, LTD.
On December 12, 1997, the Company purchased from the bankruptcy trustee of
EDO Canada, Ltd. certain development, testing, quality control and manufacturing
equipment used for the manufacture of storage tanks for compressed natural gas.
The purchase price of $790,000 was paid in cash and was primarily financed
through Bank of America's BA Capital Leasing.
42
(c) ATECO AUTOMOTIVE PTY. LTD.
On July 1, 1996, the Company acquired certain assets of Ateco Automotive
Pty. Ltd. ("Ateco") for approximately $6,500,000. Ateco, an Australian private
company, has distributed IMPCO's gaseous fuel carburetion systems and related
devices for use with internal combustion engines since 1969 through its Gas
Division near Melbourne, Australia.
In order to effectuate the transaction, IMPCO established a wholly owned
subsidiary in Australia, IMPCO Technologies Pty. Limited (IMPCO Pty). The
acquisition of Ateco has been accounted for under the purchase method of
accounting and the acquired operations have been included in the consolidated
financial statements since the date of acquisition. The assets acquired by
IMPCO Pty. primarily consist of receivables, inventory, equipment, a note,
business goodwill, distribution rights in Australia, and a 50% interest in
Ateco's sub-distributor Gas Parts (NSW) Pty. The amount of the consideration
was determined through negotiations between Ateco and IMPCO Pty.
The purchase price was financed through approximately $4,000,000 of term
loans provided by Bank of America NT&SA and its Sydney Australia Branch [See
note 3(a)(iii) and note 3(b)]. The term loans are three-year loans with a
five-year amortization schedule and interest at market rates. In addition,
accounts receivables due to IMPCO by Ateco, totaling approximately
$1,852,000, were offset against the purchase price. The balance of the
purchase price was paid with proceeds from IMPCO's existing line of credit
with Bank of America NT&SA. The Company recognized approximately $3,601,000
of intangible assets arising from acquisition which will be amortized over 20
years. The purchase price allocation is based on management's best estimates
at the acquisition date. The tangible assets and liabilities have been
recorded at their estimated fair values as of the date of acquisition as
follows:
Value
-----------
Accounts receivable $ 398,399
Inventory 2,265,589
Equipment 44,879
Notes Receivable 158,200
Other assets 49,930
----------
2,916,997
Accrued payroll and related expenses (17,959)
----------
Net tangible assets $2,899,038
----------
----------
On January 31, 1998, the Company's wholly-owned subsidiary IMPCO
Technologies Pty. Limited acquired the remaining 50% ownership interest in Gas
Parts (NSW) Pty. for A$225,000 (US$148,500) in cash. The acquisition was
accounted for using the purchase method of accounting for step-acquisitions.
Excess purchase price over fair market value of the underlying assets of
A$141,000 (US$93,000) was allocated to goodwill.
43
(d) IMPCO TECHNOLOGIES B.V.
On October 31, 1995, the Company, through its wholly owned subsidiary
IMPCO, acquired 51 percent of the outstanding stock of Technisch Bureau Media
B.V., a private company in the Netherlands, from Centradas B.V., a private
company in the Netherlands, for cash in the amount of 3,187,500 Dutch
Guilders (U.S. $2,023,000). Effective January 1, 1998, IMPCO Media Europe BV
changed its name to IMPCO Technologies B.V. (IMPCO BV). IMPCO B.V. has
distributed IMPCO's gaseous fuel carburetion systems and related devices for
use in internal combustion engines since 1972. IMPCO BV services the
European marketplace from its headquarters in the Netherlands and through its
subsidiaries in Germany, France and the United Kingdom.
The acquisition was financed through a term loan provided by Bank of
America which will be repaid over a five-year period with interest at market
rates [See Note 3(a)(ii)]. The acquisition of IMPCO BV has been accounted
for under the purchase method of accounting and has been included in the
consolidated financial statements since October 31, 1995, the date of
acquisition. The Company recognized $2,100,000 of intangible assets arising
from acquisition which will be amortized on the straight-line method over 20
years. The tangible assets and liabilities of IMPCO B.V. have been recorded
at their estimated fair market values at the date of the acquisition as
follows:
Value
------------
Cash $ 57,747
Accounts receivable 1,808,609
Inventory 3,062,545
Equipment 591,109
Other assets 171,691
-----------
5,691,701
Accounts payable and accrued expenses (2,021,422)
Term loan - DEPA Holding B.V. (2,693,283)
Other liability - DEPA Holding B.V. (810,561)
-----------
Net tangible assets $ 166,435
-----------
-----------
On May 1, 1998 the Company purchased the remaining 49% of IMPCO BV from
Depa Holding BV for 1,400,000 Dutch Guilders (U.S. $693,000). As a condition
precedent to purchase of the outstanding shares, IMPCO BV retired the debt
outstanding to Depa Holding BV with the proceeds from the term loan granted
by Bank of America NT&SA [See Note 3(a)(v)]. The acquisition was accounted
for using the purchase method of accounting for step-acquisitions. The
Company recognized approximately $238,000 of goodwill arising from the
acquisition of the 49% interest which will be amortized on the straight-line
method over 20 years.
3. DEBT PAYABLE
(a) BANK OF AMERICA NT&SA
On October 7, 1997 IMPCO amended its credit facility with Bank of America
NT&SA by extending the term of the revolving line of credit for a twelve month
period ending August 31, 1999. The amended credit facility also increased the
revolving line of credit by $4,000,000 to $12,000,000, and added a $4,000,000
term loan facility for possible future acquisitions. On February 4, 1998 the
Company amended the credit facility by extending the payment terms of the
acquisition facility from three years to five years. The amended credit
facility also includes, as part of the $12,000,000 revolving line of credit, a
$1,000,000 revolving line of credit to the Company's Mexican subsidiary.
44
On March 18, 1998 the Company further amended the credit facility by
lowering the interest rate on the revolving line of credit and the acquisition
facility by one-quarter of one percentage point. On April 29, 1998 the Company
amended the credit facility with the bank by adjusting the acquisition facility
disbursement terms. The acquisition facility was adjusted to allow for a second
disbursement of $692,520.78 for the purchase of the minority portion of IMPCO
Technologies B.V.
On April 27, 1998 IMPCO Technologies B.V. entered into a credit facility
with Bank of America NT&SA through its Amsterdam branch for a term loan for
$2,100,000 or an equivalent amount in freely convertible foreign currencies.
On September 23, 1997, the Company expanded the capital lease facility from
$3,525,000 to $5,525,000 and extended the expiration date to August 31, 2003.
Including the revolving line of credit, the capital lease facility and the
acquisition facilities, the total Bank of America credit facility was
$22,378,000 at April 30, 1998.
(i) REVOLVING LINE OF CREDIT
The revolving line of credit bears interest, payable monthly, at a
fluctuating per annum rate equal to the Bank of America reference rate minus
one-quarter of one percentage point (which was 8.25% on April 30, 1998). The
Company may elect to have all or portions of the line bear interest at an
alternative interest rate agreed upon by the Bank for periods of not less than
30 days nor more than one year. At April 30, 1998, the total outstanding line
of credit balance of $2,650,000 was subject to the reference rate.
The credit facility provides a Mexican peso line of credit equivalent to
$1,000,000 for Grupo I.M.P.C.O. Mexicano and is included as part of the existing
$12,000,000 revolving line of credit between the Company and Bank of America
NT&SA. For U.S. borrowings, the revolving line of credit carries interest,
payable monthly, at a fluctuating per annum rate equal to the Bank of America
reference rate or the London Interbank Offering Rate (LIBOR) plus 1.75% (7.41%
at 4/30/98). For Mexican borrowings, the revolving line of credit carries
interest, payable monthly, at a fluctuating per annum rate equal to the Bank of
America Mexico (BAMSA) cost of funds plus 1.50% or the TIIE plus 1.50% (21.02%
at 4/30/98). The TIIE is the Interbank Interest Equilibrium Rate calculated by
the Bank of Mexico for the most recent period of twenty-eight (28) days prior to
commencement of the interest period. The Company may prepay the facility, in
full or in part, upon two-business days notice, subject to break funding costs,
if any. The minimum prepayment is US$250,000. At April 30, 1998, the total
outstanding line of credit balance of Ps. 3,375,775 (U.S. $397,805) was subject
to the BAMSA cost of funds rate (22.8% at 4/30/98).
It is management's intent to renew the amount of its present borrowings
under the revolving line of credit for an uninterrupted period extending beyond
one year from the balance sheet date.
The line may be used for financing commercial letters of credit with a
maximum maturity of 180 days and standby letters of credit with a maximum
maturity of five years not to extend beyond April 30, 2002. The amount of
letters of credit outstanding at any one time may not exceed $2,000,000 for
commercial letters of credit and $750,000 for standby letters of credit. At
April 30, 1998, a standby letter of credit totaling $375,000 was outstanding.
45
The maximum amount available at any one time on the revolving line of credit and
the commercial letters of credit is $12,000,000.
(ii) TERM LOAN FOR ACQUISITION OF IMPCO TECHNOLOGIES B.V.
This term loan bears interest, payable monthly, at the Bank's reference
rate. The Company may elect to have all or portions of the term loan bear
interest at an alternative interest rate agreed upon by the Bank for periods of
not less than 30 days nor more than one year. The alternative interest rate is
based on the Offshore rate plus 1.50%. Each alternative rate portion must be
for an amount not less than $500,000 and may not include any portion of
principal that is scheduled to be repaid before the last day of the applicable
interest period. On October 20, 1997, the Company entered into a 34 month
interest rate swap agreement with Bank of America NT&SA ending August 31, 2000,
that fixes the interest rate on the facility at 7.90%. At April 30, 1998, the
total outstanding balance was $1,025,000.
(iii) TERM LOAN FOR THE ACQUISITION FOR ATECO
On October 31, 1997, the Company retired this facility early by making a
balloon payment of $1,600,000.
(iv) TERM LOAN FOR FUTURE ACQUISITION(S)
This term loan bears interest, payable monthly, at the Bank's reference
rate. The Company may elect to have all or portions of the term loan bear
interest at an alternative interest rate agreed upon by the Bank for periods of
not less than 30 days nor more than one year. The alternative interest rate is
based on the Offshore rate plus 1.75%. Each alternative rate portion must be
for an amount not less than $500,000 and may not include any portion of
principal that is scheduled to be repaid before the last day of the applicable
interest period. Principal is payable in 20 successive quarterly installments,
starting on the last day of the third month after funding. The first 19
installments will be equal to 1/19 of the original principal amount with the
last installment equal to the remaining balance. The term loan may be prepaid,
with payments applied in inverse order of maturity, in whole or in part, at any
time.
On December 5, 1997, the Company utilized $3.3 million of the $4 million
term loan for the acquisition of Algas (See Note 2). On February 3, 1998, the
Company entered into a 58-month interest rate swap agreement with Bank of
America ending December 5, 2002 that fixes the interest rate on the facility at
7.74%. At April 30, 1998, the total outstanding balance was $3,135,000.
On April 30, 1998, the Company utilized $693,000 of the remaining term loan
facility for the acquisition of the minority shares of IMPCO Technologies B.V.
(See Note 2). The outstanding balance of $693,000 was subject to the offshore
rate (7.46%). On May 29, 1998, the Company entered into a 59-month interest
rate swap agreement with Bank of America ending April 15, 2003 that fixes the
interest rate on the facility at 7.80%.
(v) IMPCO TECHNOLOGIES B.V. TERM LOAN
On May 1, 1998 IMPCO Technologies B.V. borrowed 4,200,000 Dutch Guilders
(U.S. $2,098,000) to refinance the existing term loan with Depa Holdings as a
condition precedent to the sale of the minority shares in IMPCO Technologies
B.V. This term loan bears interest, payable monthly, at the
46
Amsterdam Interbank Offered Rate for the corresponding period of the advance,
plus 1.50%. Principal is payable in 19 successive quarterly installments of
210,000 Dutch Guilders and the remaining balance is payable as the 20th
installment. The term loan may be prepaid, with payments applied in inverse
order of maturity, in whole or in part, at any time. At May 1, 1998, the
outstanding balance of 4,200,000 Dutch guilders bore an interest rate of
4.94%.
(vi) CAPITAL LEASE FACILITY
The capital lease facility is available in incremental draws of $50,000 or
more to finance acquisitions of equipment such as machinery, dies, molds, office
furniture, and motor vehicles. At April 30, 1998, approximately $2,625,000 was
outstanding and approximately $1,746,000 remained available. Each draw is to be
repaid in twenty consecutive equal quarterly installments and bears interest at
either a variable rate or fixed rate of interest. The fixed rate of interest is
the U.S. Treasury note bond-equivalent yield per annum corresponding to the
number of months remaining on the draw, plus 2.55 percentage points. The
variable rate of interest is equal to Bank of America's London Branch 3-month
LIBOR rate plus 2.15 percentage points. At April 30, 1998, all draws were
subject to the variable rate of interest. The long-term and short-term portions
of the capital lease facility are included in other long-term liabilities and
other accrued expenses, respectively, on the Company's balance sheet. On May
29, 1998, the Company entered into a 59-month interest rate swap agreement with
Bank of America ending April 15, 2003 that fixes the interest rate on $2,578,000
of the facility at 8.50% for fundings 1 through 18 and 8.20% for fundings 19
through 22.
If the Company exercises an early termination option before the scheduled
expiration date of a capital lease, a termination charge will be assessed. The
termination charge is a sliding percentage (not to exceed 3%) of the balance on
the lease at time of termination.
(vii) LOAN COVENANTS AND COLLATERAL
The Bank of America credit facility contains certain restrictions and
financial covenants, including liquidity, tangible net worth and cash flow
coverage thresholds, as well as limitations on other indebtedness, and is
secured by substantially all of the Company's assets. At April 30, 1998, the
Company was in compliance with all covenants.
(b) TERM LOAN - BANK OF AMERICA, AUSTRALIA
On January 31, 1998, the Company retired this facility by making a payment
of A$1,000,000 (U.S. $650,000).
(c) TERM LOAN - DEPA HOLDING B.V.
As of April 30, 1998, the outstanding principal balance on the term loan
was 4,200,000 Dutch Guilders (U.S. $2,100,000) and was subject to the annual
interest rate of 4.11%. On May 1, 1998, as a condition precedent to the sale
of the minority shares held by Depa Holding B.V., IMPCO Technologies B.V.
retired this facility from the proceeds of the term loan facility granted by
Bank of America NT&SA.
(d) CREDIT FACILITY - MEES PIERSON
In February of 1996, IMPCO Technologies B.V. secured a 3,000,000 Dutch
Guilder (U.S. $1,500,000) revocable credit facility with Mees Pierson, a
financial institution in the Netherlands. The interest rate is determined
weekly based on a weighted average of several money market indices. IMPCO
Technologies B.V.'s borrowings under this facility may not exceed the
combined total of a specified amount of its accounts receivable (70% of book
value) and inventory (50% of book value). At April 30, 1998, the interest
rate was 5.125% and there was no outstanding balance on the credit facility.
Annual maturities of long-term debt for the five years subsequent to May 1,
1998 (in millions) are as follows: 1999 - $1.4; 2000 - $1.5; 2001 - $1.3; 2002 -
$1.1; 2003 - $1.0; and thereafter - $.7.
4. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
The Company uses derivative financial instruments for the purpose of
reducing its exposure to adverse fluctuations in interest and foreign exchange
rates. While these hedging instruments are subject to fluctuations in value,
such fluctuations are generally offset by the value of the underlying exposures
being hedged. The Company is not a party to leveraged derivatives and does not
hold or issue financial instruments for speculative purposes.
(a) Foreign Currency Management
The results and financial condition of the Company's international
operations are affected by changes in exchange rates between certain foreign
currencies and the U.S. Dollar. The Company's exposure to fluctuations in
currency exchange rates has increased as a result of the growth of its
international subsidiaries. The functional currency for all of the Company's
international subsidiaries is the local currency of the subsidiary. An
increase in the value of the U.S. dollar increases costs incurred by the
subsidiaries because most of its international subsidiaries' inventory
purchases are U.S. dollar denominated. The Company monitors this risk and
attempts to minimize the exposure through forward currency forward contracts
and the management of cash disbursements in local currencies. At April 30,
1998 the Company had currency forward contracts protecting U.S.$600,000 in
inventory purchases. At April 30, 1998 the fair value of foreign currency
forward contracts approximated contract values. On May 29, 1998 the Company
entered into six currency forward contracts to protect an additional
U.S.$1,200,000 in inventory purchases.
The Company seeks to hedge its foreign currency economic risk by
minimizing its U.S. dollar investment in foreign operations using foreign
currency term-loans to finance the operations of its foreign subsidiaries.
The term loans are denominated in local currencies and translated to U.S.
dollars at period end exchange rates.
(b) Interest Rate Management
The Company uses interest rate swap agreements with Bank of America to
manage its exposure to interest rate changes and stabilize the cost of
borrowed funds. When an agreement is executed, the swap is linked to a
specific debt instrument. At April 30, 1998, the Company had $4,160,000
secured under fixed interest rate agreements at a weighted average fixed
interest rate of 7.78%. Absent these fixed rate agreements, the weighted
average variable rate for this debt at April 30, 1998 would have been 7.38%.
At April 30, 1998 the fair value of interest rate swap agreements
approximated carrying value. On May 29, 1998 the Company secured an
additional $3,271,000 under a fixed interest rate agreement.
(c) Fair Value of Long-Term Debt
The fair value of the Company's long-term debt is estimated using
discounted cash flows based on the Company's incremental borrowing rates for
similar types of borrowings. At April 30, 1998 the fair value of the
Company's long-term debt approximated carrying value.
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Fiscal years ended April 30,
----------------------------------------
Current: 1998 1997 1996
--------- ---------- -----------
Federal $ 90,759 $ 79,065 $ 32,352
State 36,314 23,828 (29,966)
Foreign 208,556 432,422 348,998
-------- -------- --------
335,629 535,315 351,384
--------- ---------- ----------
--------- ---------- ----------
Deferred:
Federal 571,887 (272,856) (1,600,000)
State - - (100,000)
Foreign - - -
--------- ---------- ----------
571,887 (272,856) (1,700,000)
--------- ---------- ----------
--------- ---------- ----------
Total provision (benefit)
for income taxes: $ 907,516 $ 262,459 $(1,348,616)
--------- ---------- -----------
--------- ---------- -----------
Income before income taxes and minority interest in income of
consolidated subsidiaries and dividends for U.S. and foreign based operations is
shown below:
Fiscal Years ended April 30,
----------------------------------------
1998 1997 1996
----------- ----------- ------------
U.S. $ 4,574,310 $ 2,737,074 $ 2,655,220
Foreign 1,608,825 1,012,343 972,607
----------- ----------- ------------
6,183,135 3,749,417 3,627,827
----------- ----------- ------------
----------- ----------- ------------
The current provision (benefit) for income taxes for fiscal years 1998,
1997 and 1996 has been reduced by the utilization of approximately
$5,045,500, $3,953,000 and $1,650,000 of federal net operating loss
carryforwards, respectively. During fiscal years 1998, 1997 and 1996, the
current provision for state taxes was reduced by the utilization of
approximately $375,000, $246,000 and 140,000, respectively, of investment
and/or research tax credits. In addition, in fiscal year 1996 a state income
tax refund of approximately $82,000 was applied to the 1996 provision.
During the fourth quarter of fiscal year 1996, the Company reevaluated
the valuation allowance for its deferred tax assets. Based on this
reevaluation, which considered among other items projections as to future
taxable income, the Company determined that the valuation allowance should be
reduced by $1,700,000 principally due to the presumed future use of federal
net operating loss carryforwards. This reduction in the valuation allowance
is reflected in the deferred tax benefit for fiscal year 1996. During the
fourth quarter of fiscal year 1997, the Company reevaluated the valuation
allowance for its deferred tax assets. Based on this reevaluation, which
considered among other items, projections as to future taxable income, the
Company determined that the valuation allowance should be reduced by
$1,559,000 principally due to the presumed future use of federal net
operating loss carryforwards. This reduction in the valuation allowance is
reflected in the deferred tax benefit for fiscal year 1997. During fiscal
year 1998, the Company determined that there is no need to carry a valuation
allowance and therefore reduced the valuation allowance by $510,000. This
reevaluation was based on projections of future taxable income.
A reconciliation of income taxes computed at the federal statutory income
tax rate to income taxes reported in the consolidated statements of income is as
follows:
Fiscal years ended April 30,
--------------------------------
1998 1997 1996
----- ----- -----
Federal statutory income tax rate 34.0% 34.0% 34.0%
Permanent differences 3.0% 4.0 3.0
Benefit of net operating loss
carryforward (13.8) (38.0) (15.4)
Federal alternative minimum tax - 2.1 .9
State tax, net .4 .6 (3.7)
Foreign tax, net .1 4.3 .5
R and D Credit (9.0) - -
Recognition of Deferred Tax Asset - - (56.5)
----- ----- -----
Effective tax rate 14.7% 7.0% (37.2)%
----- ----- -----
----- ----- -----
The components of the Company's deferred tax liabilities and assets and the
related valuation allowance is as follows:
Years ended April 30,
--------------------------
1998 1997
----------- ------------
Deferred tax liabilities:
Tax over book depreciation $ (955,000) $ (866,000)
Other (81,000) (53,000)
----------- ----------
(1,036,000) (919,000)
----------- ----------
Deferred tax assets:
Net operating loss carryforwards - 1,234,000
Tax credit carryforwards 2,024,000 1,564,000
Inventory reserves 173,000 224,000
Other provisions for estimated expenses 439,000 380,000
----------- ----------
2,636,000 3,402,000
----------- ----------
Gross deferred tax asset 1,600,000 2,483,000
Valuation allowance - (510,000)
----------- ----------
Net deferred tax asset recognized $ 1,600,000 $ 1,973,000
----------- ----------
----------- ----------
The net deferred tax assets are included in other current assets and other
assets in the accompanying balance sheets.
At April 30, 1998, the Company had a general business tax credit
carryforward available for federal income tax purposes of approximately
$1,776,000 which, if not utilized, will expire by fiscal year 2012.
Additionally, the Company had an alternative minimum tax credit carryforward
available for federal income tax purposes of approximately $248,000 which does
not expire for tax reporting purposes.
6. COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company has certain non-cancelable operating leases for
facilities and equipment, and non-cancelable capital leases for machinery,
equipment and motor vehicles. Future minimum lease commitments under
non-cancelable leases are as follows:
Lease Obligations
--------------------------------
Fiscal years ending April 30, Capital Operating
----------------------------- -------------- ---------------
1999 $ 1,022,641 $ 1,035,726
2000 897,219 650,908
2001 646,055 503,772
2002 407,970 489,543
2003 258,551 503,394
Later years - 650,217
------------ ------------
Total minimum lease payments 3,232,436 $ 3,833,560
------------ ------------
Less imputed interest 457,061
------------
Present value of future minimum
lease payments 2,775,375
Less current portion 741,685
------------
Long-term capital lease obligation $ 2,033,690
------------
------------
Total rental expense under the operating leases for the fiscal years ended
April 30, 1998, 1997 and 1996 was approximately $1,126,700, $903,000, and
$632,000, respectively. The Company currently leases facilities in Cerritos,
California; Irvine, California; Seattle, Washington; Rijswijk, Holland;
Cheltenham, Australia; and De Mexico, Mexico. These leases are non-cancelable
and certain leases have renewal options.
During fiscal year 1998, IMPCO increased its $3,525,000 capital lease
facility to $5,525,000 to finance acquisitions of equipment such as machinery,
dies, molds and patterns, office furniture and fixtures and motor vehicles. At
April 30, 1998 and 1997 respectively, approximately $2,625,000 and $1,819,000
was outstanding under the capital lease facility. At April 30, 1998 the gross
and net assets acquired under the capital lease facility was approximately
$3,854,000 and $2,131,000, respectively. At April 30, 1997 the gross and net
assets acquired under the capital lease facility was approximately $2,482,000
and $1,056,000, respectively.
51
(b) CONTINGENCIES
The Company is currently subject to certain legal proceedings and claims
arising in the ordinary course of business. Based on discussions with legal
counsel, management does not believe that the outcome of any of these matters
will have a materially adverse effect on the Company's consolidated financial
statements.
INVESTMENT AND TAX SAVINGS PLAN
The Company's Investment and Tax Savings Plan (the Plan) is a defined
contribution plan which is qualified under Internal Revenue Service Code
Section 401(k). The Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA). All employees who are at
least age twenty-one or older are eligible to participate in the Plan on the
first day of any calendar month following one year of service with the
Company. Employees of the Company who elect to participate in the Plan may
contribute into the Plan not less than 1% nor more than 15% of compensation.
The Company's matching contributions are discretionary and match elective
salary deferrals up to 1.8% of compensation. Approximately 42% of eligible
employees were enrolled in the 401(k) plan at April 30, 1998. Employer
contributions totaled approximately $98,000, $95,000, and $85,000 for fiscal
years ended 1998, 1997 and 1996.
7. STOCKHOLDERS' EQUITY
(a) 1993 SERIES 1 PREFERRED STOCK
The holders of the Company's' 1993 Series 1 Preferred Stock (1993
Preferred) are entitled to receive annual cumulative dividends of up to $105
per share and not less than $80 per share ($100 per share at April 30, 1998).
The dividend rate, which is adjusted on the first day of each calendar
quarter, is based on the Seafirst Bank prime rate of interest plus 1.5%
(assuming a deemed principal value of $1,000 per share). Holders of 1993
Preferred are entitled to vote on all matters brought before the common
stockholders and have the number of votes equal to the number of full shares
of common stock into which the 1993 Preferred could then be converted.
The 1993 Preferred is convertible into common stock at the option of the
holders by dividing the then conversion price into its liquidation value of
$1,000 for each share being converted. At April 30, 1998, the conversion
price was $5.29 per share. The conversion price decreases if additional
shares of common stock are issued for a consideration per share less than the
then conversion price.
Each share of 1993 Preferred automatically converts into shares of
common stock upon the Company reporting audited consolidated net earnings of
$5,000,000 for a fiscal year, or upon the closing of an underwritten public
offering of the Company's common stock in which the Company realizes gross
proceeds of $10,000,000 or more and the public offering price is at least
$12.00 per share, provided that all dividends in arrears are paid and the
obligation of the underwriters is that all offered shares must be purchased.
Commencing March 31, 1999, the Company has the right to convert the 1993
Preferred to common stock if the average market price for the common stock
for the immediately preceding 30 trading days equals or exceeds the
conversion price then in effect and the Company pays all accrued dividends.
52
(b) WARRANTS TO PURCHASE COMMON STOCK
In the fourth quarter of the current fiscal year, the Company issued a
contingent warrant certificate that entitles a contractor to purchase 38,750
shares of Common Stock at a price of $12.00 per share. The warrant vests and
becomes exercisable if the closing price equals or exceeds $14.40 per share
occuring prior to April 9, 1999. In the first quarter of fiscal year 1999,
this condition was met but pursuant to an additional requirement the warrants
are not exercisable until April 9, 1999. The following table sets forth the
expiration date, number of warrants and the respective exercise prices of
these warrants.
EXPIRATION NUMBER
DATE OF WARRANTS EXERCISE PRICE
----------------- ------------------- --------------------
April 9, 2001 38,750 $12.00
At date of grant, the fair value of the warrants was determined at
$93,000 and is being amortized to expense over the service period.
(c) STOCK OPTIONS
The Company has five stock option plans which provide for the issuance of
options to key employees and directors of the Company. As of April 30, 1998,
1997 and 1996, the Company had outstanding stock options of 1,308,086, 922,810,
and 841,303, respectively, to purchase shares of common stock. The following
table summarizes the transactions of the Company's stock option plans for the
three year period ended April 30, 1998:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
_____________________________________________________________________
Unexercised options outstanding -
April 30, 1995 798,335 $7.59
Options granted 95,000 $8.56
Options exercised (13,198) $6.58
Options forfeited (38,834) $10.28
_____________________________________________________________________
Unexercised options outstanding -
April 30, 1996 841,303 $7.59
Options granted 238,118 $6.84
Options exercised (139,244) $3.16
Options forfeited (17,367) $8.60
_____________________________________________________________________
Unexercised options outstanding -
April 30, 1997 922,810 $7.82
Options granted 475,556 $7.86
Options exercised (57,795) $3.36
Options forfeited (32,485) $6.80
_____________________________________________________________________
Unexercised options outstanding -
April 30, 1998 1,308,086 $8.06
Price range $0.00 to $1.50 21,806 $.06
(weighted-average contractual life
of 3.5 years)
Price range $3.00 to $4.50 51,668 $3.89
(weighted-average contractual life
of 3.5 years)
Price range $4.50 to $6.00 80,832 $5.63
(weighted-average contractual life
53
of 3.5 years)
Price range $6.00 to $7.50 193,876 $6.43
(weighted-average contractual life
of 8.2 years)
Price range $7.50 to $9.00 664,348 $7.92
(weighted-average contractual life
of 8.7 years)
Price range $9.00 to $10.50 12,000 $9.13
(weighted-average contractual life
of 9.2 years)
Price range $10.50 to $12.00 283,556 $11.53
(weighted-average contractual life
of 6.0 years)
_____________________________________________________________________
Exercisable options -
April 30, 1996 576,889 $6.81
April 30, 1997 501,727 $8.00
April 30, 1998 544,232 $8.63
Price range $0.00 to $1.50 21,806 $.06
Price range $3.00 to $4.50 51,668 $3.89
Price range $4.50 to $6.00 80,832 $5.63
Price range $6.00 to $7.50 29,876 $7.04
Price range $7.50 to $9.00 117,550 $8.71
Price range $10.50 to $12.00 242,500 $11.57
_____________________________________________________________________
1997 INCENTIVE STOCK OPTION PLAN
During fiscal year 1998, the Company adopted the 1997 Incentive Stock Option
Plan. Options for up to 750,000 shares of common stock may be issued to
eligible employees. Options vest at a rate of 40% after the first two years
following the date of grant and 20% each year thereafter so that the employee is
100% vested in the option after 5 years. The Board of Directors may grant
options which have different vesting and exercise provisions. Further
information relating to this plan is as follows:
OPTION PRICE
PER SHARE APRIL 30, 1998
--------------- ----------------
Granted and effective $7.63 to $11.63 427,000
Exercisable at April 30 -
Shares available for future grant 3,000
In addition to the 427,000 options granted, 320,000 options have been
issued with contingent vesting schedules. These 320,000 options shall vest
pursuant to the plan's normal vesting schedule and be exercisable if the
closing price of the Company's Common Stock equals or exceeds (i) $17.00 per
share on or prior to April 30, 1999 or (ii) $15.30 per share on at least
twenty of thirty consecutive trading days occurring on or before April 30,
1999. The contingency provision was satisfied on June 26, 1998.
1996 INCENTIVE STOCK OPTION PLAN
During fiscal year 1997, the Company adopted the 1996 Incentive Stock
Option Plan. Options for up to 250,000 shares of common stock may be issued
to eligible employees. Options vest at a rate of 40% after the first two
years following the date of grant and 20% each year thereafter so that the
54
employee is 100% vested in the option after 5 years. Further information
relating to this plan is as follows:
FISCAL YEAR ENDED APRIL 30,
---------------------------
OPTION PRICE
PER SHARE 1998 1997
--------------- ------- -------
Beginning balance $6.25 to $11.00 212,583 -
Granted $6.25 to $11.00 38,556 218,118
Relinquished $6.25 to $8.75 (11,735) (5,535)
Exercised $8.38 (2,000) -
Ending balance $6.25 to $11.00 237,404 212,583
Exercisable at April 30 2,800 -
------- -------
------- -------
Shares available for future grant 10,596 37,417
------- -------
55
1993 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
During fiscal year 1994, the Company adopted the 1993 Stock Option Plan
for Nonemployee Directors. Options for up to 350,000 shares of the Company's
common stock may be issued to members of the Company's Board of Directors who
are not and have not been employees of the Company within three years prior
to the date of the grant of an option. Options are not assignable and
generally vest cumulatively at the rate of 25% per year, commencing twelve
months following the date of grant. The option exercise price per share is
the higher of (i) the average of the fair market values for the fifteen
trading days immediately following the date of grant or (ii) the market value
on the fifteenth trading day immediately following the date of grant.
Further information relating to this plan is as follows:
FISCAL YEAR ENDED APRIL 30,
------------------------------------
OPTION PRICE
PER SHARE 1998 1997 1996
--------------- ------- ------- -------
Beginning balance $8.64 to $11.78 290,000 270,000 220,000
Granted $8.64 to $11.78 - 20,000 70,000
Relinquished 11.78 - - (20,000)
------- ------- -------
Ending balance $8.64 to $11.78 290,000 290,000 270,000
------- ------- -------
------- ------- -------
Exercisable at April 30 255,000 222,500 200,000
------- ------- -------
------- ------- -------
Shares available for future grant 60,000 60,000 80,000
------- ------- -------
------- ------- -------
1991 EXECUTIVE STOCK OPTION PLAN
During fiscal year 1992, the Company adopted the 1991 Executive Stock
Option Plan, under which three executive officers were granted Series A and
Series B options. These options may be exercised at any time through
November 6, 2001, are not assignable, and may be exercised whether or not the
optionee is an employee at the time of exercise. The Series B options were
granted in exchange for the termination of certain executive officers rights
in the 1989 phantom stock pool. Further information relating to this Plan is
as follows:
FISCAL YEAR ENDED APRIL 30,
SERIES A OPTIONS OPTION PRICE -------------------------------------
---------------- PER SHARE 1998 1997 1996
---------------- ---------- ----------- -----------
Beginning balance $3.89 51,668 126,668 126,668
Exercised $3.89 - (75,000) -
------- -------- --------
Ending balance $3.89 51,668 51,668 126,668
------- -------- --------
------- -------- --------
Exercisable at April 30 51,668 51,668 126,668
------- -------- --------
------- -------- --------
SERIES B OPTIONS
Beginning balance $0.06 53,520 96,900 96,900
Exercised $0.06 31,714 43,380 -
------- -------- --------
Ending balance $0.06 21,806 53,520 96,900
------- -------- --------
------- -------- --------
Exercisable at April 30 21,806 53,520 96,900
------- -------- --------
------- -------- --------
56
1989 INCENTIVE STOCK OPTION PLAN
Under the Company's 1989 Incentive Stock Option Plan, up to 500,000
options may be issued. Options generally vest at the rate of 25% per year,
cumulatively, beginning on the first anniversary of the date of grant.
Further information relating to the 1989 Incentive Stock Option Plan is as
follows:
FISCAL YEAR ENDED APRIL 30,
-------------------------------------
OPTION PRICE
PER SHARE 1998 1997 1996
--------------- ------- ------- -------
Beginning balance $5.25 to $15.00 315,039 347,735 354,767
Granted $8.00 10,000 - 25,000
Exercised $6.00 to $ 9.00 (24,081) (20,864) (13,198)
Relinquished $6.00 to $10.38 (20,750) (11,832) (18,834)
------- ------- -------
Ending balance $5.25 to $15.00 280,208 315,039 347,735
------- ------- -------
Exerciseable at April 30 212,958 174,039 153,321
------- ------- -------
------- ------- -------
Shares available for future grant 23,586 12,836 1,004
------- ------- -------
------- ------- -------
57
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Numerator:
Net income $5,275,619 $3,486,958 $4,976,443
Preferred stock dividends (594,997) (581,365) (609,875)
Minority interest (410,554) (261,667) (305,568)
----------- ----------- -----------
Numerator for basic earnings per
share - income available to
common stockholders to common stock 4,270,068 2,643,926 4,061,000
Effect of dilutive securities:
Preferred stock dividends 594,997 - 609,875
----------- ----------- -----------
----------- ----------- -----------
Numerator for diluted earnings per
share - income available to
common stockholders after
assumed conversions $4,865,065 $2,643,926 $4,670,875
Denominator:
Denominator for basic earnings per
Share -- weighted-average shares 6,333,769 5,722,382 5,648,290
Effect of dilutive securities:
Employee stock options 450,315 117,738 166,503
Warrants 246,628 290,422 361,917
Convertible preferred stock 1,124,764 - 1,123,489
----------- ----------- -----------
Dilutive potential common shares 1,821,707 408,160 1,651,909
Denominator for diluted earnings per
share -- adjusted weighted-average
shares and assumed conversions 8,155,476 6,130,542 7,300,199
----------- ----------- -----------
Basic earnings per share $0.67 $0.46 $0.72
----------- ----------- -----------
----------- ----------- -----------
Diluted earnings per share $0.60 $0.43 $0.64
----------- ----------- -----------
For additional disclosures regarding the outstanding preferred stock, the
employee stock options, and the warrants, see Note 7.
Options to purchase 260,000 shares of common stock at prices ranging
from $10.88 to $11.78 were outstanding during fiscal year 1998 but were not
included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be anti-dilutive.
9. FASB 123: COMPENSATORY STOCK OPTION PLAN
The Company has elected to account for its employee stock options under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations in accounting for employee
stock options. No compensation expense is recorded under APB 25 because the
exercise price of the Company's employee common stock options equals the
market price of the underlying common stock on the grant date.
58
Statement 123 requires "as adjusted" information regarding net income
and net income per share to be disclosed for new options granted after fiscal
year 1996. The Company determined this information using the fair value
method of that Statement. The fair value of these options was determined at
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
YEAR ENDED APRIL 30,
1998 1997 1996
------- --------- ---------
Expected dividend yield 0% 0% 0%
Calculated volatility .534 .486 .497
Risk-free interest rate 3% 3% 3%
Expected Life of the option in years 9.09 8.70 8.35
The estimated fair value of the options is amortized to expense over the
options' vesting period for "as adjusted" disclosures. The net income per
share "as adjusted" for the effects of statement No. 123 is not indicative of
the effects on reported net income/loss for future years. The Company's
reported "as adjusted" information at April 30 is as follows: (in thousands,
except per share amounts):
59
YEAR ENDED APRIL 30,
1998 1997 1996
---- ---- ----
Net Income $4,270 $2,654 $4,061
As Adjusted $3,628 $2,467 $3,756
Net Income Per Share As Reported - Basic $.67 $.46 $.72
Net Income Per Share "As Adjusted" - Basic $.57 $.43 $.66
Net Income Per Share As Reported - Dilutive $.60 $.43 $.64
Net Income Per Share "As Adjusted" - Dilutive $.52 $.40 $.60
In management's opinion existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
that have vesting provisions and are not transferable. In addition, option
pricing models require the input of highly subjective assumptions, including
expected stock price volatility. For fiscal years 1997 and 1996, the "As
Adjusted" net income per share has been restated based on refined estimates
and assumptions.
10. REVENUES
During fiscal year 1998, the IMPCO, BV, IMPCO Pty and I.M.P.C.O.
Mexicano subsidiaries accounted for approximately sixteen percent, ten
percent and one percent of total consolidated revenues, respectively, and
contract revenue accounted for approximately twelve percent of consolidated
revenues. During fiscal year 1998, General Motors Corporation accounted for
approximately FIFTEEN percent of consolidated revenues. During fiscal years
1997 and 1996, no single unaffiliated customer exceeded ten percent of
consolidated revenues.
The Company routinely sells products to a broad base of customers, which
includes distributors and original equipment manufacturers. Based on the
nature of these customers, credit is generally granted without collateral
being required. Management does not anticipate that a significant credit risk
exists as a result of these customer relationships.
11. SEGMENT DATA
The Company has U.S. based operating facilities and three foreign based
operating subsidiaries in Holland (IMPCO BV), Australia (IMPCO Pty) and
Mexico (I.M.P.C.O. Mexicano). Transfers between geographic areas include
inter-company sales, which are eliminated in consolidation. Operating income
is total revenue less operating expenses, excluding finance charges and
taxes. Information concerning the Company's geographic areas of operation in
fiscal year 1998 is as follows (dollars in thousands):
Fiscal year ended April 30, 1998
---------------------------------------------------
United States Europe Australia Mexico Elims Consolidated
------------- ------ --------- ------ ----- ------------
Sales to unaffiliated
Customers $51,780 $ 11,588 $ 6,893 $ 822 $ - $ 71,083
Transfers between
geographic areas 8,826 - - - (8,826) -
------- -------- ------- ------ ------- ---------
Total revenue 60,606 11,588 6,893 822 (8,826) 71,083
------- -------- ------- ------ ------- ---------
------- -------- ------- ------ ------- ---------
Operating income 5,778 1,364 455 (47) (432) 7,118
------- -------- ------- ------ ------- ---------
------- -------- ------- ------ ------- ---------
Total assets,
at April 30, 1998 51,375 7,399 7,169 1,647 (10,298) 57,292
------- -------- ------- ------ ------- ---------
------- -------- ------- ------ ------- ---------
60
Export sales from the corporation's United States operations to
unaffiliated customers were as follows (dollars in thousands):
1998 1997 1996
------- ------ --------
Canada $ 1,214 $1,499 $ 1,659
Pacific Rim 8,146 4,139 4,966
Europe 11,588 5,500 2,529
Latin America 6,719 6,537 3,779
12. CONTRACT REVENUE
In August 1995, the Company extended its original 1993 two year
fixed-price contract with General Motors Corporation (GM) to develop,
manufacture and install compressed natural gas engine management systems (CNG
systems). Under the terms of the contract, the Company is engineering,
testing and validating CNG systems for certain 1997, 1998, and 1999 model
year car and truck platforms in compliance with GM's specifications.
Revenues for development efforts are principally recognized by the
percentage of completion method and principally related to contracts with GM.
During fiscal year 1998, 1997, and 1996 GM and other contract revenues
comprised 12%, 5%, and 6% of the Company's total revenues, respectively.
Operating income earned on the GM and other development contracts during
fiscal year 1998, 1997 and 1996 was approximately $1,511,000, $400,000 and
$155,000 after deducting an allocation for selling, general and
administrative costs.
13. PURCHASES
During fiscal years 1998, 1997 and 1996, purchases from one vendor
constituted approximately 18%, 17% and 20% of consolidated net inventory
purchases, respectively. In fiscal year 1998, 10 suppliers accounted for
approximately 55% of consolidated net inventory purchases.
14. SUPPLEMENTARY CASH FLOW INFORMATION
During fiscal years 1998, 1997 and 1996 the following non-cash
transactions were effected and are not reflected in the Consolidated
Statements of Cash Flows:
a) The Company incurred capital lease obligations of approximately
$1,296,000, $835,000 and $700,000, respectively.
b) Pursuant to the IMPCO BV acquisition an outstanding debt obligation of
1,279,000 Dutch Guilders (US $766,000), was converted into a term loan
during fiscal year 1996.
c) Interest and taxes paid during fiscal year 1998, 1997, and 1996 are as
follows:
Fiscal year ended April 30
--------------------------------------
1998 1997 1996
-------- ---------- --------
Interest paid $940,000 $1,062,000 $436,000
Taxes paid 191,000 755,000 110,000
61
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results of operations follows (in
thousands, except per share amounts):
Fiscal year 1998
July 31 Oct. 31 Jan. 31 Apr. 30
-------- -------- -------- --------
Product sales $ 14,151 $ 15,730 $ 14,835 $ 17,493
Contract revenue 2,138 2,432 2,158 2,146
Total revenue 16,289 18,162 16,993 19,639
Cost of sales 8,819 9,756 8,657 10,942
Gross Profit 7,470 8,406 8,336 8,697
Research and development
expense 3,066 3,278 3,628 3,365
Net income 692 991 1,197 1,391
Net income per share:
Basic .12 .17 .18 .20
Diluted .11 .15 .16 .18
Fiscal year 1997
July 31 Oct. 31 Jan. 31 Apr. 30
-------- -------- -------- --------
Product sales $ 14,179 $ 14,014 $ 14,765 $ 15,479
Contract revenue 970 633 294 1,495
Total revenue 15,149 14,647 15,059 16,974
Cost of sales 9,109 8,636 9,183 10,414
Gross Profit 6,040 6,011 5,876 6,560
Research and development
expense 2,284 2,087 1,784 2,325
Net income 567 495 623 959
Net income per share:
Basic .10 .09 .11 .17
Diluted .09 .08 .10 .15
16. OTHER MATTERS
In July 1998, the Company became aware of a fourth quarter 1997
transaction that could be in violation of certain U.S. Government export
regulations. In July 1997, the Company became aware of a similar transaction
which also occurred in the fourth quarter of 1997. In both cases, the
Company immediately engaged legal counsel to investigate the occurrences,
assess whether a violation occurred and advise whether disclosure should be
made to the appropriate governmental authorities. Following discovery of the
first fourth quarter 1997 transaction, the Company adopted a compliance
policy which includes compliance with export licensing and trade sanctions,
and has taken steps to make employees aware of export regulations. Also, the
first transaction was disclosed to the appropriate governmental authorities
in August of 1997.
Currently, there are no charges of wrong doing, any pending government
investigation of the Company's export activities or any other response from
the governmental authorities to the Company's prior disclosure. It is the
opinion of the Company that as a result of its disclosure of the facts to the
appropriate authorities in both cases, and in light of the facts that the
products sold were non-sensitive in nature and that the Company has installed
policies and procedures to prevent future violations of export regulations,
an ultimate settlement with the government should not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows. However, until the matter is settled with the government, the amount
of fines, if any, or other sanctions that may be imposed cannot be reasonably
estimated.
62
IMPCO TECHNOLOGIES, INC.
SCHEDULE II - VALUATION ACCOUNTS
Additions
charged
Balance at (credited) Write-offs Balance
beginning to costs and and other at end of
of period expenses adjustments period
--------- ------------ ----------- ---------
Allowance for doubtful accounts
for the years ended:
April 30, 1998 $288,111 $119,390 ($92,707) $314,794
April 30, 1997 165,322 157,288 (34,499) 288,111
April 30, 1996 153,802 13,000 (1,480) 165,322
Inventory valuation reserve
for the years ended:
April 30, 1998 837,718 235,865 (298,851) 774,732
April 30, 1997 610,515 384,829 (157,626) 837,718
April 30, 1996 1,280,000 237,151 (906,636) 610,515
Warranty reserve
for the years ended:
April 30, 1998 275,761 219,812 (194,383) 301,190
April 30, 1997 469,639 222,121 (416,000) 275,760
April 30, 1996 217,123 627,978 (375,462) 469,639
Product liability reserve
for the years ended:
April 30, 1998 91,935 - (42,944) 48,991
April 30, 1997 156,848 10,793 (75,705) 91,935
April 30, 1996 234,489 - (77,641) 156,848