As Filed with the Securities and Exchange Commission on February 8, 2002.
Registration No. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SYPRIS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 61-1321992
(State or other (I.R.S. Employer
jurisdiction of
incorporation or Identification No.)
organization)
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
(502) 329-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Jeffrey T. Gill
President & Chief Executive Officer
Sypris Solutions, Inc.
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
Telephone (502) 329-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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With Copies to:
Robert A. Heath, Esq. Kenneth G. Alberstadt,
Esq.
Wyatt, Tarrant & Combs, Wollmuth Maher & Deutsch
LLP LLP
2800 PNC Plaza 500 Fifth Avenue, Suite
1200
Louisville, Kentucky 40202 New York, New York 10110
Telephone (502) 589-5235 Telephone (212) 382-3300
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Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
maximum maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered (1) per share (2) offering price (2) registration fee
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Common Stock, $0.01 par value (3) 3,450,000 shares $14.85 $51,232,500 $4,713.39
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(1) Includes 450,000 shares issuable pursuant to an over-allotment option
granted to the underwriters.
(2) Estimated and calculated pursuant to Rule 457(c), solely for the purpose of
calculating the registration fee.
(3) Includes the Series A Preferred Stock purchase rights associated with the
common stock.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell securities, and we are not soliciting offers to buy these
securities, in any state where the offer or sale is not permitted.
Subject to completion, dated February 8, 2002
PROSPECTUS
3,000,000 Shares
[LOGO] Sypris
Solutions
Common Stock
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We are offering 3,000,000 shares of our common stock. Our common stock is
traded on the Nasdaq National Market under the symbol SYPR. On February 6,
2002, the last reported sale price for our common stock on the Nasdaq National
Market was $14.85 per share.
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Investing in our common stock involves risks. See "Risk Factors" beginning
on page 5.
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Per share Total
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Public Offering Price......................... $ $
Underwriting Discount......................... $ $
Proceeds, before expenses, to Sypris Solutions $ $
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We have granted the underwriters the right to purchase up to an additional
450,000 shares of our common stock from us to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
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Needham & Company, Inc. A.G. Edwards & Sons, Inc.
The date of this prospectus is , 2002.
INSIDE FRONT COVER GRAPHICS:
Top of the page text: Providing Customers with Solutions
Bottom of the page: Appears Sypris logo.
Also shown are four depictions representing the primary markets in which the
company provides its services or sells its products.
Depiction 1 (first 1/4 of page): shows jet fighters and contains the
following phrases:
Manufacturing Services
Aerospace & Defense Electronics
Where performance, precision and reliability are critical.
We are an established supplier of manufacturing and technical services
for the production of complex circuit cards for use in missile guidance
systems, avionics and satellite communication systems.
Depiction 2 (second 1/4 of page): shows a class 8 truck and contains the
following phrases:
Truck Components & Assemblies
Helping customers compete on a global basis.
We are the principal supplier of manufacturing services for the
production of medium and heavy-duty truck axles in North America.
Depiction 3 (third 1/4 of page): shows communications tower in background
and contains the following phrases:
Test & Measurement Services
Meeting mission critical charters in the most remote of locations.
We provide technical services for the calibration, certification and
repair of test and measurement equipment in the U.S.
Depiction 4 (fourth 1/4 of page): shows three pie charts - revenue mix,
markets and top five customers.
TABLE OF CONTENTS
Page
----
Prospectus Summary................................................................... 1
Summary Consolidated Financial Data.................................................. 4
Risk Factors......................................................................... 5
Forward Looking Statements........................................................... 13
Use of Proceeds...................................................................... 13
Price Range of Common Stock.......................................................... 14
Dividend Policy...................................................................... 14
Capitalization....................................................................... 15
Selected Consolidated Financial Data................................................. 16
Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Business............................................................................. 27
Management........................................................................... 39
Certain Relationships and Related Transactions....................................... 44
Principal Stockholders............................................................... 45
Description of Capital Stock......................................................... 47
Shares Eligible For Future Sale...................................................... 49
Underwriting......................................................................... 50
Legal Matters........................................................................ 51
Experts.............................................................................. 51
Where You Can Find More Information.................................................. 52
Index to Consolidated Financial Statements........................................... F-1
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You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized anyone to provide you with
information different from that contained in this prospectus. We are not, and
the underwriters are not, making an offer to sell or seeking offers to buy,
these securities in any jurisdiction where the offer or sale is not permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of these securities.
In this prospectus, "Sypris," "SYPR," "we," "us" and "our" refer to Sypris
Solutions, Inc. and its subsidiaries and predecessors, collectively. "Sypris
Solutions" and "Sypris" are our trademarks. All other trademarks, servicemarks
or trade names referred to in this prospectus are the property of their
respective owners.
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PROSPECTUS SUMMARY
This summary highlights our business and other selected information
contained elsewhere in this prospectus. This summary does not contain all of
the information that you should consider before making an investment decision.
You should read the entire prospectus carefully, including our financial
statements and other information incorporated by reference in this prospectus,
before deciding to invest. This prospectus contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from the results anticipated in those forward-looking statements as
a result of factors described under the heading "Risk Factors" and elsewhere in
this prospectus.
Our Business
We are a diversified provider of outsourced services and specialty products.
We perform a wide range of manufacturing, engineering, design, testing and
other technical services, typically under multi-year, sole-source contracts
with major companies and government agencies in the markets for aerospace &
defense electronics, truck components & assemblies, and for users of test &
measurement equipment. Outsourced services accounted for approximately 82% of
our revenue during the year ended December 31, 2001 and we expect this
percentage to increase in the future.
We focus on those markets where we have the expertise, qualifications and
leadership position to sustain a competitive advantage. We develop strong
partnerships with industry leaders who embrace multi-year contractual
relationships as a strategic component of their supply chain management and
have the potential for long-term growth. The quality of these contracts, many
of which are sole-source by part number and which are for terms of up to seven
years, enables us to invest in leading-edge technologies to help our customers
remain competitive. As a recent example, during 2001 we entered into a
multi-year contract with Dana Corporation that runs through 2008 and is
expected to generate approximately $300 million of revenue over the term of the
agreement, based upon current market volumes and other assumptions described
more fully elsewhere in this prospectus.
The investments we make in advanced manufacturing and process technologies
in support of our contracts provide us with the productivity, flexibility,
capabilities and economies of scale that help to differentiate us from the
competition when it comes to cost, quality, reliability and customer service.
For example, during 1999 we launched a $35 million capital investment program
to expand and automate the services we provide to our customers in the truck
components & assemblies market. The automation substantially increased our
output per man hour and the integration of new machining capabilities with our
existing operations will enable us to reduce labor and shipping costs and
minimize cycle times for our customers. In addition, the ability to use these
assets to meet the production needs of a number of customers should help us to
balance our risk and increase capacity utilization, thereby further reducing
our total cost of production.
We have established positions of leadership in each of our core markets,
which consist of the following:
Aerospace & Defense Electronics. We have been a supplier of manufacturing
and technical services to major aerospace & defense companies and agencies of
the U.S. Government for over 35 years. Our customers include Boeing Company,
Honeywell International, Inc., Lockheed Martin Corporation, Northrop Grumman
Corporation and Raytheon Company. We manufacture complex circuit cards,
high-level assemblies and subsystems for applications where performance,
precision and reliability are critical, such as missile guidance systems,
satellite communications systems and avionics. We also have a long-term
relationship with the National Security Agency to design and build secure
communications equipment and write encryption software. The defense budget for
fiscal 2002, as well as the recently proposed defense budget for fiscal 2003,
contains provisions to increase spending for missiles, smart weapons, sensors,
surveillance, intelligence and secure communications, areas for which we have
long provided essential services and products.
1
Truck Components & Assemblies. We are the principal supplier of
manufacturing services for the forging and machining of medium and heavy-duty
truck axles in North America. We provide these services under multi-year,
sole-source contracts with ArvinMeritor, Inc. and Dana, the two primary
providers of drive train assemblies for the leading truck manufacturers,
including Freightliner LLC, Mack Trucks, Inc., Navistar International
Corporation, PACCAR, Inc., and Volvo Truck Corporation. During 2002, we expect
to ramp-up production for new and certain existing customers on additional
forging and machining equipment we installed during 2001.
Test & Measurement Services. We provide technical services for the
calibration, certification and repair of test & measurement equipment in the
U.S. Our customers include AT&T Corporation, Bose Corporation, Lucent
Technologies, Inc., Schneider Electric SA, Siemens AG and TRW Inc., which
utilize these services to ensure their equipment is maintained in accordance
with the requirements of certain manufacturing and quality assurance standards.
We are the sole provider of calibration, certification and repair services for
equipment used by the Federal Aviation Administration to maintain the radar
systems and directional beacons at each of the airports it serves in the U.S.,
the Caribbean and the South Pacific. We also have a sole-source relationship
with the National Weather Service to calibrate and certify the equipment that
is used to maintain the NEXRAD Doppler radar systems at each of its advanced
warning weather service radar stations.
We believe the trend toward outsourcing is continuing because outsourcing
frequently represents a more efficient, lower cost means for producing a
product or delivering a service. We believe that our core markets will
experience even greater growth in outsourcing in response to industry
consolidation and global competition as companies increasingly embrace the use
of outsourcing specialists as a strategic means to enhance operating
flexibility, reduce costs, preserve capital and gain access to advanced
manufacturing and process technologies. According to the Dun & Bradstreet
Barometer of Global Outsourcing last published in 2000, outsourcing worldwide
was estimated to increase in excess of 25% from 1999 to 2000. According to
Electronic Trend Publications and New Venture Research, outsourcing in the
aerospace & defense electronics market in particular is expected to continue to
grow far more rapidly than the economy as a whole, with growth forecasted to
increase at a compounded annual rate of 40% per year from 2002 to 2005.
Our objective is to increase our leadership position in each of our core
markets. We intend to serve our customers and achieve this objective by
continuing to:
. concentrate on our core markets;
. dedicate our resources to support strategic partnerships;
. invest to increase our competitiveness and that of our partners;
. grow through the addition of new value-added services; and
. target strategic acquisitions that enhance our market leadership.
We believe that by maintaining a concentrated focus, we will benefit as
companies increasingly favor outsourcing specialists who have the financial,
managerial and capital resources to assume an increasingly greater role in the
management of their supply chains.
2
The Offering
Unless otherwise indicated, all information in this prospectus assumes no
exercise by the underwriters of their over-allotment option to purchase up to
450,000 additional shares of our common stock from us.
Common stock offered..... 3,000,000 shares
Common stock outstanding
after the offering..... 12,904,375 shares
Use of proceeds.......... The proceeds from the
common stock offering
will beused to repay a
portion of our credit
facility.
Nasdaq National Market
symbol................... SYPR
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Common stock to be outstanding after this offering is based on 9,904,375
shares outstanding as of January 28, 2002, and excludes options to purchase
1,844,184 shares of our common stock exercisable at a weighted average exercise
price of $7.63 per share and 377,303 shares of common stock reserved for future
grant or issuance under our equity incentive compensation plans.
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We are organized as a Delaware corporation. Our principal executive office
is located at 101 Bullitt Lane, Suite 450, Louisville, Kentucky 40222, and our
telephone number is (502) 329-2000. We maintain a corporate web site at
www.sypris.com. The information on our web site is not part of this prospectus.
3
Summary Consolidated Financial Data
(in thousands, except per share data)
We derived the summary financial information below as of and for each of the
years ended December 31, 1999, 2000 and 2001 from our audited financial
statements included elsewhere in this prospectus.
The as adjusted information reflects the application of the net proceeds
from the sale of 3,000,000 shares of our common stock in this offering at an
assumed public offering price of $14.85 per share, after deducting underwriting
discounts and estimated offering expenses payable by us, and the repayment of
$41.8 million in outstanding debt.
Years Ended December 31,
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1999 2000 2001
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Consolidated Income Statement Data:
Net revenue................................ $202,130 $216,571 $254,640
Gross profit............................... 44,949 40,313 43,547
Operating income........................... 14,166 5,477 13,030
Net income................................. 9,556 3,184 6,367
Net income per share:
Basic..................................... $ 1.00 $ 0.33 $ 0.65
Diluted................................... $ 0.97 $ 0.32 $ 0.63
Shares used in computing per share amounts:
Basic..................................... 9,515 9,671 9,828
Diluted................................... 9,861 9,964 10,028
December 31, 2001
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Actual As Adjusted
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Consolidated Balance Sheet Data:
Cash and cash equivalents............. $ 13,232 $ 13,232
Working capital....................... 67,325 67,325
Total assets.......................... 211,444 211,444
Current portion of long-term debt..... 7,500 7,500
Long-term debt, net of current portion 80,000 38,187
Total stockholders' equity............ 70,120 111,933
4
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risks and all the other information in this
prospectus before making an investment decision about our common stock. While
the risks described below are the ones we believe are most important for you to
consider, these risks are not the only ones that we face. If any of the
following risks actually occurs, our business, operating results or financial
condition could be materially adversely affected, the trading price of our
common stock could decline and you could lose all or part of your investment.
Risks Related to Our Business
Fluctuations in our operating results may cause our stock price to decline.
Our operating results have varied from quarter to quarter and may vary
significantly in the future. As a result of these fluctuations, our revenue
growth and operating results at any given time may fall below the expectations
of securities analysts or investors. If this occurs, the price of our common
stock is likely to decline.
We frequently incur significant start-up costs at the beginning of a
manufacturing services contract. Accordingly, our level of experience in
manufacturing a particular product and our efficiency in minimizing start-up
costs can materially affect our operating results in a particular quarter.
Additional factors that may cause our results to fluctuate include:
. variations in the level and timing of orders placed by customers;
. our effectiveness in managing inventories and production capacity;
. fluctuations in material costs and/or lead times;
. the mix of material costs versus labor and manufacturing overhead costs;
. price competition and the ability to pass on excess costs to customers;
. the timing of expenditures in anticipation of increased sales and customer
delivery requirements;
. changes in assumptions underlying the funding of our defined benefit
pension plan obligations; and
. economic conditions generally and affecting us specifically.
In addition, we conduct a portion of our business under multi-year contracts
and, where appropriate, we use the percentage of completion, units of delivery
method of accounting, which involves substantial estimation processes,
including estimates of future costs to complete contracts. Revisions of
estimates are reflected in operating results in the period in which the factors
causing the revisions become known. Accordingly, operating results are subject
to the effect of these revisions.
The demand for our services and products is subject to the needs of our
customers, which could vary dramatically, resulting in lower than expected net
earnings and a decline in our stock price.
Our customer orders can fluctuate dramatically for a variety of reasons,
including anticipated and unanticipated product life cycle durations, new
product introductions and competitive conditions in our customers' industries.
Many of our customers will not commit to firm production schedules for more
than one quarter in advance and we may be requested to accommodate delivery
schedule modifications. As a result, we may be unable to accurately forecast
the level of our customers' service and product requirements, which in turn may
affect, and in some instances impair, our ability to maintain stable
utilization of our manufacturing capacity and manage our inventories. In
addition, we have at times been required to increase or decrease staffing and
incur other expenses to meet the fluctuating demands of our customers. The
fluctuation and deferral of customers' orders have had an adverse effect on our
operating results in the past and there can be no assurance that we will not
experience such effects in the future.
5
Many of our multi-year contracts contain terms that could negatively affect our
future financial results.
Many of our multi-year contracts do not include minimum purchase
requirements. As a result, we cannot predict the demand for our services and
products under such contracts. In certain instances, we may be required to make
investments in order to service potential future requirements under such
contracts and we may not be able to make those investments or those investments
may prove to be less profitable than we anticipate. In general, under our
contracts, start-up costs, the management of labor and equipment resources in
connection with the establishment of new programs and any inability to
accurately project required resources could adversely affect our gross margins,
operating results and capital resources.
A substantial part of our revenue is derived from manufacturing services in
which we provide material sourcing, procurement, testing and assembly, among
other functions. In certain instances, we bear the risk of component price
increases, which could increase costs and reduce our operating income. The
majority of our contracts are fixed-price type contracts. Under this type of
contract, we bear the inherent risk that actual performance cost may exceed the
fixed contract price. This is particularly true where the contract was awarded
and the price finalized in advance of final completion of design. For these and
other reasons, including competitive pressures attendant to the bidding process
under which many of our U.S. Government contracts are awarded, contracts we
enter into may prove to be unprofitable.
Several of our multi-year contracts have provisions that specify price
reductions on a periodic basis during the life of the contract. Our ability to
control costs, achieve productivity improvements and develop new processes will
be essential if we are to maintain our profit margins during future reductions
of prices under these contracts. If we are unable to offset these reductions in
price with savings through increased operating efficiencies or from other
sources, our financial performance will suffer.
We, like other government contractors, are subject to various audits,
reviews and investigations (including private party "whistleblower" lawsuits)
relating to our compliance with federal and state laws. Generally, claims
arising out of these U.S. Government inquiries and voluntary disclosures can be
resolved without resorting to litigation. However, should the business involved
be charged with wrongdoing, or should the U.S. Government determine that the
unit or division is not a "presently responsible contractor," that business,
and conceivably our company as a whole, could be temporarily suspended or, in
the event of a conviction, debarred for up to three years from receiving new
government contracts or government-approved subcontracts. In addition, we could
expend substantial amounts in defending against such charges and in damages,
fines and penalties if such charges are proven or result in negotiated
settlements.
If our contracts are terminated or not renewed or our customers are unable to
perform under contracts they have entered into with us, our operating results
could be harmed.
We provide manufacturing services and products under contracts that contain
detailed specifications, quality standards and other terms that we must comply
with in performing our contract obligations. If we are unable to perform in
accordance with the terms of any contract, the customer could seek to terminate
that contract. Moreover, most of our U.S. Government contracts are subject to
termination by the U.S. Government either at its convenience or upon our
default. Termination-for-convenience provisions provide only for the recovery
of costs incurred or committed, settlement expenses, and profit on work
completed prior to termination. Termination-for-default provisions impose
liability on the contractor for excess costs incurred by the U.S. Government in
reprocuring undelivered items from another source. If any of our significant
contracts were to be terminated or not renewed, we would lose substantial
revenues and our operating results would be adversely affected.
We are required to make substantial capital investments in order to supply
manufacturing services to customers launching new programs. If a new program in
which a substantial investment had been made were to be delayed or terminated,
we could lose the benefit of the associated start-up costs, as well as the
anticipated revenues from the program, and our operating results could be
harmed. Moreover, the inability or unwillingness
6
of any customer to perform under a significant contract, particularly certain
of our multi-year contracts, could materially and adversely affect our
financial condition and results of operations.
Growth in our operations may strain our resources. If we are unable to
successfully manage our growth, our business could be seriously harmed.
If we are unable to successfully manage our growth or if we have problems
implementing our new systems or controls, our business could be seriously
harmed. This growth has placed, and our future growth may place, a significant
strain on our management and other resources. To manage this growth, we will be
required to implement new operational and financial systems, procedures and
controls and expand and train our employee base. We cannot assure you that our
management or systems will be adequate to support our existing or future
operations. If we are unable to manage our growth and assimilate new operations
cost effectively, our profitability could decline.
Our growth strategy includes acquiring complementary businesses. Most of our
acquisitions require the approval of our bank group. We cannot assure you that
we will be able to successfully identify suitable acquisition opportunities or
finance and complete any particular acquisition, combination or other
transaction on acceptable terms and prices. Furthermore, acquisitions may
involve a number of risks for us, including:
. diversion of management's attention;
. difficulties in integrating systems, operations and cultures;
. potential loss of key employees and customers of the acquired companies;
. lack of experience operating in the geographic market of the acquired
business; and
. an increase in our expenses and working capital requirements.
We must integrate acquisitions successfully in order to maintain
profitability of the acquired businesses and operations.
If we are unable to obtain additional capital on favorable terms, our growth
could be adversely affected.
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including the pace at which we grow
our business and acquire new facilities. In addition to the net proceeds we
will receive from this offering, we may need to raise substantial additional
funds. We cannot be certain that we will be able to obtain such additional
financing on favorable terms or at all. Additional equity financing could
result in dilution to existing holders, including holders of common stock
purchased in this offering. If additional financing is obtained in the form of
debt, the terms of the debt could place restrictions on our ability to operate
or increase the financial risk of our capital structure.
If we are unable to raise additional funds when needed, our ability to
operate and grow our business could be impeded. Our ability to obtain
additional financing will be subject to a number of factors, including market
conditions, our operating performance and investor sentiment. These factors may
make the timing, amount, terms and conditions of additional financing
unattractive for us.
Most of our sales come from a small number of customers and many of these
customers are in consolidating industries. If we lose any of our customers, our
net revenue could decline significantly.
Our five largest customers accounted for approximately 39% and 46% of our
net revenue in 2000 and 2001, respectively. Our most significant customers are
in the aerospace & defense electronics and truck components & assemblies
industries. The aerospace & defense electronics industry, in particular, has
been characterized by consolidation in the last several years. If any of our
significant customers were to be involved in a business combination, it is
possible that the combined entity might choose to terminate business with us or
originate new
7
business with our competitors. If one or more of our major customers does not
engage us to provide additional services and products, or if it reduces the
amount of our services and products that it uses, and we are not able to sell
our services and products to new customers at comparable levels, our revenue
could decline materially. In addition, the non-payment or late payment of
amounts due from our major customers could adversely affect us.
We face substantial competition and our failure to compete successfully will
limit our ability to retain or increase our market share.
We operate in a highly competitive environment and compete against numerous
domestic and foreign companies. In addition, we are dependent upon the
continuing trend of original equipment manufacturers, or OEMs, to outsource,
and we consider the internal capabilities of our customers to be a source of
substantial competition. We believe that the principal competitive factors in
our markets include the availability of capacity, technological capability,
flexibility and timeliness in responding to design and schedule changes, price,
quality, delivery and financial strength. Our net revenue could decline if our
competitors or customers are able to provide comparable manufacturing services
or products at a lower cost, or if we fail to make the investments in our
business necessary to provide the range and quality of manufacturing services
and products our customers require.
Some of our competitors are larger and have greater financial and
organizational resources, larger customer bases and greater brand or name
recognition than we do. As a consequence, our competitors may be better able to
respond to technological changes or customer needs or finance acquisitions or
internal growth. If we fail to compete successfully, we may not be able to
retain or increase our market share and our business could be seriously harmed.
There can be no assurance that our business will not be adversely affected by
increased competition, or that we will be able to maintain our profitability if
the competitive environment changes.
We generate a substantial amount of revenue from sales to agencies of the
federal government, which can be negatively impacted by budgetary constraints
and Congressional priorities.
We sell manufacturing services and products to a number of government
agencies, which in the aggregate represented approximately 21% and 16% of net
revenue during 2000 and 2001, respectively. We also serve as a contractor for a
number of large aerospace & defense companies, such as Boeing, Honeywell,
Lockheed Martin, Northrop Grumman and Raytheon, that participate in federally
funded programs. Sales to these companies, in the aggregate, represented
approximately 30% and 40% of net revenue during 2000 and 2001, respectively.
Performance under government contracts has certain inherent risks that could
have an adverse impact on our business, results of operations and financial
condition.
Government contracts are conditioned upon the continuing availability of
Congressional appropriations. Congress typically appropriates funds for a given
program on a fiscal-year basis even though contract performance may take more
than one year. As a result, at the beginning of a major program, a contract is
typically only partially funded and additional monies are normally committed to
the contract by the procuring agency only as appropriations are made by
Congress for future fiscal years. Future levels of defense spending cannot be
predicted and delays or declines in U.S. military expenditures could adversely
affect our business, results of operations and financial condition, depending
upon the programs affected, the timing and size of the changes, and our ability
to offset the impact with new business or cost reductions.
We purchase certain components that are available from only a limited number of
suppliers and/or are subject to allocation among users, and any interruption in
the supply of these components could adversely affect our profitability.
Some of our manufacturing services or products require one or more
components that are available from a limited number of providers or from
sole-source providers. In the past, some of the materials we use, such as
capacitors and memory and logic devices, have been subject to industry-wide
shortages. As a result, suppliers have been forced to allocate available
quantities among their customers and we have not been able to obtain all
8
of the materials desired. Our inability to obtain these needed materials could
slow production or assembly, delay shipments to our customers, increase costs
and reduce operating income.
Our competitiveness could be challenged and our business could be negatively
impacted should we fail to maintain satisfactory labor relations.
We currently have collective bargaining agreements, covering approximately
600 employees, with the United Steelworkers of America, the International
Association of Machinists, the International Brotherhood of Electrical Workers,
the International Brotherhood of Teamsters, and the International Brotherhood
of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers and Helpers, AFL-CIO.
Since October 2001, we have been experiencing a strike by approximately 115 of
our 303 Teamsters union employees at our Tampa, Florida facility. We have
replaced the striking workers with permanent employees and implemented the last
contract proposal in accordance with applicable laws and regulations. The
strike has not had a negative impact on our operations or financial performance
to date, though there can be no assurance that this will be the case in the
future. Although we believe overall that our relations with our labor unions
are positive, there can be no assurance that present and future issues with our
unions will be resolved favorably or that we will not experience a work
stoppage, which could adversely affect our results of operations.
We are a party to two lawsuits, which if determined adversely to us, could have
a material adverse effect on our earnings.
Our Sypris Technologies subsidiary is a co-defendant in two lawsuits arising
out of an explosion at a coker plant owned by Exxon Mobil Corporation located
in Baton Rouge, Louisiana. In each of these lawsuits, it is alleged that a
carbon steel pipe elbow that we manufactured was improperly installed and the
failure of which caused the explosion. One of the actions was brought by Exxon
Mobil in 1994 in state district court in Louisiana and claims damages for
destruction of the plant, which Exxon Mobil estimates exceed one hundred
million dollars. We are a co-defendant in this action with the fabricator who
built the pipeline into which the elbow was incorporated and with the general
contractor for the plant. The second action is a class action suit also filed
in 1994 in federal court in Louisiana on behalf of the residents living around
the plant and claims unspecified damages. We are a co-defendant in this action
with Exxon Mobil, the contractor and the fabricator. In both actions, we
maintain that the carbon steel pipe elbow at issue was appropriately marked as
carbon steel and was improperly installed, without our knowledge, by the
fabricator and general contractor in circumstances that required the use of a
chromium steel elbow. Although we believe these defenses to be meritorious,
there can be no assurance that we will not be found liable for some or all of
the alleged damages. If we were to be found liable and the damages exceeded
available insurance coverage, the impact could materially and adversely affect
our financial condition and results of operations.
We may incur material losses and costs as a result of product liability claims
that may be brought against us.
We face an inherent risk of exposure to product liability claims in the
event that the failure of our products results, or is alleged to result, in
bodily injury or property damage. We cannot assure you that we will not
experience any material product liability losses in the future or that we will
not incur significant costs to defend such claims. Although we are currently
covered by insurance against product liability claims, we cannot assure you
that such coverage will be adequate for liabilities ultimately incurred or that
it will continue to be available on terms acceptable to us. In addition, if any
of the products of which our components are a part are alleged to be defective,
we may be required to participate in a recall involving such products. Each
vehicle manufacturer has its own policy regarding product recalls and other
product liability actions relating to its suppliers. However, as suppliers
become more integrally involved in the vehicle design process and assume more
of the vehicle assembly functions, vehicle manufacturers are increasingly
looking to their suppliers for contribution when faced with product liability
claims. A successful claim brought against us in excess of our available
insurance coverage, or a requirement to participate in a product recall, may
have a material adverse effect on our business.
Our ability to operate effectively could be impaired if we were to lose key
personnel or fail to attract and retain qualified employees.
Our future success will depend to a large extent upon the efforts and
abilities of key senior management, managerial and technical employees. The
loss of services of certain of these key employees could have a material
9
adverse effect on our business. Our future success will also be influenced by
our ability to continue to attract and retain qualified employees. We generally
do not enter into employment agreements with our employees and have limited the
use of employment agreements to executive recruitment and the retention of key
management associated with an acquisition.
We may be unable to comply with covenants contained in our credit agreement,
which could result in the impairment of our working capital and alter our
ability to operate our business.
We have obtained substantial credit from a bank group led by Bank One,
Kentucky, NA. To maintain the right to make additional borrowings and avoid a
default under our credit agreement, we are required to meet certain financial
tests and comply with certain operating covenants contained in that agreement.
We are currently in compliance with the restrictions and covenants contained in
our credit agreement. However, our ability to meet required financial ratios
and tests can be affected by events beyond our control, including prevailing
economic, financial and industry conditions, and we cannot assure you that we
will continue to meet those tests in the future. A breach of any of these
covenants, ratios or tests could result in a default under our credit
agreement. If we default, our lenders will no longer be obligated to extend
credit to us and could elect to declare all amounts outstanding under the
credit agreement, together with accrued interest, to be immediately due and
payable. If we were unable to repay those amounts, the lenders could proceed
against the collateral granted to them to secure that indebtedness. The results
of such action would have a material adverse impact on our results of
operations and financial condition.
Risks Related to Our Industry
We have a high degree of dependence on the aerospace & defense and truck
components & assemblies industries, and any negative developments in these
industries could have a material adverse impact on our business.
We are dependent upon the continued growth, viability and financial
stability of our customers, which are in turn substantially dependent upon the
growth, viability and financial stability of the industries in which they
operate, including the aerospace & defense and truck components & assemblies
industries. These industries have been characterized by rapid technological
change and shortened product life cycles, and recently have experienced pricing
and profit pressures. In addition, our customers are affected by general
economic conditions. Adverse changes in the industries in which our customers
operate or a loss of market share by our customers could have a material
adverse effect on our operating results. Our business may also be adversely
affected by changes in funding levels for certain government programs and the
manner in which services and products are acquired under these programs.
The aerospace & defense industries have historically been subject to
cyclicality. Congress recently approved a supplemental appropriation in
response to the events of September 11, 2001, a significant portion of which is
expected to be spent on defense. However, the overall U.S. military budget
declined in real dollars from the mid-1980s through the late-1990s and the
missile electronics component of the budget declined in absolute dollars during
the first half of the 1990s. Any significant decline in defense spending,
particularly in the areas of missile systems and secured electronic
communications systems, could have an adverse impact on our results of
operations.
We provide manufacturing services for a number of companies that supply
components and subassemblies for use in the manufacture of medium and
heavy-duty trucks, including ArvinMeritor and Dana. The automotive and truck
markets are highly cyclical and can be subject to dramatic swings in demand.
According to America's Commercial Transportation (ACT) Publications, the market
for medium and heavy-duty trucks has declined significantly from the highs
experienced in 1999, resulting in a decrease in production levels of
approximately 44% from 1999 to 2001. The trucking industry has been impacted by
the general downturn in the economy, the existence of large volumes of high
quality used equipment, a lack of credit availability to expand fleets, higher
fuel prices and driver wages and rising insurance costs. Should these factors
continue in the future, the further
10
decline in these markets could have an adverse impact on our results of
operations. Many of our customers in this industry are undergoing
restructuring, which creates uncertainty and therefore risk for our business.
Our success is substantially dependent upon the continuing trend of our
customers to purchase the manufacturing services and products we provide.
Our success in originating business is dependent upon the continuing belief
by our customers that outsourcing the services and products we provide is a
means to reduce excess capacity, lower costs, improve quality and/or increase
balance sheet productivity. Should structural or other changes occur in the
industries we serve that cause outsourcing to be less attractive, our financial
results could be harmed.
The markets for our services and products are subject to rapid technological
change. Our failure to respond timely or adequately to those changes may render
our existing technology less competitive or obsolete, and our operating results
may suffer.
The markets for our services and products are characterized by rapidly
changing technology and continuing process development. The future success of
our business will depend in large part upon our ability to maintain and enhance
our technological capabilities, make required capital investments, develop and
market services and products that meet changing customer needs, and
successfully anticipate or respond to technological changes on a cost-effective
and timely basis. We and other providers of outsourced services and products to
the aerospace & defense electronics and truck components & assemblies
industries could in the future encounter competition from new or revised
technologies that render existing technology and equipment less competitive or
obsolete. There can be no assurance that we will effectively respond to the
technological requirements of the changing market, including the need for
substantial additional capital expenditures that may be required as a result of
those changes and as a result, our operating results may suffer.
We are subject to risks associated with environmental regulations, which expose
us to potential liability.
We are subject to a variety of environmental regulations relating to the
use, storage, discharge and disposal of hazardous chemicals and substances used
in our operations. If we fail to comply with present or future regulations, the
following adverse effects could occur:
. we could be forced to alter manufacturing processes;
. we could be fined substantial amounts;
. our production could be suspended; or
. we could be forced to discontinue certain operations.
Groundwater and other contamination has occurred at certain of our current
and former facilities during the operation of those facilities by their former
owners. See "Business--Environmental Matters."
11
Risks Related to this Offering
Our stock price has been volatile, which may make it more difficult to realize
a gain on your investment in our stock.
The market price of our common stock has been volatile. The value of our
common stock may decline regardless of our operating performance or prospects.
Moreover, prior to this offering, most of our common stock has been held by
affiliates, and we cannot assure you that an active public market for our
securities will develop after this offering. The trading price of our common
stock could be subject to wide fluctuations in response to:
. our perceived prospects;
. variations in our operating results and our achievement of key business
targets;
. changes in securities analysts' recommendations or earnings estimates;
. differences between our reported results and those expected by investors
and securities analysts;
. announcements of new contracts by our competitors;
. market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors; and
. general economic or stock market conditions unrelated to our operating
performance.
We are controlled by a small group of our existing stockholders, whose
interests may differ from other stockholders.
Immediately after this offering, members of the Gill family, as a group,
will own approximately 65% of our common stock. As a result, the Gill family,
should they vote as a group, will be able to elect all of the members of our
Board of Directors and approve or disapprove most matters submitted to a vote
of stockholders, including proposals regarding any merger, consolidation or
other change of control transaction or a sale of all or substantially all of
our assets.
Our management will have broad discretion over the use of the capital resources
made available by this offering and you may not agree with the way they are
used.
While we currently intend to use the net proceeds of this offering to reduce
borrowings under our credit facility, we may subsequently choose to make
additional borrowings under or expand that facility for a variety of purposes,
including to finance acquisitions or other expansions of our business. The
effect of the offering will be to increase capital resources available to our
management, and our management may allocate these capital resources as it
determines is necessary. You will be relying on the judgment of our management
with regard to the use of the capital resources generated by this offering.
Our stock price may decline if additional shares are sold in the market after
the offering.
Future sales of substantial amounts of shares of our common stock by our
existing stockholders in the public market, or the perception that these sales
could occur, could adversely affect the prevailing market price of our common
stock and could impair our ability to raise additional capital through future
sales of equity securities. Holders of 8,508,448 shares of our common stock
have agreed with the underwriters to refrain from selling their shares for a
period of 180 days after this offering. Increased sales of our common stock in
the market after expiration of the lock-up agreements could exert significant
downward pressure on our stock price.
12
Our current or proposed anti-takeover provisions and the concentration of
ownership of our common stock may deter potential acquirers and may depress our
stock price.
Certain current or proposed provisions of our certificate of incorporation
and by-laws may discourage, delay or prevent a change of control, or changes in
our management, that stockholders consider favorable. Such current or proposed
provisions include:
. a provision authorizing the issuance by our Board of "blank check"
preferred stock without any action by our stockholders;
. a proposal to provide for a classified board of directors with staggered,
three-year terms; and
. a proposal to require a vote of not less than 80% of voting shares
outstanding to call a special meeting of stockholders.
Additionally, because members of the Gill family will continue to hold
voting control after the offering, they will be able to prevent most changes of
control. Moreover, we recently adopted a stockholder rights plan, which could
substantially deter a takeover attempt on terms we deem unacceptable. Lastly,
the Delaware General Corporation Law imposes limitations on persons proposing
to merge with or acquire us. If a change of control or change in management is
delayed or prevented, the market price of our common stock could decline.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements including statements
concerning the future of our industries, product development, business
strategy, the possibility of future acquisitions, continued acceptance and
growth of our products and dependence upon significant customers. These
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial condition or include other
forward-looking information. You should not place undue reliance on these
forward-looking statements. When considering forward-looking statements, you
should keep in mind the risk factors and other cautionary statements in this
prospectus. The risk factors noted above and other factors noted throughout
this prospectus could cause our actual results to differ significantly from the
results contained in any forward-looking statement.
In this prospectus, we rely on and refer to information and statistics
regarding the markets in which we compete. We obtained this information and
these statistics from various third party sources and publications that are not
produced for the purposes of securities offerings or economic analysis. We have
not independently verified the data and cannot assure you of the accuracy of
the data we have included.
USE OF PROCEEDS
The net proceeds to us from the sale of the 3,000,000 shares of common stock
offered with this prospectus will be approximately $41.8 million, assuming a
public offering price of $14.85 per share and after deduction of the
underwriting discounts and estimated offering expenses to be paid by us.
We intend to use all of the net proceeds from the offering to reduce
outstanding debt under our credit facility. The weighted average interest rate
on borrowings under our credit facility, which expires in January 2005, was
approximately 5.1% at January 28, 2002.
We may subsequently choose to make additional borrowings under or expand our
credit facility for a variety of purposes, including to finance acquisitions or
other business expansions. We review acquisitions from time to time, however,
no material acquisitions are currently contemplated. We are undertaking this
offering in part because we believe that the availability of adequate financial
resources is a substantial competitive factor.
13
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"SYPR." The following table sets forth, for the periods indicated, the high and
low closing sale prices per share of the common stock as reported by the Nasdaq
National Market.
High Low
------ ------
Year ended December 31, 1999:
First Quarter............................ $ 8.00 $ 6.63
Second Quarter........................... 9.50 6.88
Third Quarter............................ 10.56 9.00
Fourth Quarter........................... 10.25 8.75
Year ended December 31, 2000:
First Quarter............................ $11.00 $ 8.88
Second Quarter........................... 10.75 8.63
Third Quarter............................ 10.63 8.63
Fourth Quarter........................... 8.75 6.19
Year ended December 31, 2001:
First Quarter............................ $ 8.00 $ 4.00
Second Quarter........................... 8.22 3.75
Third Quarter............................ 10.55 7.50
Fourth Quarter........................... 13.46 9.80
Year ending December 31, 2002:
First Quarter (through February 6, 2002). $16.35 $12.50
On February 6, 2002, the last reported sale price of our common stock on the
Nasdaq National Market was $14.85 per share. As of January 28, 2002, there were
982 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock and do not
plan to pay any cash dividends in the near future. Our current policy is to
retain all earnings to finance future growth.
14
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2001
and as adjusted to reflect the sale of 3,000,000 shares of our common stock
offered by this prospectus at an assumed public offering price of $14.85 per
share, after deducting underwriting discounts and offering expenses payable by
us, and the repayment of $41.8 million in outstanding debt.
December 31, 2001
--------------------
Actual As Adjusted
-------- -----------
(in thousands)
Current portion of long-term debt..................................................... $ 7,500 $ 7,500
======== ========
Long-term debt, net of current portion................................................ $ 80,000 $ 38,187
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares authorized; no shares
issued............................................................................. -- --
Common stock, non-voting, par value $.01 per share, 10,000,000 shares authorized;
no shares issued................................................................... -- --
Common stock, par value $.01 per share, 20,000,000 shares authorized; 9,898,675
shares issued and outstanding, actual; 12,898,675 shares issued and outstanding, as
adjusted........................................................................... 99 129
Additional paid-in capital........................................................... 25,490 67,273
Retained earnings.................................................................... 46,427 46,427
Accumulated other comprehensive income (loss)........................................ (1,896) (1,896)
-------- --------
Total stockholders' equity......................................................... 70,120 111,933
-------- --------
Total capitalization........................................................... $150,120 $150,120
======== ========
The outstanding share information excludes outstanding options to purchase
1,846,960 shares of common stock exercisable at a weighted-average exercise
price per share, as of December 31, 2001, of $7.61 and 380,227 shares of common
stock reserved for future issuance under our stock plans.
15
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following selected financial data should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere
in this prospectus. The selected financial data set forth below with respect to
the income statement for each of the years in the three year period ended
December 31, 2001 and with respect to the balance sheets at December 31, 2000
and 2001, are derived from the audited financial statements. These financial
statements are included elsewhere in this prospectus and the data below are
qualified by reference to those financial statements and related notes. The
income statement data for the years ended December 31, 1997 and 1998 and the
balance sheet data at December 31, 1997, 1998 and 1999 are derived from audited
financial statements not included in this prospectus.
Years Ended December 31,
-------------------------------------------------
1997(1, 2) 1998(1) 1999 2000 2001
---------- -------- -------- -------- --------
Consolidated Income Statement Data:
Net revenue......................................... $217,355 $211,625 $202,130 $216,571 $254,640
Cost of sales....................................... 185,220 163,702 157,181 176,258 211,093
-------- -------- -------- -------- --------
Gross profit........................................ 32,135 47,923 44,949 40,313 43,547
Selling, general and administrative................. 26,658 28,169 23,388 26,881 26,134
Research and development............................ 3,487 5,940 6,409 3,574 3,054
Amortization of intangible assets................... 205 963 986 1,436 1,329
Special charges..................................... -- -- -- 2,945 --
-------- -------- -------- -------- --------
Operating income.................................... 1,785 12,851 14,166 5,477 13,030
Interest expense, net............................... 1,959 1,298 1,730 4,035 4,111
Other income........................................ (2,205) (204) (219) (344) (358)
-------- -------- -------- -------- --------
Income before income taxes, minority interests and
discontinued operations........................... 2,031 11,757 12,655 1,786 9,277
Income taxes........................................ 1,143 4,311 3,099 (1,398) 2,910
-------- -------- -------- -------- --------
Income before minority interests and discontinued
operations........................................ 888 7,446 9,556 3,184 6,367
Minority interests in losses of consolidated
subsidiaries...................................... 639 -- -- -- --
-------- -------- -------- -------- --------
Income from continuing operations...................
1,527 7,446 9,556 3,184 6,367
Loss from discontinued operations (net of applicable
taxes of $186)....................................
(375) -- -- -- --
Gain on disposal of discontinued operations (net of
applicable taxes of $2,160)....................... 4,192 -- -- -- --
-------- -------- -------- -------- --------
Net income.......................................... $ 5,344 $ 7,446 $ 9,556 $ 3,184 $ 6,367
======== ======== ======== ======== ========
Net income per share:
Basic.............................................. $ 0.50 $ 0.79 $ 1.00 $ 0.33 $ 0.65
Diluted............................................ $ 0.48 $ 0.76 $ 0.97 $ 0.32 $ 0.63
Shares used in computing per share amounts:
Basic.............................................. 9,424 9,438 9,515 9,671 9,828
Diluted............................................ 9,826 9,793 9,861 9,964 10,028
16
December 31,
--------------------------------------------
1997(1) 1998 1999 2000 2001
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Cash and cash equivalents............. $ 9,836 $ 12,387 $ 10,406 $ 14,674 $ 13,232
Working capital....................... 35,123 32,121 53,705 58,602 67,325
Total assets.......................... 120,608 121,119 148,564 179,122 211,444
Current portion of long-term debt..... 3,477 10,083 5,400 2,500 7,500
Long-term debt, net of current portion 27,863 18,500 49,000 62,500 80,000
Total stockholders' equity............ 27,728 49,359 60,820 64,205 70,120
- --------
(1) For periods ended prior to March 30, 1998:
. The consolidated financial statements of our predecessor are included in
the presentation of selected consolidated financial data as our
predecessor was deemed to be the acquirer for accounting purposes in our
reorganization.
. The computation of net income per share has been adjusted to exclude the
minority interests reflected in the historical financial statements of
our predecessor.
. Shares used in computing per share amounts reflect our one-for-four
reverse stock split that occurred on March 30, 1998, and include the
outstanding shares of our common stock as of March 30, 1998 and the
dilution associated with common stock options issued prior to that date.
(2) For the year ended December 31, 1997:
. Our consolidated financial statements included certain Latin American
operations which were sold on June 30, 1997. After reflecting pro forma
adjustments related to the Latin American operations, our net revenue
for 1997 was $200,424,000, and our net income was $5,014,000.
. The results of operations of our real estate segment are presented as
discontinued operations in our consolidated financial statements. The
divestiture of all operations related to our real estate segment was
completed in March 1997.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read together with the other financial information and
consolidated financial statements included in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in the
forward-looking statements as a result of a variety of factors, including those
discussed in "Risk Factors" and elsewhere in this prospectus.
Overview
We are a diversified provider of outsourced services and specialty products.
We perform a wide range of manufacturing, engineering, design, testing and
other technical services, typically under multi-year, sole-source contracts
with major companies and government agencies in the markets for aerospace &
defense electronics, truck components & assemblies, and for users of test &
measurement equipment. Outsourced services accounted for approximately 82% of
our revenue for the year ended December 31, 2001, and we expect this percentage
to increase in the future.
We have four major operating subsidiaries that are grouped into two
reportable segments, the Electronics Group and the Industrial Group. The
Electronics Group is comprised of Sypris Electronics, LLC, Sypris Test &
Measurement, Inc. and Sypris Data Systems, Inc. Revenue from this group is
derived primarily from the sale of manufacturing services, technical services
and products to customers in the markets for aerospace & defense electronics
and test & measurement services. The Industrial Group consists solely of Sypris
Technologies, Inc., which generates revenue primarily from the sale of
manufacturing services to customers in the market for truck components &
assemblies and from the sale of products to the energy and chemical markets.
Company Background. Robert E. Gill and Jeffrey T. Gill formed our
predecessor company in 1983 for the purpose of acquiring under-performing
divisions of Fortune 500 companies. From 1985 to 1994, we acquired 15
businesses from a variety of companies, including Allegheny International,
Alliant Techsystems, Inc., Honeywell, Philips Electronics North America
Corporation and Sumitomo Corporation. These businesses were combined into four
subsidiaries.
In 1994, we completed an initial public offering of one of these
subsidiaries to support its expansion into commercial contract manufacturing.
The business performed poorly in the face of intense competition and reported a
series of financial losses from 1995 to 1997. Beginning in 1997, we initiated a
restructuring of the subsidiary that included the disposition of operations in
Mexico and Brazil, the replacement of the executive management team, the
completion of and exit from unprofitable contracts and a rededication of the
subsidiary to its core aerospace & defense electronics business. As a result of
these and other actions, our revenue declined from 1996 to 1999, but
profitability increased significantly. The restructuring culminated in 1998
when we merged with this public subsidiary and changed our name to Sypris
Solutions.
Since 1998, our objective has been to become the leading outsourcing
specialist in each of our core markets for aerospace & defense electronics,
truck components & assemblies, and for users of test & measurement equipment.
We have focused our efforts on establishing long-term relationships with
industry leaders who embrace multi-year contractual relationships as a
strategic component of their supply chain management. The quality of these
contracts has enabled us to invest in leading-edge technologies that we believe
will serve as an important means for differentiating ourselves in the future
from the competition when it comes to cost, quality, reliability and customer
service.
Dana Contract. The pursuit of multi-year contractual relationships with
industry leaders in each of our core market segments is a key component of our
strategy. During June 2001, we announced the award of a new seven-year contract
with Dana that is expected to generate approximately $300 million of revenue
over the term
18
of the agreement, based upon the assumption that the current annualized volume
for these services is maintained over the life of the contract and that
additional services anticipated to be provided to Dana are in fact provided at
the levels contemplated by the agreement. Under the terms of the contract,
which was part of a transaction that included the purchase of certain
manufacturing assets from Dana, we will manufacture all of Dana's North
American requirements for certain medium and heavy-duty truck axles, ring gears
and pinions through May 2008. Dana does not have an obligation to purchase a
particular level of services under the contract and there can be no assurance
that the $300 million of revenue expected under the contract will be realized.
The prices contained in the Dana contract for our services are fixed for an
initial term and reduced thereafter in accordance with schedules contained in
the agreement. We believe these price reductions will not materially affect our
profitability. We purchase steel for this contract at the direction of Dana,
with any periodic changes in the price of steel being reflected in the prices
we are paid for our services, such that we neither benefit from nor are harmed
by any future changes in the price of steel. The contract also provides for us
to share in the benefits of any cost reduction suggestions that we make that
are accepted by Dana. The addition of the Dana contract is expected to
substantially increase the percentage of our net revenue attributable to the
truck components & assemblies market in future years. Dana is expected to
account for more than 10% of our consolidated net revenue in 2002.
Acquisitions. The selective pursuit of acquisitions represents another
important component of our strategy. We focus primarily on those candidates
that will enable us to consolidate positions of leadership in our existing
markets, further develop strategic partnerships with leading companies, and
expand our capability and capacity to increase our value-added service
offerings.
During May 2001, we invested $11.5 million in the acquisition of certain
manufacturing assets and inventory from Dana in conjunction with the award of a
seven-year, sole-source contract to supply Dana with fully machined, medium and
heavy-duty truck axle shafts, ring gears, pinions, helical gears and other
drive train components for integration into subassemblies for Freightliner,
Mack Trucks, Navistar, PACCAR and Volvo. The transaction added valuable forging
and machining capacity, increased our range of value-added services and added
important professional depth to our management team at Sypris Technologies.
During December 1999, we acquired the assets of the mobile calibration,
certification and repair service business from Lucent for approximately $10.7
million in cash. The assets included 13 ISO-certified mobile calibration
laboratories, one ISO-certified transportable field calibration unit and
laboratories in New Jersey and Tennessee. The business included multi-year
contracts to provide these services for AT&T, the National Weather Service, the
Federal Aviation Administration and Lucent, among others, and was combined with
our existing national network of laboratories to increase our range of
capabilities at Sypris Test & Measurement.
Accounting Policies. Our significant accounting policies are described in
Note 1 to the consolidated financial statements included elsewhere in this
prospectus. We believe our most critical accounting policies include revenue
recognition and cost estimation on certain contracts for which we use a
percentage of completion, units of delivery method of accounting, as described
immediately below.
The complexity of the estimation process and all issues related to the
assumptions, risks and uncertainties inherent with the application of the
percentage of completion, units of delivery method of accounting affect the
amounts reported in our financial statements. A number of internal and external
factors affect our cost of sales estimates, including labor rate and efficiency
variances, revised estimates of warranty costs, estimated future material
prices and customer specification and testing requirement changes. If our
business conditions were different, or if we used different assumptions in the
application of this and other accounting policies, it is likely that materially
different amounts would be reported in our financial statements.
Net Revenue. The majority of our outsourced services revenue is derived
from manufacturing services contracts under which we supply products to our
customers according to specifications provided under our
19
contracts. We generally recognize revenue for these outsourced services, as
well as our product sales, when we ship the products, at which time title
generally passes to the customer. The percentage of completion, units of
delivery method of accounting is applied by our Electronics Group for
outsourced services provided under multi-year contracts with aerospace &
defense customers. Approximately 45%, 49% and 53% of total net revenue was
recognized under the percentage of completion, units of delivery method of
accounting during 1999, 2000 and 2001, respectively. Revenue is recognized on
these contracts when units are delivered to the customer, with unit revenue
based upon unit prices as set forth in the applicable contracts. We recognize
all other outsourced services revenue when the service is provided to the
customer. Our net revenue includes adjustments for estimated product warranty
and allowances for returns by our customers.
Cost of Sales. Cost of sales consists primarily of our payments to our
suppliers, compensation, payroll taxes and employee benefits for service and
manufacturing personnel, and purchasing and manufacturing overhead costs. The
contracts for which our Electronics Group recognizes net revenue under the
percentage of completion, units of delivery method of accounting, involve the
use of estimates for cost of sales. Under this approach, we compare estimated
costs to complete an entire contract to total net revenue for the term of the
contract to arrive at an estimated gross margin percentage for each contract.
Each month, the estimated gross margin percentage is applied to the cumulative
net revenue recognized on the contract to arrive at cost of sales for the
period. Management reviews these estimates monthly and the effect of any change
in the estimated gross margin percentage for a contract is reflected in cost of
sales in the period in which the change is known. Such changes to these
estimates have not been material to our quarterly results of operations during
the three year period ended December 31, 2001. If increases in projected
costs-to-complete are sufficient to create a loss contract, the entire
estimated loss is charged to operations in the period the loss first becomes
known. Additionally, our reserve for excess and obsolete inventory is primarily
based upon forecasted demand for our products and any change to the reserve
arising from forecast revisions is reflected in cost of sales in the period the
revision is made.
Gross Profit. Gross profit is affected by many factors including sales
volume, pricing, product mix, estimates for the costs to complete multi-year
contracts, and cost factors including component costs, materials costs, and
manufacturing and labor costs.
Selling, General and Administrative. Selling, general, and administrative
expense consists primarily of compensation, payroll taxes and employee benefits
for selling, general, and administrative personnel, commissions, sales and
marketing efforts, promotional programs, and investment in our infrastructure
in order to support our continued growth.
Research and Development. Research and development expense consists
primarily of compensation, payroll taxes and employee benefits for engineering
and development personnel, consulting expenses, and project materials. The
majority of our research and development relates to our data systems products.
We expect to continue to invest in data systems product development and launch
new products and line extensions.
Interest Expense, Net. Net interest expense consists primarily of interest
expense on our revolving credit facility.
Income Taxes. Income tax expense consists of current and deferred federal
and state income taxes. We recognize tax benefits associated with research and
development tax credits and certain qualifying foreign trade income from
shipments outside the U.S. As of December 31, 2001, we had a valuation
allowance of approximately $0.7 million related to certain state tax net
operating loss carryforwards. Our effective tax rate is expected to be between
32% and 35% for 2002.
20
Results of Operations
The following table sets forth certain data from the Company's consolidated
income statements for the years ended December 31, 1999, 2000 and 2001,
expressed as a percentage of net revenue:
Years Ended
December 31,
-------------------
1999 2000 2001
----- ----- -----
Net revenue:
Electronics Group................. 81.6% 84.1% 81.4%
Industrial Group.................. 18.4 15.9 18.6
----- ----- -----
Total net revenue................. 100.0 100.0 100.0
Cost of sales...................... 77.8 81.4 82.9
----- ----- -----
Gross profit....................... 22.2 18.6 17.1
Selling, general and administrative 11.5 12.4 10.3
Research and development........... 3.2 1.6 1.2
Amortization of intangible assets.. 0.5 0.7 0.5
Special charges.................... 0.0 1.4 0.0
----- ----- -----
Operating income................... 7.0 2.5 5.1
Net income......................... 4.7% 1.5% 2.5%
===== ===== =====
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Revenue. Net revenue was $254.6 million in 2001, an increase of $38.0
million, or 17.6%, from $216.6 million in 2000. Backlog at December 31, 2001
was $162.3 million, an increase of $1.5 million from $160.8 million at December
31, 2000. Backlog for our Electronics Group and Industrial Group at December
31, 2001 was $118.5 million and $43.8 million, respectively.
Net revenue for our Electronics Group in 2001 was $207.3 million, an
increase of $25.2 million, or 13.8%, from $182.1 million in 2000. The increase
in net revenue was primarily from contracts with aerospace & defense customers
for manufacturing services, which generated an increase of $28.7 million in
2001 over the prior year. Other outsourced services accounted for an increase
in net revenue of $0.5 million during 2001. Product sales accounted for a
decrease in net revenue of $4.0 million during 2001, primarily due to reduced
sales quantities for data systems products.
Net revenue for our Industrial Group in 2001 was $47.3 million, an increase
of $12.8 million, or 37.5%, from $34.5 million in 2000. During May 2001, we
acquired certain manufacturing assets and inventory from Dana for approximately
$11.5 million in cash. The assets are used to produce fully machined,
heavy-duty truck axle shafts and other drive train components for integration
into subassemblies produced for leading truck manufacturers. This business
generated outsourced services revenue of $17.7 million during 2001. Excluding
the acquisition, the Industrial Group's net revenue declined $4.9 million in
2001 from the prior year. The decrease in net revenue was primarily due to a
decline in outsourced services provided to customers in the heavy-duty truck
market. Unfavorable market conditions for heavy-duty truck production resulted
in an industry-wide market decrease of approximately 44% from 1999 to 2001 and
reduced the volume of axles we supplied to that market. We expect demand in the
heavy-duty truck market to remain weak during 2002; however, further
significant declines in demand are not anticipated. During 2002, we expect to
ramp-up production for new and certain existing customers on additional forging
and machining equipment we installed during 2001. The increased production
volume from these opportunities, combined with the full year impact of the
acquisition from Dana, is expected to result in higher revenue for our
Industrial Group in 2002 as compared to 2001.
Gross Profit. Gross profit in 2001 was $43.5 million, an increase of $3.2
million, or 8.0%, from $40.3 million in 2000. Gross margin in 2001 declined to
17.1% from 18.6% in 2000.
Gross profit for our Electronics Group in 2001 was $37.4 million, an
increase of $1.1 million, or 3.1%, from $36.3 million in 2000. The increase in
manufacturing services revenue generated an increase in gross profit of
21
$3.8 million, while gross profit from other outsourced services decreased $0.6
million. Gross margin in 2001 declined to 18.0% from 19.9% in 2000.
Manufacturing services comprised approximately 59% of our Electronics Group's
revenue in 2001 as compared to approximately 51% in 2000. Gross margin from
manufacturing services improved slightly over the prior year; however, since
gross margin on manufacturing services is lower than other outsourced services,
the change in revenue mix contributed to the decrease in gross margin. Another
factor in the gross margin decline was a slight decrease in gross margin on
other outsourced services, primarily due to adverse economic conditions
impacting demand and pricing for certain services provided to our customers.
Gross profit from product sales decreased $2.1 million during 2001, primarily
due to reduced demand for certain product offerings.
Gross profit for our Industrial Group in 2001 was $6.1 million, an increase
of $2.1 million or 52.5% from $4.0 million in 2000. Excluding the acquisition
from Dana, gross profit declined $0.9 million in 2001 primarily due to the
downturn of the heavy-duty truck market. The reduction in demand and
corresponding impact on shipments occurred as our organizational infrastructure
to support future growth plans was being developed. The increased cost
structure associated with the additional people and systems required to meet
future contractual requirements and the underabsorption of overhead due to the
volume decline resulted in a decline in our gross margin, excluding the impact
of the operation acquired from Dana, to 10.6% in 2001, as compared to 11.7% for
the prior year. Gross margin for our Industrial Group during 2001 including the
operation acquired from Dana was 13.0%.
Selling, General and Administrative. Selling, general and administrative
expense in 2001 was $26.1 million, or 10.3% of net revenue, as compared to
$26.9 million, or 12.4% of net revenue in 2000. Although net revenue increased
17.6% from 2000 to 2001 and the acquisition from Dana added approximately $1.0
million to selling, general and administrative expense during 2001, our total
selling, general and administrative spending decreased by $0.8 million, or
2.8%. The decline in selling, general and administrative expense was primarily
attributable to decreased selling expenses and commissions related to lower
product sales for our Electronics Group, decreased marketing costs and cost
reductions in both our Electronics Group and Industrial Group in response to
the general weakness in the U.S. economy.
Research and Development. Research and development expense in 2001 was $3.1
million, or 1.2% of net revenue, as compared to $3.6 million, or 1.6% of net
revenue in 2000. The decrease in research and development expense was
attributable to our Electronics Group, and was related to the quantity and
timing of new product releases for the data systems product lines and the
increased utilization of strategic alliances with suppliers for product
development.
Amortization of Intangible Assets. Amortization of intangible assets in
2001 was $1.3 million, a decrease of $0.1 million, or 7.5% compared to $1.4
million in 2000.
Special Charges. Special charges of $2.9 million were recognized during
2000 for activities related to the consolidation of certain operations within
our Electronics Group. The consolidation activities were completed in 2000 and
no such charges were recognized in 2001.
Interest Expense, Net. Interest expense in 2001 was $4.1 million, an
increase of $0.1 million, or 1.9%, from $4.0 million in 2000. Interest expense
attributable to increased borrowings during 2001 was offset by a reduction in
interest rates and the capitalization of interest incurred on our Industrial
Group's capital expenditure program. Our weighted average debt outstanding
increased to approximately $74.5 million during 2001 from approximately $58.7
million in 2000. This increase reflected the $11.5 million acquisition from
Dana made by our Industrial Group in May 2001 and capital expenditures during
2000 and 2001 to support new business opportunities. The weighted average
interest rate in 2001 was approximately 7.1% as compared to approximately 8.3%
for the prior year. Capitalized interest in 2001 was $1.8 million as compared
to $0.9 million in 2000, and is expected to be insignificant in 2002 as the
related capital projects have been substantially completed as of December 31,
2001.
22
Income Taxes. Income tax expense was $2.9 million in 2001 as compared to an
income tax benefit of $1.4 million in 2000. The effective tax rate in 2001 was
31.4%. The effective tax rate for 2001 and the income tax benefit in 2000
reflect research and development tax credits, foreign sales corporation tax
benefits and a reduction in the Company's valuation allowance on deferred tax
assets. The reduction in the valuation allowance for 2001 and 2000 was $0.3
million and $3.0 million, respectively.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Revenue. Net revenue was $216.6 million in 2000, an increase of $14.5
million, or 7.1%, from $202.1 million in 1999. Backlog at December 31, 2000 was
$160.8 million, an increase of $33.8 million from $127.0 million at December
31, 1999. Backlog for our Electronics and Industrial Groups at December 31,
2000 was $143.2 million and $17.6 million, respectively.
Net revenue for our Electronics Group in 2000 was $182.1 million, an
increase of $17.2 million or 10.4% from $164.9 million in 1999. The increase in
net revenue was generated primarily from new contracts for manufacturing
services and the expansion of calibration services resulting from the
acquisition from Lucent. Production on several new manufacturing service
contracts, mainly with aerospace & defense customers, began to ramp-up during
2000, generating a $16.2 million increase in revenue. The acquired calibration
business added a fleet of mobile calibration labs to our service capabilities
and accounted for an $8.4 million increase in revenue during 2000. The increase
in service revenue was partially offset by a $6.5 million decrease in product
revenue, primarily due to reduced sales quantities for our data systems
products, which began to decline in 1999 and continued to decline throughout
2000. The reduced level of demand reflects an overall market decline and
increased competition. Other outsourced services and product sales accounted
for a net $0.9 million decrease in net revenue during 2000.
Net revenue for our Industrial Group was $34.5 million, a decrease of $2.7
million, or 7.3%, from $37.2 million in 1999. The decrease in net revenue was
primarily due to a decline in outsourced services provided to customers in the
heavy-duty truck market. Market conditions in North America for heavy-duty
truck production were negatively impacted by oil prices, interest rates and an
excess inventory of new and used trucks, resulting in an overall market
decrease of approximately 40%. This reduced the volume of forged truck axles
provided under manufacturing service agreements and accounted for a $4.0
million decrease in net revenue, the majority of which occurred during the
second half of 2000. Revenue derived from manufacturing services in other
markets increased by $0.5 million and fabricated product sales increased by
$0.8 million. During 1999 and 2000, our Industrial Group invested approximately
$22.6 million to expand its forging capacity and add new machining capabilities.
Gross Profit. Gross profit in 2000 was $40.3 million, a decrease of $4.6
million, or 10.3%, from $44.9 million in 1999. Gross margin in 2000 was 18.6%
of net revenue, as compared to 22.2% of net revenue in 1999.
Gross profit for our Electronics Group in 2000 was $36.3 million, or 19.9%
of net revenue, as compared to $37.9 million, or 23.0% of net revenue in 1999.
The $1.6 million decrease in gross profit in 2000 was primarily due to volume
reductions and increased costs on data systems products and increased costs on
manufacturing service contracts. Volume declines for data systems products,
related underabsorbed overhead costs and manufacturing inefficiencies arising
from the transfer of production following the consolidation of two facilities
during the first half of 2000 contributed to a $5.0 million decline in gross
profit. This reduction was substantially offset by increased gross profit from
the growth in the manufacturing and calibration service revenue. The additional
volume generated increased gross profit of $4.4 million which was offset by
increased costs of $1.0 million associated with the following three primary
factors. First, shortages and extended lead times for the purchase of certain
electronic components resulted in manufacturing inefficiencies due to the
unpredictability of scheduling receipts of allocated components from vendors.
Second, the number of new program start-ups increased substantially during 2000
as compared to the prior year. Manufacturing inefficiencies on new programs
generally result in lower gross margins during the start-up phase and margins
typically improve as the programs mature. Third, additional costs incurred to
make the necessary investments in people, equipment and processes to support
the record level of backlog also reduced gross profit in 2000.
23
Gross profit for our Industrial Group in 2000 was $4.0 million, or 11.7% of
net revenue, as compared to $7.0 million, or 19.0% of net revenue in 1999. The
$3.0 million decrease in gross profit was primarily due to the downturn of the
heavy-duty truck market. The reduction in demand and corresponding impact on
shipments occurred as the organizational infrastructure to support future
growth plans was being developed. The increased cost structure associated with
the additional people and systems required to meet future contractual
requirements and the underabsorption of overhead due to the volume decline
resulted in low gross margin levels, particularly during the second half of
2000.
Selling, General and Administrative. Selling, general and administrative
expense in 2000 was $26.9 million, or 12.4% of net revenue, as compared to
$23.4 million, or 11.5% of net revenue in 1999. The increase in selling,
general and administrative expense was attributable primarily to our
Electronics Group, which reported an increase of $2.9 million. Investments in
our organizational infrastructure as discussed above also include certain
selling, general and administrative expenses, the majority of which were within
our Electronics Group. Selling expenses incurred for marketing and bid and
proposal activities during 2000 exceeded prior year amounts and were a
contributing factor to the increased orders and net revenue in 2000.
Research and Development. Research and development expense in 2000 was $3.6
million, or 1.6% of net revenue, as compared to $6.4 million, or 3.2% of net
revenue in 1999. This decrease was attributable to our Electronics Group, and
relates to the quantity and timing of new product releases for the data systems
product lines and the utilization of strategic alliances with suppliers for
product development.
Amortization of Intangible Assets. Amortization of intangible assets in
2000 was $1.4 million, an increase of $0.4 million, or 45.6% compared to $1.0
million in 1999. This increase resulted from the amortization of goodwill
recorded in connection with the acquisition from Lucent.
Special Charges. Special charges of $2.9 million were recognized during
2000 for activities related to the consolidation of certain operations within
the Electronics Group. Operations for the data systems product lines have been
conducted at two facilities since the November 1997 acquisition that expanded
this business. Although several consolidation actions were implemented
immediately following this acquisition, management identified potential cost
savings in 2000 that could be realized through the elimination of redundant
manufacturing operations and staffing of functional areas between the two
facilities. The consolidation activities were substantially completed during
the first nine months of 2000. The special charges incurred for these
activities include workforce reductions, facilities rearrangement and
relocation expenses, and employment costs related to the transfer of production.
Interest Expense, Net. Interest expense in 2000 was $4.0 million, an
increase of $2.3 million, or 133%, from $1.7 million in 1999. The increase in
interest expense was primarily due to an increase in the weighted average debt
outstanding coupled with an increase in interest rates. Our weighted average
debt outstanding more than doubled to approximately $58.7 million in 2000 from
approximately $28.4 million in 1999. This increase resulted primarily from the
acquisition from Lucent, working capital funding related to the increase in
revenue and order backlog and capital expenditures during 1999 and 2000 to
support new business opportunities. The weighted average interest rate for 2000
was approximately 8.3% as compared to approximately 6.1% for the prior year.
The year-to-year rate change includes an increase in the margin paid on
outstanding borrowings of approximately 100 basis points under the terms of our
credit agreement.
Income Taxes. An income tax benefit of approximately $1.4 million was
recognized during 2000 as compared to income tax expense of $3.1 million during
1999. The tax benefit during 2000 was primarily due to a $3.0 million reduction
in our valuation allowance on deferred tax assets. Certain issues related to
our consolidated federal taxable income were resolved during 2000, which gave
rise to the elimination of the valuation allowance for deferred tax assets
related to federal income tax temporary differences. We also recognized a tax
benefit during 2000 of approximately $0.3 million for research and development
tax credits. The provision for income taxes in 1999 included a reduction in the
valuation allowance on deferred tax assets of $1.9 million and a benefit for
research and development tax credits of $0.6 million.
24
Liquidity, Capital Resources and Financial Condition
Net cash provided by operating activities was $8.5 million in 2001, as
compared to $8.1 million in 2000. Accounts receivable increased by $8.5
million, primarily due to increased revenue and the acquisition from Dana
completed in May 2001. Inventory increased by $3.5 million, excluding the fair
value of inventory acquired in the Dana transaction. Accounts payable increased
$3.6 million, excluding the impact of open accounts payable at each year-end
related to capital expenditures. The increases in inventory and accounts
payable are primarily attributable to the revenue increase in our business.
Net cash used in investing activities was $32.9 million in 2001 as compared
to $14.9 million for the prior year. The increase was primarily attributable to
the $11.5 million acquisition from Dana. Capital expenditures for our
Electronics Group and Industrial Group totaled $7.9 million and $19.5 million,
respectively, in 2001. Capital expenditures for our Electronics Group were
principally comprised of manufacturing, assembly and test equipment. Our
Industrial Group's capital expenditures included new forging and machining
equipment to increase and expand the range of production capabilities. Our
Industrial Group invested $19.5 million, $15.5 million and $7.1 million during
2001, 2000 and 1999, respectively, in facilities, equipment and systems to
support our current and anticipated growth in the truck components & assemblies
market. We substantially completed the investments for this growth during 2001,
which provides us with the capacity to serve the requirements of our existing
multi-year contracts with ArvinMeritor and Dana and allows us the opportunity
to undertake additional large contracts from new customers. We completed sale
and leaseback transactions with members of our bank group during each of the
last two years for certain machinery and equipment. Proceeds from the sale of
these assets in 2001 and 2000 were $5.4 million and $9.3 million, respectively.
We entered into operating leases for the related assets for periods ranging
from five to nine years. We also received $1.4 million in 2001 for the sale of
certain assets by the Electronics Group.
Net cash provided by financing activities was $23.0 million during 2001 as
compared to $11.1 million during the prior year. Our outstanding debt increased
$22.5 million during 2001 to $87.5 million, primarily to fund the acquisition
from Dana and capital expenditures.
We had total availability for borrowings and letters of credit under the
revolving credit facility of $12.5 million at December 31, 2001, which, when
combined with our unrestricted cash balance of $13.2 million, provides for
total cash and borrowing capacity of $25.7 million. Maximum borrowings on the
revolving credit facility are $100.0 million, subject to a $15.0 million limit
for letters of credit. Borrowings under the revolving credit facility may be
used to finance working capital requirements, acquisitions and for general
corporate purposes, including capital expenditures. Most acquisitions require
the approval of our bank group.
Our credit agreement contains customary affirmative and negative covenants,
including financial covenants requiring the maintenance of specified fixed
charge and leverage ratios and minimum levels of net worth. At December 31,
2001, we were in compliance with these covenants and retained earnings of $15.4
million were unrestricted. The credit agreement is secured by substantially all
of our assets, including but not limited to accounts receivable, inventory
equipment, and real estate, and is also guaranteed by our subsidiaries. The
asset collateralization requirement may be eliminated after June 2002 in the
event we achieve certain financial ratios and remain in compliance with all
covenants.
Our principal commitments at December 31, 2001 consisted of repayments of
borrowings under the credit agreement and obligations under operating leases
for certain of our real property and equipment. We also had purchase
commitments totaling approximately $5.0 million at December 31, 2001, primarily
for manufacturing equipment. During 2001 and 2000, we financed approximately
$26.3 million of machinery and equipment through operating leases with our bank
group. Our minimum commitments on operating leases with initial or remaining
terms greater than one year, including all real and personal property leases,
total $7.0 million for 2002, $22.0 million for 2003 through 2006, and $9.2
million for 2007 and thereafter.
We believe that without taking into account the proceeds from this offering,
sufficient resources will be available to satisfy our cash requirements for at
least the next twelve months. Cash requirements for periods
25
beyond the next twelve months depend on our profitability, our ability to
manage working capital requirements and our rate of growth. If we make
significant acquisitions or if working capital and capital expenditure
requirements exceed expected levels during the next twelve months or in
subsequent periods, we may require additional external sources of capital
without taking into account the proceeds from this offering. There can be no
assurance that any additional required financing will be available through bank
borrowings, debt or equity financings or otherwise, or that if such financing
is available, it will be available on terms acceptable to us. If adequate funds
are not available on acceptable terms, our business, results of operations and
financial condition could be adversely affected.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed
annually for impairment. Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their useful lives.
The amortization provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, we will apply the new accounting rules
beginning January 1, 2002. We will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002.
We do not expect any significant loss as a result of the impairment tests. We
will be required to test the value of our
goodwill at least annually. These tests will involve estimates related to the
fair market value of the business with which the goodwill is associated. We
anticipate that substantially all amortization of intangible assets as a charge
to earnings will be eliminated beginning January 1, 2002.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and issued its
amendments, Statements No. 137 and 138, in June 1999 and June 2000,
respectively. SFAS No. 133 requires that we recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are either offset
against the change in fair value of assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value must be recognized currently in earnings. We were required
to adopt the provisions of SFAS No. 133 effective January 1, 2001.
Quantitative and Qualitative Disclosures about Market Risk
On July 26, 2001, we entered into interest rate swap agreements with a
syndicate of banks that effectively convert a portion of our variable rate debt
to a fixed rate of 4.52%, excluding our applicable margin, through July 2003.
We entered into interest rate swap agreements as a means to reduce the impact
of interest rate changes on future interest expense. Approximately 34% ($30.0
million) of our outstanding debt was covered under the interest rate swap
agreements at December 31, 2001. We are exposed to financial market risks,
including changes in interest rates and foreign currency exchange rates.
Excluding the borrowings included in the interest rate swap agreements, all
other borrowings under our credit agreement bear interest at a variable rate
based on the prime rate, the London Interbank Offered Rate, or certain
alternative short-term rates, plus a margin (2.0% at
January 28, 2002) based upon our leverage ratio. An increase in interest rates
of 100 basis points would result in additional interest expense of
approximately $0.6 million on an annualized basis, based upon our debt
outstanding at December 31, 2001. The vast majority of our transactions are
denominated in U.S. dollars. As such, fluctuations in foreign currency exchange
rates have historically had little impact on us. Inflation has not been a
significant factor in our operations in any of the periods presented and it is
not expected to affect operations in the future.
26
BUSINESS
General
We are a diversified provider of outsourced services and specialty products.
We perform a wide range of manufacturing, engineering, design, testing and
other technical services, typically under multi-year, sole-source contracts
with major companies and government agencies in the markets for aerospace &
defense electronics, truck components & assemblies, and for users of test &
measurement equipment. Outsourced services accounted for approximately 82% of
our revenue during the year ended December 31, 2001 and we expect this
percentage to increase in the future.
We focus on those markets where we have the expertise, qualifications and
leadership position to sustain a competitive advantage. We dedicate our
resources to support the needs of industry leaders who embrace multi-year
contractual relationships as a strategic component of their supply chain
management. The quality of these contracts, many of which are sole-source by
part number and are for terms of up to seven years, enable us to invest in
leading-edge technologies to help our customers remain competitive. The
productivity, flexibility and economies of scale that result become an
important means for differentiating ourselves from the competition when it
comes to cost, quality, reliability and customer service.
Aerospace & Defense Electronics. We are an established supplier of
manufacturing services for the production of complex circuit cards, high-level
assemblies and subsystems. We have long-term relationships with many of the
leading aerospace & defense contractors, including Boeing, Honeywell, Lockheed
Martin, Northrop Grumman and Raytheon. We manufacture these complex electronic
assemblies under multi-year contracts for the missile guidance systems of the
AMRAAM, BAT, Brimstone and HARM missile programs, and for the main color
display systems of the AH-64 Apache Longbow attack helicopter. We also have a
long-term relationship with the National Security Agency to design and build
secure communications equipment and write encryption software.
Truck Components & Assemblies. We are the principal supplier of
manufacturing services for the forging and machining of medium and heavy-duty
truck axles in North America. We produce these axles under multi-year,
sole-source contracts with ArvinMeritor and Dana, the two primary providers of
drive train assemblies for use by the leading truck manufacturers, including
Freightliner, Mack, Navistar, PACCAR and Volvo. The addition of the Dana
contract during 2001 represented a significant milestone in our efforts to
expand our position in this important market segment. We expect to generate
revenue of approximately $300 million over the seven-year term of the agreement
with Dana, based upon current market volumes and other assumptions described
more fully elsewhere in this prospectus.
Test & Measurement Services. We provide technical services for the
calibration, certification and repair of test & measurement equipment in the
U.S. We have a multi-year, sole-source contract with the Federal Aviation
Administration to calibrate and certify the equipment that is used to maintain
the radar systems and directional beacons at over 400 airports in the U.S., the
Caribbean and the South Pacific. We have a multi-year, sole-source contract
with the National Weather Service to calibrate the equipment that is used to
maintain the NEXRAD Doppler radar systems at each of its 132 advanced warning
weather service radar stations in 45 states, the Caribbean and Guam. We also
have a multi-year contract with AT&T to provide calibration and certification
services at over 600 of its central and field switching locations.
Industry Overview
We believe the trend toward outsourcing is continuing across a wide range of
industries and markets as outsourcing specialists assume a strategic role in
the supply chain of companies of all types and sizes. According to the Dun &
Bradstreet Barometer of Global Outsourcing last published in 2000, expenditures
on outsourcing in the U.S. were approaching $340 billion in 2000. We expect the
growth in outsourcing expenditures to continue increasing at a rate far higher
than the expansion in the overall economy.
27
We believe the trend toward outsourcing is continuing because outsourcing
frequently represents a more efficient, lower cost means for manufacturing a
product or delivering a service when compared to more vertically integrated
alternatives. The rate of acceptance of the outsourcing model, however, varies
widely among industries and markets, and even among companies within the same
industry or market. Industry leaders in each of our core markets are
increasingly embracing the use of outsourcing specialists as a strategic means
to enhance operating flexibility, reduce excess capacity, lower costs, improve
quality and increase balance sheet productivity. While the facts and
circumstances vary by industry, we believe the following benefits of
outsourcing are driving this trend.
Reduced Total Operating Costs and Invested Capital. Outsourcing specialists
are able to produce products and/or deliver services at a reduced total cost
relative to that of their customers because of the ability to allocate the
expense for a given set of fixed capacity, including assets, people and support
systems, across multiple customers with diversified needs. In turn, the
outsourcing specialists can achieve higher utilization of their resources and
achieve greater productivity, flexibility and economies of scale.
Access to Advanced Manufacturing Capabilities and Processes and Increased
Productivity. The ability to use a fixed set of production assets for a number
of customers enables outsourcing specialists to invest in the latest technology
as a means to further improve productivity, quality and cycle times. The
magnitude of these investments can be prohibitive absent the volume and
reliability of future orders associated with having a broad array of customers
for the use of those assets.
Focus on Core Competencies. Companies are under intense competitive
pressure to constantly rationalize their operations, invest in and strengthen
areas in which they can add the greatest value to their customers and divest or
outsource areas in which they add lesser value. By utilizing the services of
outsourcing specialists, these companies can react more quickly to changing
market conditions and allocate valuable capital and other resources to core
activities, such as research and development, sales and marketing or product
integration.
Improved Supply Chain Management. We believe that the trend in outsourcing
favors specialists who have the financial, managerial and capital resources to
assume an increasingly greater role in the management of the supply chain for
the customer. By utilizing fewer more capable suppliers, companies are able to
greatly simplify the infrastructure required to manage these suppliers, thereby
reducing their costs and improving margins.
Our Markets
Aerospace & Defense Electronics. According to Electronic Trend Publications
and New Venture Research, the total aerospace & defense electronics market in
North America is expected to grow from $33.6 billion in 2001 to $43.9 billion
in 2005. In addition, these sources estimate that within the aerospace &
defense electronics market, the trend toward outsourcing will increase at a
rate that is higher than the underlying growth of the market. Accordingly, they
estimate that the outsourcing of services will grow from $1.4 billion in 2000
to $7.9 billion in 2005, representing a compound annual growth rate of
approximately 40%.
The nature of providing outsourced manufacturing services to the aerospace &
defense electronics industry differs substantially from the traditional
commercial outsourced manufacturing services industry. The cost of failure can
be extremely high, the manufacturing requirements are typically complex and
products are produced in relatively small quantities. Companies that provide
these manufacturing services are required to maintain and adhere to a number of
strict certifications, security clearances and traceability standards that are
often quite comprehensive.
The consolidation of defense contractors over the past decade has added to
the increased demand for outsourcing specialists. The consolidated companies,
some of which have developed highly leveraged balance sheets as a result of
mergers and acquisitions, have been motivated to seek new ways to raise
margins, increase profitability and enhance cash flow. Accordingly, outsourcing
specialists, such as Sypris, have been successful in
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building new relationships with companies that previously relied more on
internal resources. We believe this trend will continue and that our extensive
experience, clearances, certifications and qualifications in the manufacturing
of aerospace & defense electronics will serve to differentiate us from many of
the more traditional outsource suppliers.
As part of President George W. Bush's plan to strengthen the national
defense, Congress passed a $344 billion fiscal 2002 defense budget, which
represented an 11% increase over the prior year's budget of $310 billion.
Additionally, the Bush Administration has proposed a fiscal 2003 defense budget
of approximately $379 billion, reflecting a 10% increase over the fiscal 2002
budget and the single largest increase in defense spending since the Reagan
Administration. We believe that we are well positioned to take advantage of the
additional outsourcing activity that may flow from the prime contractors that
are awarded contracts related to these increased defense appropriations and
expenditures.
Truck Components & Assemblies. The truck components & assemblies market
consists of the OEMs, such as DaimlerChrysler Corporation, Ford, Freightliner,
General Motors Corporation, Mack, Navistar, PACCAR and Volvo, and a deep and
extensive supply chain of companies of all types and sizes that are classified
into different levels or tiers. Tier I companies represent the primary
suppliers to the OEMs and include firms such as ArvinMeritor, Dana, Delphi
Automotive Systems Corporation, Eaton Corporation, TRW and Visteon Corporation,
among others. Many of the Tier I companies are confronted with excess capacity,
high hourly wage rates, rich benefit packages and aging capital equipment.
Below this group of companies reside numerous suppliers who either supply the
OEMs directly or supply the Tier I companies. In all segments of the truck
components & assemblies market, however, suppliers are under intense
competitive pressure to improve product quality and to reduce capital
expenditures, production costs and inventory levels.
In an attempt to gain a competitive advantage, many OEMs have been reducing
the number of suppliers they utilize. These manufacturers are choosing stronger
relationships with fewer suppliers who are capable of investing to support
their operations. In response to this trend, many suppliers have combined with
others to gain the critical mass required to support these needs. As a result,
the number of Tier I suppliers is being reduced, but in many cases the
aggregate production capacity of these companies has yet to be addressed. We
believe as Tier I suppliers seek to eliminate excess capacity, they will
increasingly choose outsourcing as a means to enhance their financial
performance and as a result, companies such as Sypris will be presented with
new business and acquisition opportunities.
Test & Measurement Services. The widespread adoption of the International
Organization for Standardization (ISO) and Quality Standards (QS), among
others, has been underway for many years. A critical component of basic
manufacturing discipline and these quality programs is the periodic calibration
and certification of the test & measurement equipment that is used to measure
process performance. The investment in this equipment and the skills required
to support the calibration and certification process has historically been
performed offsite by the manufacturers of the equipment, or onsite by internal
operations, even though the productive use of the assets and people is
difficult to justify since equipment is often certified on an annual, or in
some cases, biannual basis.
We believe that test & measurement services will be increasingly outsourced
to independent specialists who can use the manpower and equipment across a
diversified base of customers, reduce investment requirements and improve
profitability on a national scale.
Our Business Strategy
Our objective is to increase our leadership position in each of our core
markets. We intend to serve our customers and achieve this objective by
continuing to:
Concentrate on our Core Markets. We will continue to focus on those markets
where we have the expertise, qualifications and leadership position to sustain
a competitive advantage. We have been an established
29
supplier of manufacturing and technical services to major aerospace & defense
companies and agencies of the U.S. Government for over 35 years. We are the
principal supplier of medium and heavy-duty truck axles in North America, and
we are the sole provider of calibration, certification and repair services for
equipment used by the Federal Aviation Administration to maintain the radar
systems and directional beacons at each of the airports it serves in the U.S.,
the Caribbean and the South Pacific.
Dedicate our Resources to Support Strategic Partnerships. We will continue
to dedicate our resources to support the needs of industry leaders who embrace
multi-year contractual relationships as a strategic component of their supply
chain management and have the potential for long-term growth. We prefer
contracts that are sole-source by part number so we can work closely with the
customer to the mutual benefit of both parties. In recent years, we have
entered into multi-year manufacturing services agreements with Boeing,
Honeywell and Raytheon. We have also announced the award of sole-source supply
agreements with ArvinMeritor and Dana that run through 2004 and 2008,
respectively. We believe additional growth opportunities exist with these and
other customers.
Invest to Increase our Competitiveness and that of our Partners. We will
continue to invest in advanced manufacturing and process technologies to reduce
the cost of the services we provide for our customers on an ongoing basis.
During 1999, we launched a $35 million capital investment program to expand and
automate the services we provide to our customers in the truck components &
assemblies market. The automation substantially increased our output per man
hour and enabled us to offer our customers reduced pricing that helped them to
remain competitive on a global scale. Our ability to leverage this capability
across a number of customers in the future will further improve our capacity
utilization, absorption of overhead and reduce our manufacturing costs.
Grow Through the Addition of New Value-Added Services. We will continue to
grow through the addition of new value-added capabilities that enable us to
provide a more complete solution by improving quality and reducing product
cost, inventory levels and cycle times for our customers. We have recently
added new, state-of-the-art machining capabilities to the range of services we
have to offer our customers in the truck components & assemblies market. The
integration of these new activities with our existing operations will enable us
to reduce labor and shipping costs and minimize cycle times for our customers.
ArvinMeritor has entered into a contract for these new services, which we
believe may provide us with significant additional opportunities for growth in
the future.
Target Strategic Acquisitions that Enhance our Market Leadership. We will
continue to pursue strategic acquisitions that consolidate our position of
leadership in our core markets, create or strengthen our relationships with
leading companies and expand our range of value-added services. Since 1985, we
have completed the purchase of 18 operations from companies such as Allegheny
International, Alliant Techsystems, Dana, Honeywell, Lucent, Philips
Electronics and Sumitomo. We believe that there will be an increasing number of
opportunities to solidify our positions of market leadership through the
purchase of operating assets from our customers and others in our core markets
in the future.
We believe that the number and duration of our strategic relationships
enable us to invest in our business with greater certainty and with less risk
than others who do not benefit from the type of longer term contractual
commitments we receive from many of our major customers. The investments we
make in support of these contracts provide us with the productivity,
flexibility, technological edge and economies of scale that we believe will
help to differentiate us from the competition in the future when it comes to
cost, quality, reliability and customer service.
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Our Services and Products
We are a diversified provider of outsourced services and specialty products.
Our services consist of manufacturing, technical and other services and
products that are delivered as part of our customers' overall supply chain
management. The information below is representative of the types of products we
manufacture, services we provide and the customers and industries for which we
provide such products or services.
Aerospace & Defense Electronics:
Boeing.................. Complex circuit cards for the Brimstone missile
guidance systems.
Honeywell............... Complex circuit cards for the color display
systems of the Apache attack helicopter.
Lockheed Martin......... Space electronics for the space shuttle and the
international space station.
National Security Agency Secure communications equipment, recording
systems and encryption software.
Northrop Grumman........ Complex circuit cards for the BAT (brilliant
anti-tank) missile guidance systems.
Raytheon................ Complex circuit cards and high level assemblies
for use in satellite communications systems, the
AMRAAM (advanced, medium-range, air-to-air
missile) and HARM (high-speed, anti-radiation
missile) missile guidance systems, and secure
tactical communication systems.
Truck Components & Assemblies:
ArvinMeritor............ Axle shafts for medium and heavy-duty trucks.
Dana.................... Axle shafts, pinions, ring gears and helical
gears for medium and heavy-duty trucks.
Test & Measurement Services:
AT&T.................... Calibration and certification services at over
600 central and field switching stations.
Boeing.................. Testing of electronic components for use in
commercial avionics.
Federal Aviation
Administration.......... Calibration and certification services at over
400 airports.
National Weather Service Calibration and certification services for all
132 early warning weather radar stations.
Products:
Bombardier Inc.......... Electrical current sensors for traction motors on
airport shuttles, Amtrak and the New York City
subway.
Snap-on Incorporated.... Magnetic probes to test engine diagnostics at
Sears and AutoZone.
Manufacturing Services
Our manufacturing services typically involve the fabrication or assembly of
a product or subassembly according to specifications provided by our customers.
We purchase raw materials or components from both independent suppliers and
from our customers in connection with performing our manufacturing services.
Our manufacturing capabilities are enhanced by advanced quality and
manufacturing techniques, lean manufacturing, just-in-time procurement and
continuous flow manufacturing, statistical process control, total
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quality management, stringent and real-time engineering change control routines
and total cycle time reduction techniques.
Electronics Manufacturing Services. We provide our customers with a broad
variety of solutions, from low-volume prototype assembly to high-volume turnkey
manufacturing. We employ a multi-disciplined engineering team that provides
comprehensive manufacturing and design support to customers. The manufacturing
solutions we offer include design conversion and enhancement, materials
procurement, system assembly, testing and final system configuration.
Our manufacturing services contracts for the aerospace & defense electronics
market are generally sole-source by part number. Where we are the sole-source
provider by part number, we are the exclusive provider to our customer of
certain products for the duration of the manufacturing contract.
Industrial Manufacturing Services. We provide our customers with a wide
range of capabilities, including automated forging, extruding, machining,
induction hardening, heat-treating and testing services to meet the exacting
requirements of our customers. We also design and fabricate production tooling,
manufacture prototype products and provide other value-added services for our
customers.
Our manufacturing services contracts for the truck components & assemblies
markets are generally sole-source by part number. Part numbers may be specified
for inclusion in a single model or a range of models. Where we are the
sole-source provider by part number, we are the exclusive provider to our
customer of the specific parts and for any replacements for these parts that
may result from a design or model change for the duration of the manufacturing
contract.
Technical Services
Test & Measurement Services. We calibrate, repair and certify the test &
measurement equipment that is used to maintain wireless communication
equipment, control tower radar and direction beacons, NEXRAD Doppler advanced
warning weather service radar systems, digital oscilloscopes, microwave
equipment and fiber optic measuring equipment, among others. The applications
cover the maintenance of cellular communications systems, air traffic control
systems, broadband telecommunication systems and quality certification programs
in manufacturing operations.
Component Testing Services. We perform a wide-range of testing services on
a contract basis, including radio frequency, microwave and mixed signal
component testing, environmental testing, dynamics testing and failure
analysis, among others. These services are typically performed for components
that will be incorporated into final assemblies that require a high level of
reliability, such as aerospace and satellite systems.
Engineering Services. We utilize our advanced engineering service
capabilities to provide our customers with complete systems solutions that
exceed the scope of most manufacturing service companies. We believe that our
ability to provide these services, including software development, design
services, prototype development, product re-engineering, feature enhancement,
product ruggedization, cost reduction, product miniaturization, and
electro-magnetic interference and shielding, is instrumental in moving new
products to market quickly and consistently. Our engineers perform work on a
contract basis for a number of customers, including those requiring a high
level of security clearance.
Products
In addition to our outsourced services, we provide some of our customers
with specialized products for end-to-end solutions. With the growth of our
services business, our product business has increasingly become a smaller
portion of our overall net revenue. We expect this trend to continue in the
future.
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Data Systems. We design and manufacture digital and analog recorders,
multiplexers, storage systems and touch screen control software to collect data
from intelligence networks, performance data from missile tests, biological
data from space flights, sonar data from submarines and flight test data from
aircraft.
Encryption Devices. We design and manufacture trunk encryption devices that
provide military and intelligence agencies with the ability to transmit voice
and data over normal transmission lines with high levels of security.
Magnetics. We design and manufacture current sensors, Hall-effect
generators, auto probes and gaussmeters for current measurement applications in
homes, locomotives, mass transit systems, elevators, automotive diagnostic
systems and laboratory diagnostic systems.
Specialty. We design and manufacture high-pressure closures, transition
joints and insulated joints for use in pipeline and chemical systems.
Our Customers
Our customers include large, established companies and agencies of the
federal government. We provide some customers with a combination of outsourced
services and products, while other customers may be in a single category of our
service or product offering. Our five largest customers in 2001, which
accounted for 46% of net revenue, were ArvinMeritor, Dana, Honeywell, Lockheed
Martin and Raytheon. Our five largest customers in 2000, which accounted for
39% of net revenue, were ArvinMeritor, Honeywell, Lockheed Martin, Northrop
Grumman and Raytheon. Our five largest customers in 1999, which accounted for
29% of net revenue, were ArvinMeritor, Honeywell, IBM, Lockheed Martin and
Raytheon.
For the year ended December 31, 2001, Raytheon represented approximately 21%
of our net revenue, the U.S. Government and Government Agencies, including the
National Security Agency, collectively represented 16% of our net revenue and
Honeywell represented approximately 11% of our net revenue. Dana represented
approximately 6% of our net revenue in 2001, although this only reflects our
period of ownership of the Marion operation from the acquisition date on May
31, 2001. Dana is expected to account for more than 10% of our net revenue in
2002 and the percentage of our net revenue related to outsourced services for
the truck components & assemblies market is expected to increase in 2002.
Sales and Business Development
Our principal sources of new business originate from the expansion of
existing relationships, referrals and direct sales through senior management,
direct sales personnel, domestic and international sales representatives,
distributors and market specialists. We supplement these selling efforts with a
variety of sales literature, advertising in numerous trade media and
participation in trade shows. We also utilize engineering specialists
extensively to facilitate the sales process by working with potential customers
to reduce the cost of the service they need. Our specialists achieve this
objective by working with the customer to improve their product's design for
ease of manufacturing, reducing the amount of set up time or material that may
be required to produce the product, or by developing software that can automate
the test and/or certification process. The award of contracts or programs can
be a lengthy process, which in some circumstances can extend well beyond 12
months.
Our objective is to increase the value of the services we provide to the
customer on an annual basis beyond the contractual terms that may be contained
in a supply agreement. To achieve this objective, we commit to the customer
that we will continuously look for ways to reduce the cost, improve the
quality, reduce the cycle time and improve the life span of the products and/or
services we supply the customer. Our ability to deliver on this commitment over
time is expected to have a significant impact on customer satisfaction, loyalty
and follow-on business.
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Manufacturing and Facilities
Our principal manufacturing services operations are engaged in electronics
manufacturing services for our aerospace & defense customers and industrial
manufacturing services for our truck components & assemblies customers.
The following chart indicates the significant facilities that we own or
lease, the location and size of each such facility and the manufacturing
certifications that each facility possesses or is in process of obtaining. The
facilities listed below (other than the corporate office) are used principally
as manufacturing facilities. Substantially all of our assets secure borrowings
under our credit facility.
- ------------------------------------------------------------------------------------------
Own or Lease Approximate
Location Market Served (Expiration) Square Feet Certifications
- ------------------------------------------------------------------------------------------
Corporate Office:
- ------------------------------------------------------------------------------------------
Louisville, Kentucky Lease (2008) 9,000
- ------------------------------------------------------------------------------------------
Manufacturing Facilities:
- ------------------------------------------------------------------------------------------
Louisville, Kentucky Truck Components Own 467,000 ISO 9002
& Assemblies QS 9000
ISO 9001*
- ------------------------------------------------------------------------------------------
Tampa, Florida Aerospace & Lease (2007) 308,000 ISO 9001
Defense Electronics AS 9000
NHB5300.4
MIL-Q-9858A
MIL-STD-2000A
MIL-STD 45662
MIL-STD 801D
- ------------------------------------------------------------------------------------------
Marion, Ohio Truck Components Own 255,000 QS 9000*
& Assemblies
- ------------------------------------------------------------------------------------------
Orlando, Florida Test & Own 62,000 ISO 9001
Measurement ISO 9002
Services ISO 17025/Guide 25
MIL-STD 750
MIL-STD 883
MIL-STD 202
MIL-STD 810
- ------------------------------------------------------------------------------------------
Littleton, Colorado Aerospace & Lease (2002) 57,000 ISO 9001
Defense Electronics
- ------------------------------------------------------------------------------------------
Monrovia, California Aerospace & Lease (2004) 35,000 ISO 9001
Defense Electronics
- ------------------------------------------------------------------------------------------
* Certification in process.
In addition, we lease space in 21 other facilities primarily utilized to
provide technical services, all of which are located in the United States. We
also own 13 ISO-certified mobile calibration units and one ISO-certified
transportable field calibration unit that are utilized to provide test &
measurement services at customer locations throughout the U.S., the Caribbean
and the South Pacific. We believe that our facilities and equipment are in good
condition and reasonably suited and adequate for our current needs.
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Below is a listing and description of the various manufacturing
certifications or specifications that we utilize at our facilities.
Certification/Specification Description
- --------------------------- -----------
ISO 9001............... A certification process comprised of 20 quality system requirements to ensure
quality in the areas of design, development, production, installation and servicing of
products.
ISO 9002............... A certification process similar to the ISO 9001 requirements, but it applies
principally to manufacturing services as opposed to engineering services.
AS 9000................ A quality management system developed by the aerospace industry to measure
supplier conformance with basic common acceptable aerospace quality
requirements.
QS 9000................ A certification process developed by the nation's major automakers that focuses on
continuous improvement, defect reduction, variation reduction and elimination of
waste.
ISO 17025/Guide 25..... A certification process commonly referred to as A2LA, which sets out general
provisions that a laboratory must address to carry out specific calibrations or tests
and provides laboratories with direction for the development of a fundamental
quality management system.
NHB5300.4.............. A specification for space programs designated by the National Aeronautics and
Space Administration.
MIL.................... A specification that signifies specific functions or processes that are conducted in
compliance with military specifications, such as a quality program, high-reliability
soldering, calibration and metrology, and environmental testing.
Backlog
Our order backlog at December 31, 2001 was $162.3 million as compared to
order backlog at December 31, 2000 of $160.8 million. Backlog for the
Electronics Group and the Industrial Group at December 31, 2001 was $118.5
million and $43.8 million, respectively. Backlog for the Electronics Group and
the Industrial Group at December 31, 2000 was $143.2 million and $17.6 million,
respectively. Backlog consists of firm purchase orders with scheduled delivery
dates and quantities. Total backlog at December 31, 2001 included $131.0
million for orders that are expected to be filled within 12 months. Our backlog
has varied from quarter to quarter and may vary significantly in the future as
a result of the timing of significant new orders and/or shipments, order
cancellations, material availability and other factors.
Competition
The outsourced manufacturing services markets that we serve are highly
competitive and we compete against numerous domestic companies in addition to
the internal capabilities of some of our customers. In the aerospace & defense
electronics market, we compete primarily against companies such as LaBarge,
Inc., Primus Technologies Corporation, SMTEK International, Inc., Sparton
Corporation and Teledyne Technologies Incorporated. In the truck components &
assemblies market, we compete primarily against companies such as Mid-West
Forge, Inc., Spencer Forge and Machine, Inc. and Traxle Manufacturing, Inc.,
who serve as suppliers to many Tier 1 and smaller companies. In the test &
measurement services market, we compete primarily against companies such as
SIMCO Electronics, Transmation, Inc. and a variety of small, local, independent
laboratories.
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We may face new competitors in the future as the outsourcing industry evolves
and existing or start-up companies develop capabilities similar to ours.
We believe that the principal competitive factors in our markets include the
availability of capacity, technological capability, flexibility and timeliness
in responding to design and schedule changes, price, quality, delivery and
financial strength. Although we believe that we generally compete favorably
with respect to each of these factors, some of our competitors are larger and
have greater financial and operating resources than we do. Some of our
competitors have greater geographic breadth and range of services than we do.
We also face competition from manufacturing operations of our current and
potential customers, who continually evaluate the relative benefits of internal
manufacturing compared to outsourcing. We believe our competitive position to
be good and the barriers to entry to be high in the markets we serve.
Suppliers
We attempt to utilize standard parts, components and materials that are
available from multiple vendors. However, certain components and materials used
in our manufacturing services are currently available only from single sources,
and other components and materials are available from only a limited number of
sources. Despite the risks associated with purchasing from single sources or
from a limited number of sources, we have made the strategic decision to select
single source or limited source suppliers in order to obtain lower pricing,
receive more timely delivery and maintain quality control. In cases where
unanticipated customer demand or supply shortages occur, we attempt to arrange
for alternative sources of supply, where available, or defer planned production
to meet the anticipated availability of the critical component or material.
However, there can be no assurance that supply interruptions will not slow
production, delay shipments to our customers or increase costs in the future,
any of which could adversely affect our financial results.
Steel is a major component of our cost of sales and net revenue for the
truck components & assemblies business. We purchase the majority of our steel
for use in this business at the direction of our customers, with any periodic
changes in the price of steel being reflected in the prices we are paid for our
services, such that we neither benefit from nor are harmed by any future
changes in the price of steel. We believe that we have adequate sources for the
supply of raw materials for our manufacturing needs. Our raw materials,
including steel, are available within the geographic regions of our operating
facilities from numerous qualified sources in quantities sufficient for our
needs.
Research and Development
Our research and development activities are mainly related to our product
lines that serve the aerospace & defense electronics markets. Most of the
expenditures related to our outsourced services are for process improvements
and are not reflected in research and development expense. Accordingly, our
research and development expense represents a relatively small percentage of
our net revenue. We invested $6.4 million, $3.6 million and $3.1 million in
research and development in 1999, 2000 and 2001, respectively. We also utilize
our research and development capability to develop processes and technologies
for the benefit of our customers.
Employees
As of December 31, 2001, we had a total of approximately 1,650 employees,
1,105 engaged in manufacturing, 60 engaged in sales and marketing, 180 engaged
in engineering and 305 engaged in administration. Approximately 600 of our
employees are covered by collective bargaining agreements with various unions
that expire on various dates through 2006. We generally consider our
relationship with employees to be good. On occasion we may be subject to
strikes or labor contract interruptions, however, none has had a material
impact on our operations. Since October 2001, we have been experiencing a
strike by approximately 115 of our 303 Teamsters union employees at our Tampa,
Florida facility. We have replaced the striking workers with permanent
employees and implemented the last contract proposal in accordance with
applicable laws and regulations. The strike has not had a negative impact on
our operations or financial performance to date, though
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there can be no assurance that this will be the case in the future. Although we
believe overall that our relations with our labor unions are positive, there
can be no assurance that present and future issues with our unions will be
resolved favorably or that we will not experience a work stoppage, which could
adversely affect our results of operations.
Patents, Trademarks and Licenses
We own and are licensed under a number of patents and trademarks that we
believe are sufficient for our operations. Our business as a whole is not
materially dependent upon any one patent, trademark, license or technologically
related group of patents or licenses.
We regard our manufacturing processes and certain designs as proprietary
trade secrets and confidential information. We rely largely upon a combination
of trade secret laws, non-disclosure agreements with customers, suppliers and
consultants, and our internal security systems, confidentiality procedures and
employee confidentiality agreements to maintain the trade secrecy of our
designs and manufacturing processes.
Government Regulation
Our operations are subject to compliance with regulatory requirements of
federal, state and local authorities, including regulations concerning labor
relations, health and safety matters and protection of the environment. While
compliance with applicable regulations has not adversely affected our
operations in the past, there can be no assurance that we will continue to be
in compliance in the future or that these regulations will not change. Current
costs of compliance are not material to us.
We must comply with detailed government procurement and contracting
regulations and with U.S. Government security regulations, certain of which
carry substantial penalty provisions for nonperformance or misrepresentation in
the course of negotiations. Our failure to comply with our government
procurement, contracting or security obligations could result in penalties or
our suspension from government contracting, which would have a material adverse
effect on our results of operations.
We are required to maintain a U.S. Government security clearance at several
of our locations. This clearance could be suspended or revoked if we were found
not to be in compliance with applicable security regulations. Any such
revocation or suspension would delay our delivery of products to customers.
Although we have adopted policies directed at ensuring our compliance with
applicable regulations and there have been no suspensions or revocations at any
of our facilities, there can be no assurance that the approved status of our
facilities will continue without interruption.
We are also subject to comprehensive and changing federal, state and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and hazardous wastes and the
remediation of contamination associated with releases of hazardous substances.
We use hazardous substances in our operations and as is the case with
manufacturers in general, if a release of hazardous substances occurs on or
from our properties, we may be held liable and may be required to pay the cost
of remedying the condition. The amount of any resulting liability could be
material.
Legal Proceedings
We are involved from time to time in litigation and other legal proceedings
incidental to our business. Ongoing legal proceedings include the following:
Our Sypris Technologies subsidiary is a co-defendant in two lawsuits arising
out of an explosion at a coker plant owned by Exxon Mobil Corporation located
in Baton Rouge, Louisiana. In each of these lawsuits, it is alleged that a
carbon steel pipe elbow that we manufactured was improperly installed and, the
failure of which caused the explosion. One of the actions was brought by Exxon
Mobil in 1994 in state district court in Louisiana
37
and claims damages for destruction of the plant, which Exxon Mobil estimates
exceed one hundred million dollars. We are a co-defendant in this action with
the fabricator who built the pipeline into which the elbow was incorporated and
with the general contractor for the plant. The second action is a class action
suit also filed in 1994 in federal court in Louisiana on behalf of the
residents living around the plant and claims unspecified damages. We are a
co-defendant in this action with Exxon Mobil, the contractor and the
fabricator. In both actions, we maintain that the carbon steel pipe elbow at
issue was appropriately marked as carbon steel and was improperly installed,
without our knowledge, by the fabricator and general contractor in
circumstances that required the use of a chromium steel elbow. Although we
believe these defenses to be meritorious, there can be no assurance that we
will not be found liable for some or all of the alleged damages. If we were to
be found liable and the damages exceeded available insurance coverage, the
impact could materially and adversely affect our financial condition and
results of operations.
Environmental Matters
Our Marion, Ohio facility is subject to soil and groundwater contamination
involving petroleum compounds, semi-volatile and volatile organic compounds,
certain metals, PCBs and other contaminants, some of which exceed the State of
Ohio voluntary action program standards applicable to the site. We continue to
test and assess this site to determine the extent of this contamination by the
prior owners of the facility. Under our purchase agreement for this facility,
Dana has agreed to indemnify us for environmental conditions which existed on
the site as of closing, provided we notify Dana of the existence of such
matters by December 31, 2002.
A leased facility we formerly occupied in Tampa, Florida is currently
subject to remediation activities related to ground water contamination
involving methylene chloride and other volatile organic compounds which
occurred prior to our use of the facility. The contamination extends beyond the
boundaries of the facility. In December 1986, Honeywell, a prior operator of
the facility, entered into a consent order with the Florida Department of
Environmental Regulation under which Honeywell agreed to take corrective
actions to remediate the contamination, the full scope of which have not yet
been determined. We purchased the assets of a business formerly located on this
leased site and operated that business from 1993 until December 1994. Philips
Electronics, the seller, has agreed to indemnify us with respect to
environmental matters arising from groundwater contamination at the site.
In December 1992, we acquired certain business assets located at a facility
in Littleton, Colorado. Certain chlorinated solvents disposed of on the site by
Honeywell, a previous owner of the business, have contaminated the ground water
at and around the site. Alliant Techsystems, from which we acquired the
facility, operates a remediation system approved by the State of Colorado and
has also entered into a consent order with the EPA providing for additional
investigation at the site. Alliant Techsystems has agreed to indemnify us with
respect to these matters.
38
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of January 28, 2002
are as follows:
Name Age Position
- ---- --- --------
Robert E.Gill(1)........ 76 Chairman of the Board
Jeffrey T. Gill(1)...... 45 President, Chief Executive Officer and Director
James G. Cocke.......... 54 Vice President; President and Chief Executive Officer of
Sypris Electronics, LLC
John M. Kramer.......... 59 Vice President; President and Chief Executive Officer of
Sypris Technologies, Inc.
G. Darrell Robertson.... 59 Vice President; President and Chief Executive Officer of
Sypris Data Systems, Inc.
Henry L. Singer II...... 55 Vice President; President and Chief Executive Officer of
Sypris Test & Measurement, Inc.
Richard L. Davis........ 48 Senior Vice President and Secretary
David D. Johnson........ 45 Vice President, Chief Financial Officer and Treasurer
Anthony C. Allen........ 43 Vice President, Controller and Assistant Secretary
Henry F. Frigon(1)(2)... 67 Director
R. Scott Gill(1)........ 43 Director
William L. Healey(2)(3). 57 Director
Roger W. Johnson(3)(4).. 67 Director
Sidney R. Petersen(2)(4) 71 Director
Robert Sroka(3)(4)...... 52 Director
- --------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit and Finance Committee.
(4) Member of the Nominating and Governance Committee.
Robert E. Gill has served as Chairman of our Board and the Board of our
predecessor since 1983, and served as President and Chief Executive Officer of
our predecessor from 1983 to 1992. Prior to 1983, Mr. Gill served in a number
of senior executive positions, including Chairman, President and Chief
Executive Officer of Armor Elevator Company, Vice President of A.O. Smith
Corporation and President of Elevator Electric Company. Mr. Gill holds a BS
degree in Electrical Engineering from the University of Washington and an MBA
from the University of California at Berkeley. Robert E. Gill is the father of
Jeffrey T. Gill and R. Scott Gill.
Jeffrey T. Gill has served as a director and as a director of our
predecessor since 1983 and as our and our predecessor's President and Chief
Executive Officer since 1992. He served as Executive Vice President of our
predecessor from 1983 to 1992. Mr. Gill holds a BS degree in Business
Administration from the University of Southern California and an MBA from
Dartmouth College. Jeffrey T. Gill is the son of Robert E. Gill and the brother
of R. Scott Gill.
James G. Cocke has served as a Vice President since December 2000 and as
President and Chief Executive Officer of our Sypris Electronics subsidiary
since August 2000. Mr. Cocke served as Vice President of Finance, Contracts and
Program Management for Sypris Electronics from 1997 to 2000, and as Manager of
the Services Division of our Sypris Test & Measurement subsidiary from 1995 to
1997. Prior to 1995, Mr. Cocke held senior financial positions at SAIC, CAE
Link Corporation, Smiths Industries and E-Systems. Mr. Cocke holds a BS degree
in Business and an MS in Accounting from Roosevelt University.
39
John M. Kramer has served as a Vice President since December 2000, as
President and Chief Executive Officer of our Sypris Technologies subsidiary
since 1985, and in various executive positions at Sypris Technologies from 1977
to 1985. Mr. Kramer holds a BS degree in Management from the University of
Louisville.
G. Darrell Robertson has served as a Vice President since December 2000 and
as President and Chief Executive Officer of our Sypris Data Systems subsidiary
since February 2000. Mr. Robertson served as an Executive Consultant for
Atlantic Management Associates from 1998 to 2000, as President of Aydin
Telemetry from 1997 to 1998, and as Vice President of Controlotron Corporation
from 1994 to 1996. Prior to 1994, Mr. Robertson served in a variety of senior
executive positions with Republic Electronics Company and Aeroflex
Laboratories. Mr. Robertson holds BS and MS degrees in Electrical Engineering
from Purdue University.
Henry L. Singer II has served as a Vice President since December 2000 and as
President and Chief Executive Officer of our Sypris Test & Measurement
subsidiary since March 1998. Mr. Singer served as President of Powers Process
Controls from 1991 to 1998, and in a variety of senior management positions
with Powers Process Controls from 1975 to 1991. Mr. Singer holds a BS degree in
Mechanical Engineering from Vanderbilt University and an MBA from Emory
University.
Richard L. Davis has served as our Senior Vice President since September
1997 and as our Secretary since June 1998. He served as a Vice President and
Chief Financial Officer of our predecessor from 1985 to 1997. Prior to 1985,
Mr. Davis served as Corporate Controller for Armor Elevator Company and as an
Audit Supervisor for Coopers and Lybrand. Mr. Davis holds a BS degree in
Business Administration from Indiana University and an MBA from the University
of Louisville. Mr. Davis is a certified public accountant in the state of
Kentucky.
David D. Johnson has served as a Vice President and our Chief Financial
Officer and Treasurer since September 1997. Mr. Johnson served as a Vice
President and Chief Financial Officer of Sypris Electronics from 1996 until its
merger with us in 1998. Mr. Johnson served as Financial Director, Far East
South for Molex Inc. from 1993 to 1996, and in various management positions for
Molex from 1984 to 1993. Prior to 1984, Mr. Johnson served as a senior manager
for KPMG Peat Marwick. Mr. Johnson holds a BA degree in Economics from Stanford
University.
Anthony C. Allen has served as a Vice President and our Controller and
Assistant Secretary since September 1997. He served as Vice President of
Finance of our predecessor from 1994 to 1998, and as a Vice President and
Controller of our predecessor from 1987 to 1994. Prior to 1987, Mr. Allen
served as General Accounting Manager for Armor Elevator Company. Mr. Allen
holds a Bachelors degree in Business Administration from Eastern Kentucky
University and an MBA from Bellarmine University. Mr. Allen is a certified
public accountant in the state of Kentucky.
Henry F. Frigon has served as a director since 1997. Mr. Frigon served as a
director of Sypris Electronics from 1994 until its merger with us in 1998. From
1994 to the present, he has been a private investor and business consultant.
Mr. Frigon currently serves as Chairman of CARSTAR, and served as its President
and Chief Executive Officer from 1998 to 2001. He served as Executive Vice
President-Corporate Development and Strategy and Chief Financial Officer of
Hallmark Cards from 1990 through 1994. He retired as President and Chief
Executive Officer of BATUS in 1990, after serving with that company for over 10
years. Mr. Frigon currently serves as a director of H&R Block, Buckeye
Technologies, Dimon, Tuesday Morning and Packaging Corporation of America.
R. Scott Gill has served as a director and as a director of our predecessor
since 1983. Mr. Gill currently serves as a Managing Broker with Koenig & Strey
GMAC Real Estate, a residential real estate firm, and served as an Associate
from 1999 to 2001. Mr. Gill served as a Project Manager with IA Chicago, P.C.,
from 1998 to 1999, as our Senior Vice President and Secretary from 1997 to 1998
and as our and our predecessor's Vice
40
President and Secretary from 1983 to 1998. R. Scott Gill is the son of Robert
E. Gill and the brother of Jeffrey T. Gill.
William L. Healey has served as a director since 1997. He is currently a
private investor and consultant. Mr. Healey served as a Director of Smartflex
Systems from 1993 to 1999, as its Chairman of the Board from 1996 to 1999, and
as its President and Chief Executive Officer from 1989 to 1999. Prior to
joining Smartflex, Mr. Healey served in several executive positions with
Silicon Systems, including Senior Vice President of Operations.
Roger W. Johnson has served as a director since 1997. Mr. Johnson served as
a director of Sypris Electronics from 1996 until its merger with us in 1998. He
has served as Chairman and Chief Executive Officer of Collectors Universe since
October 2001. Mr. Johnson served as Chief Executive Officer of YPO
International from 1998 to 2000, Administrator of the United States General
Services Administration from 1993 to 1996, and as Chairman and Chief Executive
Officer of Western Digital Corporation from 1982 through 1993. He currently
serves as a director of Array Microsystems, Needham Growth Fund, Insulectro,
Collectors Universe and Maxtor Corporation.
Sidney R. Petersen has served as a director since 1997. Mr. Petersen served
as a director of Sypris Electronics from 1994 until its merger with us in 1998.
Mr. Petersen retired as Chairman of the Board and Chief Executive Officer of
Getty Oil in 1984, where he served in a variety of increasingly responsible
management positions since 1955. Mr. Petersen currently serves as a director of
Avery Dennison Corporation.
Robert Sroka has served as a director since 1997. Mr. Sroka has served as
the Managing Partner of Lighthouse Partners since 1998. Mr. Sroka served as
Managing Director of Investment Banking-Mergers and Acquisitions for J.P.
Morgan from 1994 to 1998, and in a variety of senior executive positions at
J.P. Morgan, including Vice President-Investment Banking and Vice
President-Corporate Finance, from 1985 to 1994. Mr. Sroka currently serves as a
director of Avado Brands.
Board of Directors and Committees of the Board
Our Board currently consists of eight directors. Our certificate of
incorporation provides that the number of directors is to be fixed by the
Board, but in no event shall be less than three nor more that twelve directors.
Our Board currently has four standing committees as described below.
The Audit and Finance Committee of our Board consists solely of independent
directors and currently consists of Roger W. Johnson, William L. Healey and
Robert Sroka. Our Board has adopted a written charter for the Audit and Finance
Committee which sets out the Committee's specific functions and
responsibilities. The Audit and Finance Committee has responsibility for: (i)
consultation with our officers regarding the retention or replacement of
independent auditors and making recommendations to our Board for any such
retention or replacement; (ii) establishing, reviewing and evaluating
activities of the independent auditors and our internal audit function; (iii)
reviewing annual financial statements and quarterly financial results with
management; (iv) consulting with independent auditors regarding the conduct of
audits and reviews; (v) reviewing recommendations of the independent auditors;
(vi) reviewing financial reporting, loss exposure and asset control; (vii)
discussing the auditor's independence from management; (viii) overseeing
special investigations; (ix) reviewing debt-equity ratios, coverage of fixed
charges and other financial ratios; (x) reviewing debt and credit arrangements;
(xi) assisting with the development of financing strategies; (xii) reviewing
investment banking relationships; (xiii) reviewing required Securities and
Exchange Commission reports; and (xiv) annually reviewing and assessing its
charter.
The Compensation Committee of our Board consists solely of independent
directors and currently consists of Henry F. Frigon, William L. Healey and
Sidney R. Petersen. The functions performed by the Compensation Committee
include: (i) overseeing executive compensation (including compensation for the
chief executive
41
officer); (ii) reviewing our overall compensation programs and administering
certain of our incentive compensation programs; (iii) overseeing director
compensation, benefit plans and any loans to our executive officers; and (iv)
overseeing programs for attraction and retention of senior management.
The Executive Committee of our Board currently consists of Robert E. Gill,
Jeffrey T. Gill, R. Scott Gill and Henry F. Frigon. Except for certain powers
which under Delaware law may only be exercised by our full Board, the Executive
Committee has and exercises the powers of the Board in monitoring the
management of our business between meetings of our Board.
The Nominating and Governance Committee of our Board consists solely of
independent directors and currently consists of Sidney R. Petersen, Roger W.
Johnson and Robert Sroka. The Nominating and Governance Committee has
responsibility for: (i) establishing the criteria for and reviewing the
effectiveness of our Board and our executive officers; and (ii) providing
oversight with regard to our various programs regarding management succession,
business ethics and other governance issues.
Compensation of Directors
Independent directors (currently Henry F. Frigon, R. Scott Gill, William L.
Healey, Roger W. Johnson, Sidney R. Petersen and Robert Sroka) are paid an
annual retainer of $15,000, a fee of $1,000 for attending each Board meeting
($300 if attendance is by phone), a fee of $1,250 for acting in the capacity of
chairman for each Committee meeting ($300 if attendance is by phone) and a fee
of $1,000 for attending each Committee meeting ($300 if attendance is by
phone). Committee fees are only earned if the Committee meetings are held on a
date other than a Board meeting date. Independent directors may elect to
receive their annual retainer and meeting fees in the form of stock options
granted pursuant to the Sypris Solutions, Inc. Independent Directors' Stock
Option Plan in lieu of cash. Independent directors also receive initial and
annual grants of stock options of 10,000 shares for each elected term as a
director under our Independent Directors' Stock Option Plan. The period during
which an option must be exercised is ten years from the date of grant. The
exercise price for each option is the fair market value of the stock on the
date of grant, and each option is immediately exercisable. No director has
exercised stock options. All directors are reimbursed for travel and related
expenses incurred by them in attending Board and Committee meetings. Directors
who are our employees or any of our affiliates' employees are not eligible to
receive compensation for services rendered as a director.
42
Executive Compensation
The following table contains summary information concerning the annual
compensation for the years ended December 31, 1999, 2000 and 2001 for our
President and Chief Executive Officer, and our four most highly compensated
executive officers for the year ended December 31, 2001.
Long Term
Annual Compensation Compensation Awards
----------------------------- --------------------
Other Restricted Securities All
Annual Stock Underlying Other
Name and Principal Position Year Salary Bonus Compensation Awards Options/SARs Compensation
- --------------------------- ---- -------- ------- ------------ ---------- ------------ ------------
Jeffrey T. Gill 2001 $341,169 -- -- -- -- $10,740(1)(2)
President and Chief Executive 2000 310,550 -- -- -- -- 7,971(3)(4)
Officer 1999 274,327 -- -- -- 100,000(5) 7,492(6)
James G. Cocke 2001 $217,308 -- -- -- 10,000(5) $ 5,666(1)(2)
Vice President; President and 2000 176,977 $39,638 -- -- 55,000(7)(8) 5,192(3)(4)
Chief Executive Officer of 1999 147,308 42,000 -- -- -- 5,541(6)(9)
Sypris Electronics, LLC
John M. Kramer 2001 $213,577 -- -- -- 40,000(5) $ 719(2)
Vice President; President and 2000 185,962 $21,412 -- -- 15,000(5) 637(4)
Chief Executive Officer of Sypris 1999 168,269 52,834 -- -- -- 711(9)
Technologies, Inc.
David D. Johnson 2001 $200,423 -- -- -- 25,000(5) $10,499(1)(2)
Vice President, Chief Financial 2000 185,846 $26,950 -- -- 10,000(5) 8,668(3)(4)
Officer and Treasurer 1999 177,308 29,248 -- -- -- 7,314(6)
Richard L. Davis 2001 $196,108 -- -- -- 40,000(5) $10,238(1)(2)
Senior Vice President and 2000 185,884 $26,950 -- -- 10,000(5) 8,114(3)(4)
Secretary 1999 174,077 29,248 -- -- -- 8,000(6)
- --------
(1) Includes contributions by us pursuant to our 401(k) plan ($10,200 for Mr.
Gill, $5,181 for Mr. Cocke, $10,200 for Mr. Johnson, and $10,200 for Mr.
Davis).
(2) Includes amounts paid by us on term life insurance policies ($540 for Mr.
Gill, $485 for Mr. Cocke, $719 for Mr. Kramer, $299 for Mr. Johnson, and
$38 for Mr. Davis).
(3) Includes contributions by us pursuant to our 401(k) plan ($7,650 for Mr.
Gill, $4,716 for Mr. Cocke, $7,650 for Mr. Johnson, and $7,650 for Mr.
Davis).
(4) Includes amounts paid by us on term life insurance policies ($321 for Mr.
Gill, $476 for Mr. Cocke, $637 for Mr. Kramer, $1,018 for Mr. Johnson, and
$464 for Mr. Davis).
(5) Options pursuant to 1994 Stock Option Plan for Key Employees.
(6) Includes contributions by us pursuant to our 401(k) plan ($7,492 for Mr.
Gill, $5,134 for Mr. Cocke, $7,314 for Mr. Johnson, and $8,000 for Mr.
Davis).
(7) Includes 35,000 options pursuant to 1994 Stock Option Plan for Key
Employees.
(8) Includes eight (8) performance-based options to purchase 2,500 shares of
our common stock each at the higher of the target share price of $15, $20,
$25, $30, $35, $40, $45 and $50, respectively, the fair market value of our
common stock on the date the performance-based options are granted, or the
fair market value of our common stock on the first business day following
the calendar quarter in which the average daily fair market value of our
common stock equals or exceeds the target share price for the preceding
calendar quarter. The options vest in equal annual amounts of 20%,
commencing with the second anniversary of the date the target share price
is achieved.
(9) Includes amounts paid by us on term life insurance policies ($407 for Mr.
Cocke and $711 for Mr. Kramer).
43
The following table shows grants of options to purchase our common stock to
the executive officers named in the summary compensation table during the year
ended December 31, 2001.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (2)
- - ------------------------------------------------ ----------------------
Percent of
Number of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Expiration
Name Granted Fiscal Year Base Price Date 5% 10%
- ---- ------------ ------------ ----------- ---------- -------- --------
Jeffrey T. Gill. -- -- -- -- -- --
James G. Cocke.. 10,000(1) 1.8% $6.25 02/26/09 $ 29,841 $ 71,474
John M. Kramer.. 40,000(1) 7.4 6.25 02/26/09 119,364 285,897
David D. Johnson 25,000(1) 4.6 6.25 02/26/09 74,602 178,686
Richard L. Davis 40,000(1) 7.4 6.25 02/26/09 119,364 285,897
- --------
(1) These options, pursuant to the Sypris Solutions, Inc. 1994 Stock Option
Plan for Key Employees, are exercisable in five equal annual installments,
commencing February 27, 2003.
(2) Potential realizable value calculated based upon the market price of our
common stock on the date of grant of $6.25.
The following table contains information concerning aggregated option
exercises during the year ended December 31, 2001 and the value of unexercised
options held as of December 31, 2001 by the executive officers named in the
summary compensation table.
Number of Securities
Shares Underlying Unexercised Value of Unexercised in-the-
Acquired on Value Options/SARs Fiscal money Options/SARS at
Name Exercise Realized Year-End Fiscal Year-End (1)
- ---- ----------- -------- ------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Jeffrey T. Gill. -- -- 20,000 80,000 $112,900 $ 451,600
James G. Cocke.. -- -- 12,500 97,500 100,250 276,775
John M. Kramer.. 20,354 $ 67,575 18,750 95,000 93,682 308,600
David D. Johnson -- -- 39,750 95,250 232,695 278,105
Richard L. Davis 34,516 275,313 38,516 96,000 407,111 321,620
- --------
(1) Value of in-the-money options is based on the excess of the closing price
of our common stock on December 31, 2001 ($13.02) over the exercise price
of the options, multiplied by the number of shares underlying the options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
G. Darrell Robertson, one of our executive officers, is currently indebted
to us in the principal amount of $80,000, represented by his promissory note
(originally in the principal amount of $100,000) bearing interest at 8% per
annum, the principal and accrued interest on which is forgiven in five equal
annual installments of $20,000 each, beginning February 28, 2001, so long as
Mr. Robertson remains employed by us. This indebtedness arose in connection
with Mr. Robertson's initial employment, pursuant to the terms of which we
granted him a loan for relocation purposes.
44
PRINCIPAL STOCKHOLDERS
The following table shows information regarding the beneficial ownership of
our common stock as of January 28, 2002, and as adjusted to reflect the sale of
shares offered by the prospectus for:
. each named executive officer;
. each of our directors;
. all directors and executive officers as a group; and
. each person known to us to be the beneficial owner of more than 5% of our
outstanding shares of common stock.
The percentage of beneficial ownership is based on 9,904,375 shares of
common stock outstanding as of January 28, 2002, and 12,904,375 shares of
common stock outstanding after completion of this offering, assuming no
exercise of the underwriters' over-allotment option.
To our knowledge and except as otherwise indicated, all persons listed below
have sole voting and investment power with respect to their shares of common
stock, except to the extent authority is shared by spouses under applicable
law. Each director and executive officer listed below maintains a mailing
address at c/o Sypris Solutions, Inc., 101 Bullitt Lane, Suite 450, Louisville,
KY 40222.
Shares Beneficially Owned Shares Beneficially
Prior to Offering Owned After Offering
- - ------------------------ -------------------
Number Percent Number Percent
- - --------- ------- --------- -------
Beneficial Owner
- ----------------
Robert E. Gill (1)...................... 3,275,666 33.1% 3,275,666 25.4%
Virginia G. Gill (2).................... 3,275,666 33.1 3,275,666 25.4
Jeffrey T. Gill (3)..................... 6,047,906 60.8 6,047,906 46.7
R. Scott Gill (4)....................... 5,667,371 57.0 5,667,371 43.8
GFP, Ltd. (5)........................... 3,274,666 33.1 3,274,666 25.4
Gill Family Capital Management, Inc. (6) 3,274,666 33.1 3,274,666 25.4
Henry F. Frigon (7)..................... 87,320 * 87,320 *
William L. Healey (8)................... 40,500 * 40,500 *
Roger W. Johnson (9).................... 81,694 * 81,694 *
Sidney R. Petersen (10)................. 103,361 1.0 103,361 *
Robert Sroka (11)....................... 80,013 * 80,013 *
James G. Cocke (12)..................... 16,625 * 16,625 *
John M. Kramer (13)..................... 59,470 * 59,470 *
David D. Johnson (14)................... 59,856 * 59,856 *
Richard L. Davis (15)................... 67,580 * 67,580 *
All directors and executive officers
as a group (15 persons)............... 9,163,377 86.8 9,163,377 67.6
- --------
* Denotes less than 1% of shares outstanding.
(1) Includes 500 shares beneficially owned by Virginia G. Gill, his wife.
Robert E. Gill shares voting and investment power with his spouse with
respect to these shares. Also includes 3,274,666 shares of our Common Stock
owned by GFP, Ltd., a Kentucky limited partnership, of which Robert E. Gill
is a limited partner holding a 45.31% ownership interest and of which
Virginia G. Gill is a limited partner holding a 46.20% ownership interest.
On the basis of certain provisions of the limited partnership agreement of
GFP, Ltd., Robert E. Gill and Virginia G. Gill may be deemed to
beneficially own shares of Common Stock that are attributable to such
limited partnership interests.
45
(2) Includes 500 shares beneficially owned by Robert E. Gill, her husband.
Virginia G. Gill shares voting and investment power with her spouse with
respect to these shares. Also includes 3,274,666 shares held by GFP, Ltd.
See footnote (1) above for certain information concerning GFP, Ltd.
(3) Includes 40,000 shares issuable under currently exercisable stock options
and 23,975 shares owned by Patricia G. Gill, his wife. Jeffrey T. Gill
shares voting and investment power with his spouse with respect to these
shares. Also includes 3,274,666 shares held by GFP, Ltd., of which Jeffrey
T. Gill is a limited partner holding a 0.64% ownership interest, of which
Patricia G. Gill is a limited partner holding a 0.64% ownership interest,
and of which trusts for the benefit of Jeffrey T. Gill's children, of which
Jeffrey T. Gill is trustee, are limited partners holding an aggregate of
3.07% ownership interest. Gill Family Capital Management, Inc., a Kentucky
corporation (the "General Partner"), is the general partner of GFP, Ltd.,
with a 0.96% ownership interest in GFP, Ltd. Jeffrey T. Gill is the
Co-President and Treasurer of the General Partner, is one of two directors
of the General Partner, and is a 50% stockholder of the General Partner. On
the basis of Jeffrey T. Gill's positions with the General Partner, and
pursuant to certain provisions of the GFP, Ltd. partnership agreement,
Jeffrey T. Gill may be deemed to beneficially own shares of common stock
attributable to the General Partner.
(4) Includes 40,000 shares issuable under currently exercisable stock options.
Includes 3,274,666 shares owned by GFP, Ltd., of which R. Scott Gill is a
limited partner holding a 3.18% ownership interest. R. Scott Gill is the
Co-President and Secretary of the General Partner, is one of two directors
of the General Partner, and is a 50% stockholder of the General Partner. On
the basis of R. Scott Gill's positions with the General Partner, and
pursuant to certain provisions of the GFP, Ltd. partnership agreement, R.
Scott Gill may be deemed to beneficially own shares of common stock
attributable to the General Partner.
(5) Voting and investment power is exercised through the General Partner. See
footnotes (3) and (4).
(6) In its capacity as General Partner. See footnotes (3) and (4).
(7) Includes 86,070 shares issuable under currently exercisable stock options.
(8) Includes 40,000 shares issuable under currently exercisable stock options.
(9) Includes 81,694 shares issuable under currently exercisable stock options.
(10) Includes 102,736 shares issuable under currently exercisable stock
options, and 625 shares held by a family trust of which Mr. Petersen is a
trustee. Mr. Petersen shares voting and investment power with respect to
the shares held by the family trust.
(11) Includes 79,013 shares issuable under currently exercisable stock options.
(12) Includes 16,625 shares issuable under currently exercisable stock options.
(13) Includes 21,570 shares issuable under currently exercisable stock options.
(14) Includes 45,500 shares issuable under currently exercisable stock options.
(15) Includes 40,516 shares issuable under currently exercisable stock options.
46
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 20,000,000 shares of common stock,
par value $0.01 per share, 10,000,000 shares of non-voting common stock, par
value $0.01 per share and 1,000,000 shares of preferred stock, par value $0.01
per share. Our Board designated initially 11,000 shares of preferred stock as
Series A Preferred Stock in connection with the adoption of a stockholder
rights plan as further described below. There are no shares of non-voting
common stock or preferred stock issued and outstanding. Upon the closing of
this offering, there will be 12,904,375 shares of common stock issued and
outstanding assuming no exercise of the underwriters' over-allotment option.
Common Stock and Non-voting Common Stock
The common stock and the non-voting common stock are identical in all
respects, except as follows:
The holders of our common stock are entitled to one vote per share on all
matters to be voted on by stockholders, while holders of non-voting common
stock are not entitled to vote. There is no cumulative voting for the election
of directors.
Subject to the preferences applicable to any outstanding shares of preferred
stock, the holders of common stock and non-voting common stock are entitled to
receive dividends, if any, as may be declared by our Board of Directors from
time to time out of funds legally available for that purpose and distributed
pro rata in accordance with the number of shares of common stock and non-voting
common stock held by each stockholder. If a stock split or stock dividend is
declared by our Board of Directors, the holders of common stock will receive
shares of common stock and the holders of non-voting common stock will receive
shares of non-voting common stock.
In the event of our liquidation, dissolution, or winding up, the holders of
common stock and the non-voting common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to the prior
distribution rights of any outstanding preferred shares. There are no
redemption or sinking fund provisions applicable to our common stock or
non-voting common stock.
Our Board of Directors is authorized to convert all outstanding shares of
non-voting common stock into common stock on a share-for-share basis if it is
determined that having more than one class of common stock outstanding would
have a material adverse effect on our company.
Preferred Stock
Our Board of Directors is authorized to issue from time to time up to
1,000,000 shares of preferred stock in one or more series and to fix the voting
powers, designations, preferences and other special rights, and the
qualifications, limitations, and restrictions of each series, without further
vote or action by our stockholders. The issuance of any preferred stock could
dilute the voting power or otherwise adversely affect the rights of the common
stock.
Series A Preferred Stock
There are no shares of Series A Preferred Stock outstanding. The holders of
Series A Preferred Stock are entitled to vote on each matter to be voted on by
stockholders, and shall have 1,000 votes (subject to adjustment described
below) for each whole share of Series A Preferred Stock held. The holders of
any fraction of a share of Series A Preferred Stock that is not smaller than
1/1000 of a share shall be entitled to vote such fraction. The holders of
Series A Preferred Stock have certain special voting rights in the election of
directors when the equivalent of two annual dividends are in default. The
holders of Series A Preferred Stock are entitled to receive
47
(a) annual dividends payable in cash in an amount per share equal to $0.01 per
share less the amount of cash dividends received pursuant to the following
clause (b) (but not less than zero) and (b) cash and in-kind dividends on each
payment date equal to similar dividends on common stock in an amount per whole
share of Series A Preferred Stock equal to 1,000 (which number is subject to
adjustment to reflect stock dividends, subdivisions or combinations of the
outstanding common stock), times the per share amount of all cash dividends
then to be paid on each share of common stock. In the event of our liquidation,
dissolution or winding up, whether voluntary or involuntary, the holders of any
shares of Series A Preferred Stock will be entitled to receive, before any
distribution is made to holders of shares of stock ranking junior to the Series
A Preferred Stock or any distribution (other than a ratable distribution) is
made to the holders of stock ranking on a parity with the Preferred Stock, an
amount equal to the accrued and unpaid dividends thereon plus the greater of
$.01 per share or an amount per share equal to 1,000 (subject to adjustment as
described above), times the amount per share to be distributed to holders of
the common stock. The shares of Series A Preferred Stock shall not be
redeemable. However, we may purchase shares of Series A Preferred Stock in the
open market or pursuant to an offer to a holder or holders.
No Preemptive Rights
No holder of any class of our authorized capital stock has any preemptive
right to purchase any of our securities.
Anti-Takeover Effects of Our Certificate of Incorporation and By-laws
Certain provisions of our certificate of incorporation and by-laws concern
matters of corporate governance and the rights of stockholders. These
provisions, as well as the ability of our Board to issue shares of preferred
stock and to set the voting rights, preferences and other terms, may be deemed
to have an anti-takeover effect and may discourage takeover attempts not first
approved by our Board, including takeovers which stockholders may deem to be in
their best interests. These provisions, together with our proposed staggered
Board, also could delay or frustrate the removal of incumbent directors even if
the removal of incumbent directors would be beneficial to our stockholders. Our
Board believes that these provisions are appropriate to protect the interests
of Sypris and of our stockholders.
Upon approval by our stockholders of an amendment to our certificate of
incorporation proposed to be considered at our next annual meeting of
stockholders, no action may be taken by our stockholders without a meeting and
special meetings of stockholders may only be called by our directors or by our
stockholders holding not less than 80% of our voting shares outstanding.
Staggered Board of Directors
The term of all members of our Board will expire in 2002. Upon approval by
our stockholders of an amendment to our certificate of incorporation, and
effective with the next election of directors at the annual meeting in 2002,
our Board will be divided into three groups, whose terms will expire at
successive annual meetings. The staggered Board, along with our stockholder
rights plan, is intended to help deter a coercive or unfair takeover attempt,
as well as to prevent an acquirer from gaining control of us without offering a
fair price to all stockholders.
Stockholder Rights Plan
On October 23, 2001, our Board approved a stockholder rights plan. Under the
plan, each stockholder of record as of November 7, 2001 received a distribution
of one right for each outstanding share of common stock held. Each right
entitles the holder to purchase one one-thousandth of a share of Series A
Preferred Stock at an exercise price of $63.00. The rights will trade along
with, and not separately from, the shares of common stock unless they become
exercisable. If any person or group acquires or makes a tender offer for 15% or
more of our
48
common stock (except in transactions approved by our Board in advance) the
rights become exercisable, and they will separate, become tradable, and entitle
stockholders, other than such person or group, to acquire, at the exercise
price, preferred stock with a market value equal to twice the exercise price.
If we are acquired in a merger or other business combination with such person
or group, or if 50% of our earning power or assets are sold to such person or
group, each right will entitle its holder, other than such person or group, to
acquire, at the exercise price, shares of the acquiring company's common stock
with a market value of twice the exercise price. The Board has the right to
redeem the rights in certain circumstances for $.01 per right, subject to
adjustment. The rights will expire on October 23, 2011, unless redeemed or
exchanged earlier by us, and will be represented by existing common stock
certificates until they become exercisable.
The rights plan is designed to protect our stockholders in the event of
unsolicited offers to acquire us and other coercive takeover tactics, which, in
the board's opinion, would impair its ability to represent stockholder
interests. The rights plan may make an unsolicited takeover more difficult or
less likely to occur or may prevent a takeover, even though it may offer our
stockholders the opportunity to sell their stock at a price above the
prevailing market rate and may be favored by a majority of our stockholders.
Anti-Takeover Provisions of Delaware Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale or other transaction
resulting in a financial benefit to the stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of us without further action by the stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
Listing
Our common stock is listed on the Nasdaq National Market under the symbol
"SYPR."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 12,904,375 shares of common
stock outstanding, assuming no exercise of options outstanding as of January
28, 2002. Of these shares, the 3,000,000 shares sold in this offering and an
additional 1,395,927 currently outstanding shares will be freely transferable
without restriction or further registration under the Securities Act, except
for any shares purchased or held by our existing "affiliates," as that term is
defined in Rule 144 under the Securities Act. Holders of 8,508,448 shares of
our common stock will be subject to volume limitations under Rule 144, because
the shares are held by our existing affiliates and are subject to the 180-day
lockup agreement with the underwriters.
49
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. Needham & Company, Inc. and A.G. Edwards & Sons, Inc. are acting as
representatives of the underwriters. The underwriters' obligations are several,
which means that each underwriter is required to purchase a specific number of
shares, but is not responsible for the commitment of any other underwriter to
purchase shares. Subject to the terms and conditions of the underwriting
agreement, each underwriter has severally agreed to purchase from us the number
of shares of common stock set forth opposite its name below.
Needham & Company, Inc...
A.G. Edwards & Sons, Inc.
---------
3,000,000
=========
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price per share
set forth on the cover page of this prospectus. The underwriters may offer
shares to securities dealers, who may include the underwriters, at that public
offering price less a concession of up to $ per share. The underwriters
may allow, and those dealers may reallow, a concession to other securities
dealers of up to $ per share. After the offering to the public, the
offering price and other selling terms may be changed by the representatives.
We have granted an option to the underwriters to purchase up to 450,000
additional shares of common stock at the public offering price per share, less
the underwriting discounts and commissions set forth on the cover page of this
prospectus. This option is exercisable during the 30-day period after the date
of this prospectus. The underwriters may exercise this option only to cover
over-allotments made in connection with this offering. If this option is
exercised, each of the underwriters will purchase approximately the same
percentage of the additional shares as the number of shares of common stock to
be purchased by that underwriter, as shown in the table above, bears to the
total shown.
The following table shows the per share and total underwriting discount to
be paid to the underwriters by us. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares.
Total Total
Per Share No Exercise Full Exercise
--------- ----------- -------------
Paid by Sypris Solutions $ $ $
We estimate that the total expenses of the offering, excluding the
underwriting discounts and commissions, will be approximately $175,000.
The underwriting agreement provides that we will indemnify the underwriters
against certain liabilities that may be incurred in connection with this
offering, including liabilities under the Securities Act, or to contribute
payments that the underwriters may be required to make in respect thereof.
We have agreed not to offer, sell, contract to sell, grant options to
purchase, or otherwise dispose of any shares of our common stock or securities
exchangeable for or convertible into our common stock for a period of 180 days
after the date of this prospectus without the prior written consent of Needham
& Company, Inc. This agreement does not apply to the issuance of additional
options or shares under our stock option or employee stock purchase plans. Our
directors, officers and three other stockholders who collectively hold in the
aggregate 8,508,448 shares of common stock, have agreed not to, directly or
indirectly, sell, hedge, or otherwise dispose of any shares of common stock,
options to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock, other than up to 20,000 shares per
individual that may be sold in
50
connection with the exercise of stock options, for a period of 180 days after
the date of this prospectus without the prior written consent of Needham &
Company, Inc. Needham & Company, Inc. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
these lock-up agreements.
In connection with this offering, some of the underwriters and selling group
members, if any, or their affiliates may engage in passive market making
transactions in our common stock on the Nasdaq National Market immediately
prior to the commencement of sales in this offering, in accordance with Rule
103 of Regulation M under the Exchange Act. Rule 103 generally provides that:
. a passive market maker may not effect transactions or display bids for our
common stock in excess of the highest independent bid price by persons who
are not passive market makers;
. net purchases by a passive market maker on each day are generally limited
to 30% of the passive market maker's average daily trading volume in our
common stock during a specified two-month prior period or 200 shares,
whichever is greater, and must be discontinued when that limit is reached;
and
. passive market making bids must be identified as such.
Passive market making may stabilize or maintain the market price of our
common stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
Upon consummation of the offering, investment funds, certain of which may be
deemed to be affiliates of Needham & Company, Inc., will own approximately 2.6%
of our common stock.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for us by
Wyatt, Tarrant & Combs, LLP, Louisville, Kentucky. Certain legal matters for
the underwriters will be passed upon by Wollmuth, Maher & Deutsch LLP, New
York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 2000 and 2001, and
for each of the years in the three-year period ended December 31, 2001 included
in this prospectus have been audited by Ernst & Young LLP, independent
auditors, as stated in their report appearing herein and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
51
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-2 under the Securities Act
of 1933 with the SEC for the shares we are offering by this prospectus. This
prospectus does not include all of the information contained in the
registration statement. You should refer to the registration statement and its
exhibits and schedules for additional information. Whenever we make reference
in this prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to, or incorporated into, the registration statement for copies of the
actual contract, agreement or other document.
We also file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our filings are available to the public over
the Internet at the SEC's web site at "http://www.sec.gov." You can read and
copy any document that we file with the SEC at the following SEC public
reference facilities:
Public Reference Room Chicago Regional Office
450 Fifth Street, N.W. Citicorp Center, 500 West
Madison Street
Room 1024 Suite 1400
Washington, D.C. 20549 Chicago, IL 60611
You can also obtain copies of the documents at prescribed rates by writing
to the SEC's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call 1-800-SEC-0330 for further information on the operation
of the SEC's public reference facilities. You also can inspect copies of our
filings at The Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C.
20006.
The SEC allows us to "incorporate by reference" into this prospectus the
information we file with the SEC. This means that we can disclose important
information to you by referring you to those documents. Information
incorporated by reference is part of this prospectus. Information that we later
file with the SEC will automatically update and supersede this information.
We incorporate by reference our Annual Report on Form 10-K for the year
ended December 31, 2001, filed on January 31, 2002, and any future filings we
will make with the SEC under section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until this offering is completed.
You may request a copy of these filings at no cost, other than exhibits
unless those exhibits are specifically incorporated by reference herein, by
contacting us in writing or by telephone or e-mail at the following address:
Sypris Solutions, Inc.
101 Bullitt Lane, Suite 450
Louisville, Kentucky 40222
Phone: (502) 329-2000
e-mail: ir@sypris.com
52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SYPRIS SOLUTIONS, INC.
Page
----
Report of Independent Auditors................. F-2
Consolidated Income Statements................. F-3
Consolidated Balance Sheets.................... F-4
Consolidated Statements of Cash Flows.......... F-5
Consolidated Statements of Stockholders' Equity F-6
Notes to Consolidated Financial Statements..... F-7
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Sypris Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Sypris
Solutions, Inc. as of December 31, 2000 and 2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Sypris Solutions, Inc. at December 31, 2000 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Louisville, Kentucky
January 28, 2002
F-2
SYPRIS SOLUTIONS, INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except for per share data)
Years ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Net revenue:
Outsourced services.............................. $150,139 $168,216 $209,874
Products......................................... 51,991 48,355 44,766
-------- -------- --------
Total net revenue.............................. 202,130 216,571 254,640
Cost of sales:
Outsourced services.............................. 127,153 145,059 181,818
Products......................................... 30,028 31,199 29,275
-------- -------- --------
Total cost of sales............................ 157,181 176,258 211,093
-------- -------- --------
Gross profit...................................
44,949 40,313 43,547
Selling, general and administrative............... 23,388 26,881 26,134
Research and development.......................... 6,409 3,574 3,054
Amortization of intangible assets................. 986 1,436 1,329
Special charges................................... -- 2,945 --
-------- -------- --------
Operating income...............................
14,166 5,477 13,030
Interest expense, net............................. 1,730 4,035 4,111
Other income, net................................. (219) (344) (358)
-------- -------- --------
Income before income taxes.....................
12,655 1,786 9,277
Income tax expense (benefit)...................... 3,099 (1,398) 2,910
-------- -------- --------
Net income..................................... $ 9,556 $ 3,184 $ 6,367
======== ======== ========
Net income per common share:
Basic.......................................... $ 1.00 $ 0.33 $ 0.65
Diluted........................................ $ 0.97 $ 0.32 $ 0.63
Shares used in computing per common share amounts:
Basic.......................................... 9,515 9,671 9,828
Diluted........................................ 9,861 9,964 10,028
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
SYPRUS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
December 31,
-----------------
2000 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents........ $ 14,674 $ 13,232
Accounts receivable, net......... 31,896 39,758
Inventory, net................... 51,055 60,574
Other current assets............. 7,695 7,991
-------- --------
Total current assets........... 105,320 121,555
Property, plant and equipment, net 54,317 70,452
Intangible assets, net............ 17,154 15,926
Other assets...................... 2,331 3,511
-------- --------
$179,122 $211,444
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 25,670 $ 26,828
Accrued liabilities................................................................. 18,548 19,902
Current portion of long-term debt................................................... 2,500 7,500
-------- --------
Total current liabilities......................................................... 46,718 54,230
Long-term debt....................................................................... 62,500 80,000
Other liabilities.................................................................... 5,699 7,094
-------- --------
Total liabilities................................................................. 114,917 141,324
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares authorized; no shares
issued............................................................................ -- --
Common stock, non-voting, par value $.01 per share, 10,000,000 shares authorized; no
shares issued..................................................................... -- --
Common stock, par value $.01 per share, 20,000,000 shares authorized; 9,709,669 and
9,898,675 shares issued and outstanding in 2000 and 2001, respectively............ 97 99
Additional paid-in capital.......................................................... 24,401 25,490
Retained earnings................................................................... 40,060 46,427
Accumulated other comprehensive income (loss)....................................... (353) (1,896)
-------- --------
Total stockholders' equity.................................................... 64,205 70,120
-------- --------
$179,122 $211,444
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
SYPRIS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Cash flows from operating activities:
Net income................................................................ $ 9,556 $ 3,184 $ 6,367
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization........................................... 7,582 9,351 9,856
Deferred income taxes................................................... (645) (2,478) 479
Provision for excess and obsolete inventory............................. 446 453 432
Provision for doubtful accounts......................................... (129) 18 122
Other noncash charges................................................... 133 202 59
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable..................................................... 2,619 (8,121) (8,474)
Inventory............................................................... (11,277) (2,046) (3,519)
Other assets............................................................ (1,704) (344) (416)
Accounts payable........................................................ (1,997) 9,274 3,648
Accrued and other liabilities........................................... (6,652) (1,361) (83)
-------- -------- --------
Net cash (used in) provided by operating activities................. (2,068) 8,132 8,471
Cash flows from investing activities:
Capital expenditures...................................................... (14,443) (23,886) (27,623)
Proceeds from sale of assets.............................................. 14 9,292 6,816
Purchase of the net assets of acquired entities........................... (11,642) -- (11,486)
Changes in nonoperating assets and liabilities............................ (343) (351) (650)
-------- -------- --------
Net cash used in investing activities............................... (26,414) (14,945) (32,943)
Cash flows from financing activities:
Net increase in debt under revolving credit agreements.................... 28,280 10,600 22,500
Payments on long-term debt................................................ (2,463) -- --
Proceeds from issuance of common stock.................................... 684 481 530
-------- -------- --------
Net cash provided by financing activities........................... 26,501 11,081 23,030
-------- -------- --------
Net (decrease) increase in cash and cash equivalents....................... (1,981) 4,268 (1,442)
Cash and cash equivalents at beginning of year............................. 12,387 10,406 14,674
-------- -------- --------
Cash and cash equivalents at end of year................................... $ 10,406 $ 14,674 $ 13,232
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
SYPRIS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except for share data)
Accumulated
Other
Common Stock Additional Comprehensive Total
---------------- Paid-In Retained Income Stockholders'
Shares Amount Capital Earnings (Loss) Equity
--------- ------ ---------- -------- ------------- -------------
Balance at January 1, 1999........... 9,450,593 $95 $23,238 $27,320 $(1,294) $49,359
Net income........................... -- -- -- 9,556 -- 9,556
Adjustment in minimum pension
liability.......................... -- -- -- -- 1,221 1,221
--------- --- ------- ------- ------- -------
Comprehensive income................. -- -- -- 9,556 1,221 10,777
Issuance of shares under Employee
Stock Purchase Plan................ 15,600 -- 99 -- -- 99
Exercise of stock options............ 123,021 1 584 -- -- 585
--------- --- ------- ------- ------- -------
Balance at December 31, 1999......... 9,589,214 96 23,921 36,876 (73) 60,820
Net income........................... -- -- -- 3,184 -- 3,184
Adjustment in minimum pension
liability.......................... -- -- -- -- (280) (280)
--------- --- ------- ------- ------- -------
Comprehensive income (loss).......... -- -- -- 3,184 (280) 2,904
Issuance of shares under Employee
Stock Purchase Plan................ 35,290 -- 273 -- -- 273
Exercise of stock options............ 85,165 1 207 -- -- 208
--------- --- ------- ------- ------- -------
Balance at December 31, 2000......... 9,709,669 97 24,401 40,060 (353) 64,205
Net income........................... -- -- -- 6,367 -- 6,367
Adjustment in minimum pension
liability, net of tax of $828...... -- -- -- -- (1,124) (1,124)
Change in fair value of interest rate
swap agreements, net of tax of $309 -- -- -- -- (419) (419)
--------- --- ------- ------- ------- -------
Comprehensive income (loss).......... -- -- -- 6,367 (1,543) 4,824
Issuance of shares under Employee
Stock Purchase Plan................ 52,206 1 256 -- -- 257
Exercise of stock options............ 136,800 1 833 -- -- 834
--------- --- ------- ------- ------- -------
Balance at December 31, 2001......... 9,898,675 $99 $25,490 $46,427 $(1,896) $70,120
========= === ======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Significant Accounting Policies
Consolidation Policy
The accompanying consolidated financial statements include the accounts of
Sypris Solutions, Inc. and its wholly-owned subsidiaries (collectively,
"Sypris" or the "Company"). All significant intercompany accounts and
transactions have been eliminated.
Nature of Business
Sypris is a diversified provider of outsourced services and specialty
products. The Company performs a wide range of manufacturing, engineering,
design, testing and other technical services, typically under multi-year,
sole-source contracts with major companies and government agencies in the
markets for aerospace & defense electronics, truck components & assemblies, and
for users of test & measurement equipment.
As of January 1, 2002, the Company changed the name of its four major
operating subsidiaries as part of a comprehensive branding initiative. The new
names of the four subsidiaries are Sypris Data Systems, Inc., formerly
Metrum-Datatape, Inc.; Sypris Electronics, LLC, formerly Group Technologies
Corporation; Sypris Technologies, Inc., formerly Tube Turns Technologies, Inc.;
and Sypris Test & Measurement, Inc., formerly Bell Technologies, Inc.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventory
Contract inventory is stated at actual production costs, reduced by the cost
of units for which revenue has been recognized. Gross contract inventory is
considered work in process. Progress payments under long-term contracts are
specified in the contracts as a percentage of cost and are liquidated as
contract items are completed and shipped. Other inventory is stated at the
lower of cost or market. The first-in, first-out method was used for
determining the cost of inventory excluding contract inventory and certain
other inventory, which was determined using the last-in, first-out method (see
Note 5). The Company's reserve for excess and obsolete inventory is primarily
based upon forecasted demand for its product sales, and any change to the
reserve arising from forecast revisions is reflected in cost of sales in the
period the revision is made.
Property, Plant and Equipment
Property, plant and equipment is stated on the basis of cost. Depreciation
of property, plant and equipment is generally computed using the straight-line
method over their estimated economic lives. For land improvements, buildings
and building improvements, the estimated economic life is generally 40 years.
Estimated economic lives range from three to fifteen years for machinery,
equipment, furniture and fixtures. Leasehold improvements are amortized over
the respective lease term using the straight-line method. Expenditures for
maintenance, repairs and renewals of minor items are expensed as incurred.
Major renewals and improvements are capitalized.
F-7
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest cost is capitalized for qualifying assets during the period in
which the asset is being installed and prepared for its intended use.
Capitalized interest cost is amortized on the same basis as the related
depreciation. Capitalized interest for the years ended December 31, 2000 and
2001 was $910,000 and $1,763,000, respectively.
Intangible Assets
Costs in excess of net assets of businesses acquired ("goodwill"), patents,
product drawings and similar intangible assets are amortized over their
estimated economic lives. Goodwill is being amortized over a period of fifteen
years (see Notes 2 and 7). Other intangible assets are being amortized over
periods ranging from five to fifteen years, using the straight-line method.
Impairment of Long-lived Assets
The Company evaluates long-lived assets, including goodwill, for impairment
and assesses their recoverability based upon anticipated future cash flows. If
facts and circumstances lead the Company's management to believe that the cost
of one of its assets may be impaired, the Company will evaluate the extent to
which that cost is recoverable by comparing the future undiscounted cash flows
estimated to be associated with that asset to the asset's carrying amount and
write down that carrying amount to market value, or discounted cash flow value,
to the extent necessary.
Revenue Recognition
A portion of the Company's business is conducted under long-term,
fixed-price contracts with aerospace and defense companies and agencies of the
U.S. Government. Contract revenue is included in the consolidated income
statements as units are completed and shipped using the units of delivery,
percentage of completion method of accounting. The costs attributed to contract
revenue are based upon the estimated average costs of all units to be shipped.
The cumulative average costs of units shipped to date are adjusted through
current operations as estimates of future costs to complete change (see
"Contract Accounting" below).
Revenue recognized under the percentage of completion method of accounting
totaled $90,819,000, $105,535,000 and $134,478,000 for the years ended December
31, 1999, 2000 and 2001, respectively. Substantially all such amounts were
accounted for under the units of delivery method. All other revenue is
recognized as product is shipped and title passes, or when services are
rendered.
Contract Accounting
For long-term contracts, the Company capitalizes in inventory direct
material, direct labor and factory overhead as incurred. The Company also
capitalizes certain general and administrative costs for estimating and bidding
on contracts awarded (of which approximately $210,000 remained in inventory at
December 31, 2000 and 2001). Selling costs are expensed as incurred. Costs to
complete long-term contracts are estimated on a monthly basis. Estimated
margins at completion are applied to cumulative contract revenue to arrive at
costs charged to operations.
Accounting for long-term contracts under the percentage of completion method
involves substantial estimation processes, including determining the estimated
cost to complete a contract. As contracts may require performance over several
accounting periods, formal detailed cost-to-complete estimates are performed
and updated monthly via performance reports. Management's estimates of
costs-to-complete change due to internal and external factors, such as labor
rate and efficiency variances, revised estimates of warranty costs, estimated
F-8
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
future material prices and customer specification and testing requirement
changes. Changes in estimated costs are reflected in gross profit in the period
in which they are known. If increases in projected costs-to-complete are
sufficient to create a loss contract, the entire estimated loss is charged to
operations in the period the loss first becomes known.
Product Warranty Costs
The provision for estimated warranty costs is recorded at the time of sale
and periodically adjusted to reflect actual experience. The accrued liability
for warranty costs is included in the caption "Accrued liabilities" in the
accompanying consolidated balance sheets.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk consist of accounts receivable. The Company's customer base
consists of various departments or agencies of the U.S. Government, aerospace
and defense companies under contract with the U.S. Government and a number of
customers in diverse industries across geographic areas. The Company performs
periodic credit evaluations of its customers' financial condition and does not
require collateral on its commercial accounts receivable. Credit losses are
provided for in the financial statements and consistently have been within
management's expectations. Approximately 41% of accounts receivable outstanding
at December 31, 2001 are due from three of the Company's largest customers.
The Company recognized revenue from contracts with the U.S. Government and
its agencies of approximately $53,244,000, $45,467,000 and $40,046,000 during
the years ended December 31, 1999, 2000 and 2001, respectively. For the year
ended December 31, 2000, the Company's largest customer was Raytheon Company,
which represented approximately 15% of the Company's total net revenue. The
Company's largest customers for the year ended December 31, 2001 were Raytheon
Company and Honeywell International, Inc., which represented approximately 21%
and 11%, respectively, of the Company's total net revenue. No other single
customer accounted for more than 10% of the Company's total net revenue for the
years ended December 31, 1999, 2000 or 2001.
Stock Based Compensation
Stock options are granted under various stock compensation programs to
employees and independent directors (see Note 13). The Company accounts for
stock option grants in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25").
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and issued its amendments, Statements No.
137 and 138, in June 1999 and June 2000, respectively. SFAS No. 133 requires
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value must
be recognized currently in earnings.
F-9
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Adoption of Recently Issued Accounting Standard
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets."
Under the new rules, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment. Separable intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company will apply the new accounting rules beginning January 1, 2002. The
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002. The Company currently
does not expect any significant loss as a result of the impairment tests. The
Company will be required to test the value of its goodwill at least annually.
These tests will involve estimates related to the fair market value of the
business with which the goodwill is associated. The Company anticipates that
substantially all amortization of intangible assets as a charge to earnings
will be eliminated beginning January 1, 2002.
(2) Acquisitions
During 1999, the Company completed two transactions in which it acquired the
assets of the related businesses. The transactions were accounted for as
purchases, in which the combined purchase price of $11,642,000 was allocated
based on the fair values of assets acquired, with the excess amount allocated
to goodwill, which totaled $6,607,000. The results of operations of the
acquired businesses have been included in the consolidated financial statements
since the respective acquisition dates. The acquisitions were financed by the
Company's Credit Agreement.
On May 31, 2001, the Company acquired certain assets and liabilities of the
Marion Forge plant from Dana Corporation. The business produces fully machined,
heavy-duty truck axle shafts and other drive components for integration into
subassemblies and is included with Sypris Technologies in the Industrial Group.
The transaction was accounted for as a purchase, in which the purchase price of
$11,500,000 was allocated based on the fair values of the assets and
liabilities acquired. The results of operations of the acquired business have
been included in the consolidated financial statements since the acquisition
date. The acquisition was financed by the Company's Credit Agreement.
(3) Special Charges
Special charges of $2,945,000 were recognized during the year ended December
31, 2000 for activities related to the consolidation of certain operations
within the Electronics Group. The special charges incurred and paid during 2000
include workforce reductions, related severance and other benefit costs of
$1,211,000, facilities rearrangement and relocation costs of $480,000, and
employment costs related to the transfer of production of $1,254,000. The
workforce reductions resulted in the termination of 48 employees involved in
manufacturing, engineering, sales and administrative activities during 2000.
F-10
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Accounts Receivable
Accounts receivable consists of the following (in thousands):
December 31,
----------------
2000 2001
------- -------
Commercial..................... $26,262 $34,658
U.S. Government................ 6,313 5,875
------- -------
32,575 40,533
Allowance for doubtful accounts (679) (775)
------- -------
$31,896 $39,758
======= =======
Accounts receivable from the U.S. Government includes amounts due under
long-term contracts, all of which are billed at December 31, 2000 and 2001, of
$4,864,000 and $2,939,000, respectively.
(5) Inventory
Inventory consists of the following (in thousands):
December 31,
-----------------
2000 2001
-------- -------
Raw materials................................................................... $ 13,567 $19,003
Work in process................................................................. 8,388 9,661
Finished goods.................................................................. 1,632 5,450
Costs relating to long-term contracts and programs, net of amounts attributed to
revenue recognized to date.................................................... 45,542 37,908
Progress payments related to long-term contracts and programs................... (14,011) (6,540)
LIFO reserve.................................................................... (1,059) (987)
Reserve for excess and obsolete inventory....................................... (3,004) (3,921)
-------- -------
$ 51,055 $60,574
======== =======
The preceding amounts include inventory valued under the last-in, first-out
("LIFO") method totaling $5,365,000 and $9,141,000 at December 31, 2000 and
2001, respectively. In the aggregate, these costs are less than market value.
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
December 31,
------------------
2000 2001
-------- --------
Land and land improvements.................. $ 1,032 $ 1,436
Buildings and building improvements......... 14,979 17,837
Machinery, equipment, furniture and fixtures 77,901 96,674
Construction in progress.................... 18,561 19,858
-------- --------
112,473 135,805
Accumulated depreciation.................... (58,156) (65,353)
-------- --------
$ 54,317 $ 70,452
======== ========
Depreciation expense totaled $6,526,000, $7,906,000 and $8,468,000 for the
years ended December 31, 1999, 2000 and 2001, respectively. At December 31,
2000, $5,372,000 and $2,093,000 was included in accounts
F-11
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
payable and accrued liabilities, respectively, for capital expenditures. At
December 31, 2001, $2,782,000 and $612,000 was included in accounts payable and
accrued liabilities, respectively, for capital expenditures.
(7) Intangible Assets
Intangible assets consists of the following (in thousands):
December 31,
----------------
2000 2001
------- -------
Costs in excess of net assets of businesses acquired $18,423 $18,423
Other............................................... 3,102 3,212
------- -------
21,525 21,635
Accumulated amortization............................ (4,371) (5,709)
------- -------
$17,154 $15,926
======= =======
Amortization expense totaled $1,056,000, $1,445,000 and $1,388,000 for the
years ended December 31, 1999, 2000 and 2001, respectively.
(8) Accrued Liabilities
Accrued liabilities consists of the following (in thousands):
December 31,
---------------
2000 2001
------- -------
Employee benefit plan accruals $ 4,770 $ 6,308
Salaries, wages and incentives 2,921 3,925
Other......................... 10,857 9,669
------- -------
$18,548 $19,902
======= =======
Included in other accrued liabilities are employee payroll deductions,
advance payments, accrued operating expenses, accrued warranty expenses,
accrued interest and other items, none of which exceed 5% of total current
liabilities.
(9) Long-Term Debt
The Company has a credit agreement with a syndicate of banks (the "Credit
Agreement") that was entered into in October 1999 and amended as of November
2000 and February 2001. The Credit Agreement provides for a revolving credit
facility with an aggregate commitment of $100,000,000 through January 2005.
Under the terms of the Credit Agreement, interest rates are determined at the
time of borrowing and are based on the London Interbank Offered Rate plus a
margin of 1.0% to 3.25%; or the greater of the prime rate or the federal funds
rate plus 0.5%, plus a margin up to 0.75%. The Company also pays a fee of 0.2%
to 0.5% on the unused portion of the aggregate commitment. The margins applied
to the respective interest rates and the commitment fee are adjusted quarterly
and are based on the Company's ratio of funded debt to earnings before
interest, taxes, depreciation and amortization. The weighted average interest
rate for outstanding borrowings at December 31, 2001 was 5.2%. The weighted
average interest rates for borrowings during the years ended December 31, 2000
and 2001 were 8.5% and 7.4%, respectively. Current maturities of long-term debt
represent amounts due under a
F-12
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
short-term borrowing arrangement included in the Credit Agreement. Standby
letters of credit up to a maximum of $15,000,000 may be issued under the Credit
Agreement and no amounts were outstanding at December 31, 2000 and 2001.
The Credit Agreement contains customary affirmative and negative covenants,
including financial covenants requiring the maintenance of specified fixed
charge and leverage ratios and minimum levels of net worth. At December 31,
2001, the Company was in compliance with these covenants and retained earnings
of $15,427,000 were unrestricted. The Credit Agreement is secured by
substantially all assets of the Company, including but not limited to accounts
receivable, inventory, equipment and real estate, and is also guaranteed by the
subsidiaries of the Company. The asset collateralization requirement may be
eliminated after June 2002 in the event the Company achieves certain financial
ratios and remains in compliance with all covenants.
On July 26, 2001, the Company entered into interest rate swap agreements
with three banks that effectively convert a portion of its floating rate debt
to a fixed rate basis for a period of two years, thus reducing the impact of
interest rate changes on future interest expense. The swap agreements have a
combined notional amount of $30,000,000 whereby the Company pays a fixed rate
of interest of 4.52% and receives a variable 30-day LIBOR rate. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense in the consolidated income
statement. The aggregate fair market value of all interest rate swap agreements
was approximately $728,000 at December 31, 2001 and was included in other
liabilities on the consolidated balance sheet with an offset to other
comprehensive income.
Interest incurred during the years ended December 31, 1999, 2000 and 2001
totaled $1,725,000, $5,116,000 and $5,784,000, respectively. Interest paid
during the years ended December 31, 1999, 2000 and 2001 totaled $1,629,000,
$5,063,000 and $5,623,000, respectively.
(10) Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the consolidated financial statements at their carrying amount
which approximates fair value because of the short-term maturity of those
instruments. The carrying amount of debt outstanding at December 31, 2000 and
2001 under the Credit Agreement approximates fair value because borrowings are
for terms less than six months and have rates that reflect currently available
terms and conditions for similar debt. The Company uses interest rate swap
agreements (see Note 9) to minimize its exposure to fluctuations in interest
rates for a portion of the debt. The fair value of the swap agreements is
recognized in the consolidated financial statements.
(11) Employee Benefit Plans
The Company sponsors noncontributory defined benefit pension plans (the
"Pension Plans") covering certain employees of Sypris Technologies, including
certain employees of the operation acquired from Dana in May 2001. The Pension
Plans covering salaried and management employees provide pension benefits that
are based on the employees' highest five-year average compensation within ten
years before retirement. The Pension Plans covering hourly employees and union
members generally provide benefits at stated amounts for each year of service.
The Company's funding policy is to make the minimum annual contributions
required by the applicable regulations. The Pension Plans' assets are primarily
invested in equity securities and fixed income securities. The Company recorded
increases of $280,000 and $1,952,000 in 2000 and 2001, respectively, to its
minimum pension liability, and a decrease of $1,221,000 in 1999.
F-13
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table details the components of pension expense (in thousands):
Years ended December 31,
-------------------------
1999 2000 2001
------- ------- -------
Service cost................................. $ 181 $ 180 $ 358
Interest cost on projected benefit obligation 1,283 1,409 1,939
Net amortizations and deferrals.............. 165 222 247
Expected return on plan assets............... (1,091) (1,338) (1,961)
------- ------- -------
$ 538 $ 473 $ 583
======= ======= =======
The following are summaries of the changes in the benefit obligations and
plan assets and of the funded status of the Pension Plans (in thousands):
December 31,
----------------
2000 2001
------- -------
Change in benefit obligation:
Benefit obligation at beginning of year........... $17,859 $19,096
Benefit obligation assumed in acquisition......... -- 11,547
Service cost...................................... 180 358
Interest cost..................................... 1,409 1,939
Plan amendments................................... 798 --
Actuarial loss.................................... 131 463
Benefits paid..................................... (1,281) (1,420)
------- -------
Benefit obligation at end of year................. $19,096 $31,983
======= =======
Change in plan assets:
Fair value of plan assets at beginning of year.... $14,329 $15,156
Fair value of plan assets acquired in acquisition. -- 10,547
Actual return on plan assets...................... 927 (158)
Company contributions............................. 1,181 754
Benefits paid..................................... (1,281) (1,420)
------- -------
Fair value of plan assets at end of year.......... $15,156 $24,789
======= =======
Funded status of the plans:
Benefit obligation at end of year................. $19,096 $31,983
Fair value of plan assets at end of year.......... 15,156 24,789
------- -------
Funded status of plan (underfunded)............... (3,940) (7,194)
Unrecognized actuarial (gain) loss................ (260) 2,339
Unrecognized prior service cost................... 1,166 903
------- -------
Net liability recognized.......................... $(3,034) $(3,952)
======= =======
Balance sheet liabilities (assets):
Accrued benefit liability......................... $ 4,510 $ 7,160
Intangible asset.................................. (1,123) (903)
Accumulated other comprehensive income (loss)..... (353) (2,305)
------- -------
Net amount recognized............................. $ 3,034 $ 3,952
======= =======
Assumptions at year end:
Discount rate used in determining present values.. 8.00% 7.50%
Rate of compensation increase..................... 4.25% 4.00%
Expected long-term rate of return on plan assets.. 9.50% 9.50%
F-14
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company sponsors a defined contribution plan (the "Defined Contribution
Plan") for substantially all employees of the Company. The Defined Contribution
Plan is intended to meet the requirements of Section 401(k) of the Internal
Revenue Code. The Defined Contribution Plan allows the Company to match
participant contributions and provides discretionary contributions.
Contributions to the Defined Contribution Plan in 1999, 2000 and 2001 totaled
$2,052,000, $2,278,000 and $1,933,000, respectively.
During 1999, the Company had partially self-insured medical plans (the
"Medical Plans") covering certain employees. Beginning January 1, 2000, the
Company expanded the coverage to cover substantially all employees. The number
of employees participating in the Medical Plans was approximately 1,300 and
1,350 at December 31, 2000 and 2001, respectively, as compared to approximately
600 at December 31, 1999. The Medical Plans limit the Company's annual
obligations to fund claims to specified amounts per participant and in the
aggregate. The Company is adequately insured for amounts in excess of these
limits. Employees are responsible for payment of a portion of the premiums.
During 1999, 2000 and 2001, the Company charged $2,802,000, $4,456,000 and
$5,890,000, respectively, to operations related to reinsurance premiums,
medical claims incurred and estimated, and administrative costs for the Medical
Plans. Claims paid during 1999, 2000 and 2001 did not exceed the aggregate
limits.
(12) Commitments and Contingencies
The Company leases certain of its real property and certain equipment,
vehicles and computer hardware under operating leases with terms ranging from
month-to-month to ten years and which contain various renewal and rent
escalation clauses. Future minimum annual lease commitments under operating
leases that have initial or remaining noncancelable lease terms in excess of
one year as of December 31, 2001 are as follows (in thousands):
2002............... $ 6,980
2003............... 6,365
2004............... 5,643
2005............... 5,288
2006............... 4,716
2007 and thereafter 9,194
-------
$38,186
=======
Rent expense for the years ended December 31, 1999, 2000 and 2001 totaled
$3,858,000, $3,650,000 and $5,550,000, respectively.
The Company entered into agreements for the sale and leaseback of certain
specific manufacturing and testing equipment during 2000 and 2001. The terms of
the operating leases range from five to nine years and the Company has the
option to purchase the equipment at the expiration of the respective lease at a
fixed price based upon the equipment's estimated residual value. Lease payments
on these operating leases are guaranteed by the Company. Proceeds from the sale
and leaseback transactions during 2000 and 2001 were $9,251,000 and $5,420,000,
respectively, and the transactions resulted in a deferred loss for the years
ended December 31, 2000 and 2001 of $351,000 and $787,000, respectively, that
will be amortized over the term of the respective leases. Future minimum annual
lease commitments related to these leases are included in the above schedule.
As of December 31, 2001, the Company had outstanding purchase commitments of
approximately $5,045,000, primarily for the acquisition of manufacturing
equipment.
F-15
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's Sypris Technologies subsidiary is a co-defendant in two
lawsuits arising out of an explosion at a coker plant owned by Exxon Mobil
Corporation located in Baton Rouge, Louisiana. In each of these lawsuits, it is
alleged that a carbon steel pipe elbow that Sypris Technologies manufactured
was improperly installed and the failure of which caused the explosion. One of
the actions was brought by Exxon Mobil in 1994 in state district court in
Louisiana and claims damages for destruction of the plant, which Exxon Mobil
estimates exceed one hundred million dollars. Sypris Technologies is a
co-defendant in this action with the fabricator who built the pipeline into
which the elbow was incorporated and with the general contractor for the plant.
The second action is a class action suit also filed in 1994 in federal court in
Louisiana on behalf of the residents living around the plant and claims
unspecified damages. Sypris Technologies is a co-defendant in this action with
Exxon Mobil, the contractor and the fabricator. In both actions, we maintain
that the carbon steel pipe elbow at issue was appropriately marked as carbon
steel and was improperly installed, without Sypris Technologies' knowledge, by
the fabricator and general contractor in circumstances that required the use of
a chromium steel elbow. Although the Company believe these defenses to be
meritorious, there can be no assurance that the Company will not be found
liable for some or all of the alleged damages. If the Company was to be found
liable and the damages exceeded available insurance coverage, the impact could
materially and adversely affect the Company's financial condition and results
of operations.
The Company is involved in certain litigation and contract issues arising in
the normal course of business. While the outcome of these matters cannot, at
this time, be predicted in light of the uncertainties inherent therein,
management does not expect that these matters will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
(13) Stock Option and Purchase Plans
The Company has certain stock compensation plans under which options to
purchase common stock may be granted to officers, key employees and
non-employee directors. Options may be granted at not less than the market
price on the date of grant. Options are exercisable in whole or in part up to
two years after the date of grant and ending ten years after the date of grant.
The following table summarizes option activity for the three years ended
December 31, 2001:
Weighted
Average
Exercise Exercise
Shares Price Range Price
--------- ----------- --------
Balance at January 1, 1999.. 1,228,388 $1.72-31.00 $6.35
Granted..................... 226,352 5.94- 9.63 7.75
Exercised................... (123,021) 2.76- 6.68 4.75
Forfeited................... (19,259) 2.96-11.00 8.26
--------- ----------- -----
Balance at December 31, 1999 1,312,460 1.72-31.00 6.71
Granted..................... 518,746 6.56-10.50 9.52
Exercised................... (114,246) 2.76- 8.75 4.08
Forfeited................... (163,223) 4.24-10.50 7.20
--------- ----------- -----
Balance at December 31, 2000 1,553,737 1.72-31.00 7.79
Granted..................... 632,819 3.88-13.27 6.15
Exercised................... (164,616) 1.72- 8.75 3.06
Forfeited................... (174,980) 6.25-11.76 8.21
--------- ----------- -----
Balance at December 31, 2001 1,846,960 $1.72-31.00 $7.61
========= =========== =====
F-16
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes certain weighted average data for options
outstanding and currently exercisable at December 31, 2001:
Outstanding Exercisable
- ------------------------------ ----------------
Weighted Average
- -------------------- Weighted
Remaining Average
Exercise Contractual Exercise
Exercise Price Range Shares Price Life Shares Price
-------------------- --------- -------- ----------- ------- --------
$1.72............ 63,721 $ 1.72 1.9 63,721 $ 1.72
$2.76-$4.12...... 34,364 3.82 4.8 34,364 3.82
$4.24-$6.25...... 648,123 5.81 7.1 139,148 4.93
$6.56-$10.00..... 905,634 8.59 5.9 464,334 8.66
$10.06-$15.76.... 181,011 10.92 6.1 28,661 12.62
$16.12-$23.00.... 10,003 18.16 4.4 10,003 18.16
$25.52-$31.00.... 4,104 28.86 3.2 4,104 28.86
--------- ------ --- ------- ------
Total......... 1,846,960 $ 7.61 6.2 744,335 $ 7.54
========= ====== === ======= ======
The Company's stock compensation program also provides for the grant of
performance-based stock options to key employees. The terms and conditions of
the performance-based option grants provide for the determination of the
exercise price and the beginning of the vesting period to occur when the fair
market value of the Company's common stock achieves certain targeted price
levels. Performance-based options to purchase 16,000 shares, 108,000 shares and
56,000 shares of common stock were granted during 1999, 2000 and 2001,
respectively. Performance-based options to purchase 112,000 shares and 32,000
shares of common stock were forfeited in 2000 and 2001, respectively. None of
the targeted price levels of the performance-based options were achieved during
1999, 2000 or 2001 and, accordingly, these options are excluded from
disclosures of options outstanding at December 31, 1999, 2000 and 2001.
The aggregate number of shares of common stock reserved for issuance under
the Company's stock compensation programs as of December 31, 2000 and 2001 was
3,000,000. The aggregate number of shares available for future grant as of
December 31, 2000 and 2001 was 899,566 and 380,227, respectively. Shares
available for future grant at December 31, 2001 includes 226,212 shares of
common stock related to stock options that may be subject to future grant under
certain of the Company's incentive plans based upon the achievement of certain
financial targets and individual performance objectives and action by the
Company's Board of Directors.
The Company applies APB 25 and related interpretations in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options is at least equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-17
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma information regarding net income and net income per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The
fair value for options granted by the Company during 1999, 2000 and 2001 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Years ended December 31,
-----------------------
1999 2000 2001
----- ----- -----
Expected life (years)... 6 8 8
Expected volatility..... 75.50% 70.30% 75.20%
Risk-free interest rates 6.30% 4.98% 4.93%
Expected dividend yield. -- -- --
The weighted average Black-Scholes value of options granted under the stock
option plans during 1999, 2000 and 2001 was $5.50, $7.05 and $4.71,
respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except for per share data):
Years ended December 31,
------------------------
1999 2000 2001
------ ------ ------
Pro forma net income.................. $8,533 $2,086 $4,977
====== ====== ======
Pro forma net income per common share:
Basic................................ $ 0.90 $ 0.22 $ 0.51
Diluted.............................. $ 0.87 $ 0.21 $ 0.50
The Company has a stock purchase plan that provides substantially all
employees who have satisfied the eligibility requirements the opportunity to
purchase shares of the Company's common stock on a compensation deduction
basis. The purchase price is the lower of 85% of the fair market value of the
common stock on the first or last business day of the purchase period. Payroll
deductions may not exceed $6,000 for any six-month cycle. The stock purchase
plan expires January 31, 2006. At December 31, 2000 and 2001, there were
249,110 shares and 196,904 shares, respectively, available for purchase under
the plan. During 2000 and 2001, a total of 35,290 shares and 52,206 shares,
respectively, were issued under the plan.
(14) Stockholder Rights Plan
On October 23, 2001, the Company's board of directors approved a stockholder
rights plan. Under the plan, each stockholder of record as of November 7, 2001
will automatically receive a distribution of one right for each outstanding
share of common stock held. Each right entitles the holder to purchase one
one-thousandth of a share of a new series of preferred stock at an exercise
price of $63.00. The rights will trade along with, and not separately from, the
shares of common stock unless they become exercisable. If any person or group
acquires or
F-18
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
makes a tender offer for 15% or more of the common stock of the Company (except
in transactions approved by the Company's board of directors in advance) the
rights become exercisable, and they will separate, become tradable, and entitle
stockholders, other than such person or group, to acquire, at the exercise
price, preferred stock with a market value equal to twice the exercise price.
If the Company is acquired in a merger or other business combination with such
person or group, or if 50% of its earning power or assets are sold to such
person or group, each right will entitle its holder, other than such person or
group, to acquire, at the exercise price, shares of the acquiring company's
common stock with a market value of twice the exercise price. The rights will
expire on October 23, 2011, unless redeemed or exchanged earlier by the
Company, and will be represented by existing common stock certificates until
they become exercisable.
As of December 31, 2001, 11,000 shares of the Company's preferred stock were
designated as Series A Preferred Stock in connection with the adoption of the
stockholder rights plan. There are no shares of Series A Preferred Stock
currently outstanding. The holders of Series A Preferred Stock will have voting
rights, be entitled to receive dividends based on a defined formula and have
certain rights in the event of the Company's dissolution. The shares of Series
A Preferred Stock shall not be redeemable. However, the Company may purchase
shares of Series A Preferred Stock in the open market or pursuant to an offer
to a holder or holders.
(15) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Accordingly, deferred income taxes have been
provided for temporary differences between the recognition of revenue and
expenses for financial and income tax reporting purposes and between the tax
basis of assets and liabilities and their reported amounts in the financial
statements.
The components of income tax expense (benefit) is as follows (in thousands):
Years ended December 31,
-----------------------
1999 2000 2001
------ ------- ------
Current:
Federal. $3,386 $ 969 $2,161
State... 320 102 255
Other... 38 9 15
------ ------- ------
3,744 1,080 2,431
Deferred:
Federal. (630) (2,351) 706
State... (15) (127) (227)
------ ------- ------
(645) (2,478) 479
------ ------- ------
$3,099 $(1,398) $2,910
====== ======= ======
The Company files a consolidated federal income tax return which includes
all subsidiaries. Income taxes paid during 1999, 2000 and 2001 totaled
$2,136,000, $1,347,000 and $1,962,000, respectively. During 2000 and 2001, the
Company received $2,102,000 and $2,108,000 in federal income tax refunds,
respectively.
F-19
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2001, the Company had $17,771,000 of state net operating
loss carryforwards available to offset future taxable income. Such
carryforwards reflect income tax losses incurred which will expire on December
31 of the following years (in thousands):
2008 $ 2,386
2009 8,362
2010 560
2011 5,999
2017 464
-------
$17,771
=======
The following is a reconciliation of income tax (benefit) expense to that
computed by applying the federal statutory rate of 34% to income before income
taxes (in thousands):
Years ended December 31,
------------------------
1999 2000 2001
------- ------- ------
Federal tax at the statutory rate................... $ 4,303 $ 607 $3,154
State income taxes, net of federal tax benefit...... 236 153 238
Change in valuation allowance for deferred tax asset (1,891) (3,008) (300)
Research and development tax credit................. (544) (262) (338)
Non-deductible expenses............................. 135 240 262
Other............................................... 860 872 (106)
------- ------- ------
$ 3,099 $(1,398) $2,910
======= ======= ======
Deferred income tax assets and liabilities are as follows (in thousands):
December 31,
----------------
2000 2001
- ------- -------
Deferred tax assets:
Compensation and benefit accruals..... $ 1,108 $ 1,287
Inventory valuation................... 673 728
State net operating loss carryforwards 977 977
Contract provisions................... 796 517
Accounts receivable allowance......... 255 290
Defined benefit pension plan.......... 995 1,451
Interest rate swap agreements......... -- 309
Other................................. 327 303
------- -------
5,131 5,862
Valuation allowance................... (977) (677)
------- -------
4,154 5,185
Deferred tax liabilities:
Depreciation.......................... (1,981) (2,354)
------- -------
Net deferred tax asset................. $ 2,173 $ 2,831
======= =======
F-20
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The valuation allowance for deferred tax assets decreased by $1,891,000,
$3,008,000 and $300,000 in 1999, 2000 and 2001, respectively. At December 31,
2001, the valuation allowance of $677,000 relates to state tax net operating
loss ("NOL") carryforwards. Management believes it is more likely than not that
the Company's future earnings will be sufficient to ensure the realization of
deferred tax assets for federal and state purposes, excluding the portion of
the state NOL carryforward for which utilization within the carryforward period
is uncertain.
(16) Net Income Per Common Share
Basic income per common share is calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the year. Diluted income per common share is calculated by
using the weighted average number of common shares outstanding adjusted to
include the potentially dilutive effect of outstanding stock options.
The following table presents information necessary to calculate net income
per common share (in thousands, except for per share data):
Years ended December 31,
------------------------
1999 2000 2001
------ ------ -------
Shares outstanding:
Weighted average shares outstanding................................. 9,515 9,671 9,828
Effect of dilutive employee stock options........................... 346 293 200
------ ------ -------
Adjusted weighted average shares outstanding and assumed conversions 9,861 9,964 10,028
====== ====== =======
Net income applicable to common stock................................ $9,556 $3,184 $ 6,367
====== ====== =======
Net income per common share:
Basic............................................................... $ 1.00 $ 0.33 $ 0.65
Diluted............................................................. $ 0.97 $ 0.32 $ 0.63
F-21
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(17) Segment Information
The Company's operations are conducted in two reportable business segments:
the Electronics Group and the Industrial Group. The segments are each managed
separately because of the distinctions between the products, services, markets,
customers, technologies and workforce skills of the segments. The Electronics
Group provides a wide range of manufacturing and technical services for a
diversified customer base as an outsourced service provider. The Electronics
Group also manufactures complex data storage systems, magnetic instruments,
current sensors and other electronic products. The Industrial Group provides
manufacturing services for a variety of customers that outsourced forged and
finished steel components and subassemblies. The Industrial Group also
manufactures high-pressure closures and other fabricated products. Revenue
derived from outsourced services for the Electronics Group accounted for 59%,
65% and 67% of total net revenue in 1999, 2000 and 2001, respectively. Revenue
derived from outsourced services for the Industrial Group accounted for 15%,
12% and 15% of total net revenue in 1999, 2000 and 2001, respectively. There
was no intersegment net revenue recognized for all years presented. The
following table presents financial information for the reportable segments of
the Company (in thousands):
Years ended December 31,
----------------------------
1999 2000 2001
-------- -------- --------
Net revenue:
Electronics Group............ $164,963 $182,126 $207,282
Industrial Group............. 37,167 34,445 47,358
-------- -------- --------
$202,130 $216,571 $254,640
======== ======== ========
Gross profit:
Electronics Group............ $ 37,873 $ 36,272 $ 37,385
Industrial Group............. 7,076 4,041 6,162
-------- -------- --------
$ 44,949 $ 40,313 $ 43,547
======== ======== ========
Operating income:
Electronics Group............ $ 12,005 $ 6,935 $ 12,903
Industrial Group............. 4,930 1,648 3,563
General, corporate and other. (2,769) (3,106) (3,436)
-------- -------- --------
$ 14,166 $ 5,477 $ 13,030
======== ======== ========
Total assets:
Electronics Group............ $106,229 $124,523 $121,228
Industrial Group............. 26,714 37,851 73,820
General, corporate and other. 15,621 16,748 16,396
-------- -------- --------
$148,564 $179,122 $211,444
======== ======== ========
Depreciation and amortization:
Electronics Group............ $ 6,551 $ 8,037 $ 7,951
Industrial Group............. 902 1,109 1,694
General, corporate and other. 129 205 211
-------- -------- --------
$ 7,582 $ 9,351 $ 9,856
======== ======== ========
Capital expenditures:
Electronics Group............ $ 6,327 $ 7,971 $ 7,917
Industrial Group............. 7,134 15,546 19,547
General, corporate and other. 982 369 159
-------- -------- --------
$ 14,443 $ 23,886 $ 27,623
======== ======== ========
The Company attributes net revenue to countries based upon the location of
its operations. Export sales from the United States totaled $30,061,000,
$25,250,000 and $23,890,000 in 1999, 2000 and 2001, respectively.
F-22
SYPRIS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(18) Quarterly Financial Information (Unaudited)
The following is an analysis of certain items in the consolidated income
statements by quarter for the years ended December 31, 2000 and 2001 (in
thousands, except for per share data):
2000 2001
------------------------------- -------------------------------
First Second Third Fourth First Second Third Fourth
------- ------- ------- ------- ------- ------- ------- -------
Net revenue................. $50,697 $52,118 $53,887 $59,869 $58,035 $63,152 $65,228 $68,225
Gross profit................ 10,754 11,353 9,090 9,116 10,164 10,914 11,063 11,406
Operating income............ 1,182 2,739 707 849 2,577 2,912 3,501 4,040
Net income.................. 179 1,368 90 1,547 1,019 1,209 1,760 2,379
Net income per common share:
Basic..................... $ 0.02 $ 0.14 $ 0.01 $ 0.16 $ 0.10 $ 0.12 $ 0.18 $ 0.24
Diluted................... $ 0.02 $ 0.14 $ 0.01 $ 0.16 $ 0.10 $ 0.12 $ 0.18 $ 0.23
F-23
INSIDE BACK COVER GRAPHICS:
Bottom of the page, right hand side: Appears Sypris logo.
Also shown are three depictions representing facilities, equipment and
vehicles through which the company provides its services or sells its products.
Depiction 1 (top left 1/4 of page): Shows photograph of the Tampa plant.
Depiction 2 (top right 1/4 of page): Shows photograph of the Orlando plant.
Depiction 3 (next left 1/4 of page): Shows photograph of the Louisville plant.
Depiction 4 (next right 1/4 of page): Shows photograph of the Marion plant.
Depiction 5 (next left 1/4 of page): Shows photograph of the Monrovia plant.
Depiction 6 (next right 1/4 of page): Shows photograph of the Littleton plant.
Depiction 7 (bottom left 1/4 of page): Shows photograph of a mobile calibration laboratory.
Depiction 8 (bottom right 1/4 of page): Shows photograph of the Sypris headquarters building.
[LOGO] Sypris
Solutions
Needham & Company, Inc. A.G. Edwards & Sons, Inc.
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, to be paid in connection with the sale
of the registrant's common stock being registered, all of which will be paid by
the registrant. All amounts are estimates except the registration fee and the
NASD listing fee.
Securities and Exchange Commission registration fee $ 4,713
Nasdaq National Market listing fee................. 4,000
Accounting fees and expenses....................... 40,000
Legal fees and expenses............................ 70,000
Transfer agent and registrar fees.................. 5,000
Printing expenses.................................. 20,000
Miscellaneous...................................... 31,000
--------
Total........................................... $174,713
========
Item 15. Indemnification of Directors and Officers.
Limitation of Directors' Liability. The registrant's certificate of
incorporation provides that, except to the extent prohibited by the Delaware
General Corporation Law (DGCL), the registrant's directors shall not be
personally liable to the registrant or its stockholders for monetary damages
for any breach of fiduciary duty as directors. Under the certificate of
incorporation and the DGCL, directors will continue to be subject to liability
for any breach of the director's duty of loyalty to the registrant or its
stockholders, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for payment of dividends
or approval of stock repurchases or redemptions that are prohibited by the
DGCL, and for transactions from which the director derived an improper personal
benefit. The certificate of incorporation provides that if the DGCL is amended
to authorize corporate action further eliminating or limiting directors'
personal liability, the liability of the registrant's directors will be
eliminated or limited to the fullest extent permitted by the DGCL, as so
amended. Any repeal or modification of this provision of the registrant's
certificate of incorporation by the registrant's stockholders shall not
adversely affect any right or protection of a director existing at the time of
such repeal or modification.
This provision provides the registrant's directors with protection from
awards for monetary damages for breach of their duty of care, but it does not
eliminate such duty. Accordingly, this provision will not affect the
availability of equitable remedies such as an injunction or rescission based on
a director's breach of his duty of care.
Indemnification. Section 145 of the DGCL empowers a corporation to
indemnify its directors, officers, employees or agents for judgments,
settlements and expenses in respect of third party actions, and for expenses in
respect of actions by or in the right of the corporation, and to purchase
insurance with respect to liability arising out of such status. The DGCL
provides that the indemnification permitted by statute shall not be deemed
exclusive of any other rights to which the directors and officers may be
entitled under the corporation's bylaws, any agreement, a vote of stockholders
or otherwise.
The registrant's certificate of incorporation provides that the registrant
shall indemnify any person who was or is a party or is threatened to be made a
party to or becomes involved in any action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person, is or was a director, officer, employee or agent of the registrant, or
is or was serving at the request of the registrant as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other
II-1
enterprise, against all liability and loss suffered and expenses reasonably
incurred by such person in connection with such action, suit or proceeding. The
registrant will be required to indemnify a person in connection with a
proceeding initiated by the person seeking indemnification only if the
proceeding was authorized by the board of directors of the registrant. The
registrant shall pay the expenses of its directors and executive officers, and
may pay the expenses of all other officers, employees or agents, incurred in
defending any such proceeding in advance of its final disposition, subject to
the provisions of the DGCL. Any repeal or modification of the indemnification
provision in the registrant's certificate of incorporation shall not adversely
affect any right or protection of any person in respect of any act or omission
occurring prior to the time of such repeal or modification.
Pursuant to authority granted in its certificate of incorporation, the
registrant maintains directors' and officers' liability insurance covering
certain liabilities which may be incurred by its directors and officers in the
performance of their duties.
Item 16. Exhibits.
The exhibits listed on the Exhibit Index appearing on page II-3 of this
Registration Statement are hereby incorporated by reference.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this registration
statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
1 Form of Underwriting Agreement.*
2 Fourth Amended and Restated Agreement and Plan of Reorganization dated February 5, 1998 by and
among Group Financial Partners, Inc., Group Technologies Corporation, Bell Technologies, Inc.
and Tube Turns Technologies, Inc. (incorporated by reference to Appendix A to the Prospectus
included in the registrant's Registration Statement on Form S-4/A filed February 12, 1998 (No.
333-20299)).
3.1 Certificate of Incorporation of registrant (incorporated by reference to Appendix H to the Prospectus
included in the registrant's Registration Statement on Form S-4/A filed February 12, 1998 (No.
333-20299)).
3.2 Bylaws of registrant (incorporated by reference to Appendix I to the Prospectus included in the
registrant's Registration Statement on Form S-4/A filed February 12, 1998 (No. 333-20299)).
4.1 Specimen common stock certificate (incorporated by reference to Exhibit 2.1 to the registrant's Form
10-K for the fiscal year ended December 31, 1998 filed on March 5, 1999 (Commission File No.
000-24020)).
4.2 Rights Agreement dated as of October 23, 2001 between registrant and LaSalle Bank National
Association, as Rights Agent, including as Exhibit A the Form of Certificate of Designation and as
Exhibit B the Form of Right Certificate (incorporated by reference to Exhibit 4.1 to the registrant's
Form 8-K filed on October 23, 2001 (Commission File No. 000-24020)).
5 Opinion of Wyatt, Tarrant & Combs, LLP.*
10.1 Purchase and Sale Agreement among Honeywell Inc., Defense Communications Products
Corporation (prior name of Group Technologies Corporation) and Group Financial Partners, Inc.
dated May 21, 1989 (incorporated by reference to Exhibit 10.18 to the registrant's Registration
Statement on Form S-1 filed May 18, 1994 (Registration No. 33-76326)).
10.2 Purchase and Sale Agreement among Alliant Techsystems Inc., MAC Acquisition I, Inc. and Group
Technologies Corporation dated December 31, 1992 (incorporated by reference to Exhibit 10.16 to
the registrant's Registration Statement on Form S-1 filed May 18, 1994 (Registration No.
33-76326)).
10.3 Purchase and Sale Agreement among Philips Electronic North America Corporation and Group
Technologies Corporation dated June 25, 1993 (incorporated by reference to Exhibit 10.17 to the
registrant's Registration Statement on Form S-1 filed May 18, 1994 (Registration No. 33-76326).
10.4 Stock and Asset Purchase and Sale Agreement among Group Technologies Corporation, Group
Technologies Mexican Holding Company, SCI Systems, Inc., SCI Systems de Mexico S.A. de
C.V. and SCI Holdings, Inc. dated June 30, 1997 (incorporated by reference to Exhibit 2.1 to the
registrant's Form 8-K filed on July 15, 1997 (Commission File No. 000-24020)).
10.5 Asset Purchase Agreement among Datatape Incorporated, Delta Tango, Inc., Metrum-D, Inc.,
Impactdata, Inc. and M. Stuart Millar dated November 12, 1997 (incorporated by reference to
Exhibit 2.11 to the registrant's Form 10-Q for the quarterly period ended June 28, 1998 filed on
August 4, 1998 (Commission File No. 000-24020)).
10.6 1999 Amended and Restated Loan Agreement between Bank One, Kentucky, NA, the registrant, Bell
Technologies, Inc., Tube Turns Technologies, Inc., Group Technologies Corporation and Metrum-
Datatape, Inc. dated October 27, 1999 (incorporated by reference to Exhibit 10.1 to the registrant's
Form 10-K for the fiscal year ended December 31, 1999 filed on February 25, 2000 (Commission
File No. 000-24020)).
II-3
Exhibit
Number Description
- ------ -----------
10.6.1 2000A Amendment to Loan Documents between Bank One, Kentucky, NA, the registrant, Bell
Technologies, Inc., Tube Turns Technologies, Inc., Group Technologies Corporation and Metrum-
Datatape, Inc. dated November 9, 2000 (incorporated by reference to Exhibit 10.6.1 to the
registrant's Form 10-K for the fiscal year ended December 31, 2000 filed on March 2, 2001
(Commission File No. 000-24020)).
10.6.2 2001A Amendment to Loan Documents between Bank One, Kentucky, NA, the registrant, Bell
Technologies, Inc., Tube Turns Technologies, Inc., Group Technologies Corporation and Metrum-
Datatape, Inc. dated February 15, 2001 (incorporated by reference to Exhibit 10.6.2 to the
registrant's Form 10-Q for the quarterly period ended April 1, 2001 filed on April 30, 2001
(Commission File No. 000-24020)).
10.6.3 2002A Amendment to Loan Documents between Bank One, Kentucky, NA, Sypris Solutions, Inc.,
Sypris Test & Measurement, Inc., Sypris Technologies, Inc., Sypris Electronics, LLC, Sypris Data
Systems, Inc. and Sypris Technologies Marion, LLC dated December 21, 2001 (incorporated by
reference to Exhibit 10.6.3 to the registrant's Form 10-K for the fiscal year ended December 31,
2001 filed on January 31, 2002 (Commission File No. 000-24020)).
10.7 Lease between John Hancock Mutual Life Insurance Company and Honeywell, Inc. dated April 27,
1979; related Notice of Assignment from John Hancock Mutual Life Insurance Company to
Sweetwell Industrial Associates, L.P., dated July 10, 1986; related Assignment and Assumption of
Lease between Honeywell, Inc. and Defense Communications Products Corporation (prior name
of Group Technologies Corporation) dated May 21, 1989; and related Amendment I to Lease
Agreement between Sweetwell Industries Associates, L.P. and Group Technologies Corporation
dated October 25, 1991, regarding Tampa industrial park property (incorporated by reference to
Exhibit 10.2 to the registrant's Registration Statement on Form S-1 filed May 18, 1994
(Registration No. 33-76326)).
10.7.1 Agreement related to Fourth Renewal of Lease between Sweetwell Industries Associates, L.P. and
Group Technologies Corporation dated November 1, 2000, regarding Tampa industrial park
property (incorporated by reference to Exhibit 10.8.1 to the registrant's Form 10-K for the fiscal
year ended December 31, 2000 filed on March 2, 2001 (Commission File No. 000-24020)).
10.8 Lease between Metrum-Datatape, Inc. (assignee of Metrum, Inc.) and Alliant Techsystems, Inc.
dated March 29, 1993 and amended July 29, 1993, May 2, 1994, November 14, 1995, December 4,
1996 and February 12, 1998 regarding 4800 East Dry Creek Road Property (incorporated by
reference to Exhibit 10.25 to the registrant's Form 10-Q for the quarterly period ended June 28,
1998 filed on August 4, 1998 (Commission File No. 000-24020)).
10.8.1 Sublease between Pharmacia & Upjohn Company and Metrum-D, Inc. dated November 14, 1997
(incorporated by reference to Exhibit 10.26 to the Company's Form 10-Q for the quarterly period
ended June 28, 1998 filed on August 4, 1998 (Commission File No. 000-24020))
10.8.2 Amendment of Sublease between Pharmacia & Upjohn Company and Metrum-Datatape, Inc. dated
August 6, 1998 (incorporated by reference to Exhibit 10.10.1 to the registrant's Form 10-K for the
fiscal year ended December 31, 2000 filed on March 2, 2001 (Commission File No. 000-24020)).
10.9 Sypris Solutions, Inc. Stock Option Plan, Restated effective December 17, 1996, dated January 22,
1990 (incorporated by reference to Exhibit 10.22.2 to the registrant's Form 10-K for the fiscal year
ended December 31, 1996 filed on March 31, 1997 (Commission File No. 000-24020)).
10.10 Sypris Solutions, Inc. 1994 Stock Option Plan for Key Employees as Amended and Restated
effective July 1, 1998, dated October 27, 1994 (incorporated by reference to Exhibit 4 to the
registrant's Form S-8 filed on September 2, 1998 (Registration No. 333-62781)).
II-4
Exhibit
Number Description
- ------ -----------
10.11 Sypris Solutions, Inc. Share Performance Program For Stock Option Grants dated July 1, 1998
(incorporated by reference to Exhibit 10.28 to the registrant's Form 10-Q for the quarterly period
ended June 28, 1998 filed on August 4, 1998 (Commission File No. 000-24020)).
10.12 Sypris Solutions, Inc. Independent Directors' Stock Option Plan as Amended and Restated effective
February 23, 1999, dated October 27, 1994 (incorporated by reference to Exhibit 10.10 to the
registrant's Form 10-K for the fiscal year ended December 31, 1998 filed on March 5, 1999
(Commission File No. 000-24020)).
10.13 Sypris Solutions, Inc. Independent Directors Compensation Program Amended and Restated on
April 28, 1998, dated September 1, 1995 (incorporated by reference to Exhibit 10.16 to the
registrant's Form 10-Q for the quarterly period ended June 28, 1998 filed on August 4, 1998
(Commission File No. 000-24020)).
10.14 Sypris Solutions, Inc. Profit Sharing Bonus Plan, effective as of January 3, 2000 (incorporated by
reference to Exhibit 10.16 to the registrant's Form 10-K for the fiscal year ended December 31,
2000 filed on March 2, 2001 (Commission File No. 000-24020)).
10.15 Group Technologies Corporation Profit Sharing Bonus Plan, effective as of January 3, 2000
(incorporated by reference to Exhibit 10.17 to the registrant's Form 10-K for the fiscal year ended
December 31, 2000 filed on March 2, 2001 (Commission File No. 000-24020)).
10.16 Tube Turns Technologies, Inc. Profit Sharing Bonus Plan, effective as of January 3, 2000
(incorporated by reference to Exhibit 10.18 to the registrant's Form 10-K for the fiscal year ended
December 31, 2000 filed on March 2, 2001 (Commission File No. 000-24020)).
10.17 Sypris Solutions, Inc. Executive Bonus Plan, effective as of January 2, 2001 (incorporated by
reference to Exhibit 10.19 to the registrant's Form 10-K for the fiscal year ended December 31,
2000 filed on March 2, 2001 (Commission File No. 000-24020)).
10.18 Employment Agreement by and between Metrum-Datatape, Inc. and G. Darrell Robertson dated
February 28, 2000 (incorporated by reference to Exhibit 10.20 to the registrant's Form 10-K for
the fiscal year ended December 31, 2000 filed on March 2, 2001 (Commission File No.
000-24020)).
10.19 Asset Purchase Agreement dated April 6, 2001 by and between Tube Turns Technologies, Inc. and
Dana Corporation as amended by a First Amendment dated May 4, 2001 and as amended by a
Second Amendment on May 15, 2001 (incorporated by reference to Exhibit 2.1 to the registrant's
Form 10-Q for the quarterly period ended June 30, 2001 filed on July 30, 2001 (Commission File
No. 000-24020)).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Wyatt, Tarrant & Combs, LLP (included in Exhibit 5).*
24 Power of attorney (included on the signature page of the Registration Statement).
* To be filed by amendment.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Louisville, Commonwealth of Kentucky, on February 8,
2002.
SYPRIS SOLUTIONS, INC.
By: /s/ JEFFREY T. GILL
------------------------------
Jeffrey T. Gill, President and
Chief Executive Officer
II-6
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey T. Gill and David D. Johnson, and each
of them, with the power to act without the other, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him, and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 8th day
of February, 2002 in the capacities indicated:
Signature Title
--------- -----
/s/ JEFFREY T. GILL
- ----------------------- President, Chief Executive Officer and Director
(Jeffrey T. Gill)
/s/ DAVID D. JOHNSON
- ----------------------- Vice President and Chief Financial Officer
(David D. Johnson) (Principal Financial Officer)
/s/ ANTHONY C. ALLEN
- ----------------------- Vice President and Controller
(Anthony C. Allen) (Principal Accounting Officer)
/s/ HENRY F. FRIGON
- ----------------------- Director
(Henry F. Frigon)
/s/ ROBERT E. GILL
- ----------------------- Chairman of the Board and Director
(Robert E. Gill)
/s/ R. SCOTT GILL
- ----------------------- Director
(R. Scott Gill)
/s/ WILLIAM L. HEALEY
- ----------------------- Director
(William L. Healey)
/s/ ROGER W. JOHNSON
- ----------------------- Director
(Roger W. Johnson)
/s/ SIDNEY R. PETERSEN
- ----------------------- Director
(Sidney R. Petersen)
/s/ ROBERT SROKA
- ----------------------- Director
(Robert Sroka)
II-7
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 28, 2002, in the Registration Statement (Form
S-2 No. 333- ______) and related Prospectus of Sypris Solutions, Inc. for the
registration of 3,000,000 shares of its common stock.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 8, 2002
