Item 1. Business
General
Brenco, Incorporated was founded in 1949. Initially Brenco was engaged in the manufacture and sale of bronze bearings for use on railroad freight cars. In the early 1960s Brenco expanded into the manufacture and sale of tapered roller bearings for use on railroad freight cars and in recent years has begun the manufacture and sale of automotive forgings. Brenco also services and repairs used railroad bearings, and manufactures lubrication seals for use in railroad bearings and for sale to third parties. In 1979 Brenco discontinued the manufacture of bronze friction bearings.
The customer base for Brenco's products and services is made up of major railroads, car builders and automobile manufacturers, of which there are a limited number. During 1994, sales to Trinity Industries, Inc., CSX and Ford Motor Company amounted to $12,850,000, $9,704,000 and $8,926,000, or approximately 10.9%, 8.2% and 7.6% of 1994 net sales, respectively. Accounts receivable at December 31, 1994, includes $596,000, $1,332,000 and $963,000 for the above customers, respectively.
Regulations prescribed by the Association of American Railroads require that principal component parts used by a railroad in the repair and maintenance of railroad roller bearings be parts made by the original bearing manufacturer. Thus as domestic sales of new railroad roller bearings increase, it may be anticipated that the market for reconditioned Brenco bearings and component parts for Brenco bearings will also increase.
In 1994, sales of automotive forgings represented 10.6% of Brenco's business. Automotive forgings sales amounted to $12,451,000 in 1994, $11,637,000 in 1993 and $10,942,000 in 1992. These products are sold principally to original equipment manufacturers.
Export sales to India, Canada, Brazil, Mexico, Australia and to FAG for their worldwide markets amounted to $17,491,000 in 1994, $17,849,000 in 1993 and $11,094,000 in 1992. Brenco has no foreign manufacturing facilities and all products manufactured for export sales are manufactured at Brenco's Petersburg, Virginia facilities. Payment for export sales, other than Canadian, FAG and Australian sales, is made through the utilization of letters of credit. The Company believes the profitability of its export business is approximately the same as its domestic business.
Products
The roller bearing is an anti-friction bearing that contains steel rollers that turn as the axle rotates. Basically, the tapered roller bearing made by Brenco consists of four components: (1) the cone or inner race, (2) the cup or outer race, (3) the tapered rollers which roll between the cup and cone and (4) the cage which serves as a retainer and maintains proper spacing between the rollers. The design of such bearings permits the distribution of unit pressures over the full length of the roller. This fact, coupled with its tapered design, high precision tolerances and top quality material, provides a bearing with high load carrying capacity, excellent friction-reducing qualities and a significantly longer life than older friction-type bearings. The tapered principle of bearings permits ready absorption of radial loads, imposed at right angles to the axis of the bearing, and thrust loads which are exerted parallel to the axis of the bearing. For this reason, they are particularly adapted to reducing friction where shafts, gears or wheels are used.
Brenco has a separate plant for the manufacture of grease seals which is a component part of the railroad roller bearing.
Brenco produces automotive forgings for automobile manufacturers. These products are sold as both unmachined and machined forgings.
Sales of all Brenco's products are made through both a company sales force and independent manufacturer's representatives.
Through its wholly-owned subsidiary, Rail Link, Inc., Brenco offers third party switching. This service, currently offered in ten different states, entails the switching of railcars between the railroad and the ultimate customers.
Carolina Coastal Railway, Inc. and Commonwealth Railway, Inc., wholly- owned subsidiaries of Rail Link, Inc. operate short line railroads in North Carolina and Virginia. In performing this service, railcars are moved over the short line route from the railroad to the ultimate customer. All short line operations are under 25 miles in length.
Competition
Brenco is principally in competition with one other domestic manufacturer of railroad roller bearings, The Timken Company, and a number of foreign bearing manufacturers.
Bearing specifications for railroad roller bearings are largely determined by the Association of American Railroads. As a result, there are no significant differences between manufacturers in terms of bearing design. Consequently, the market for roller
bearings, and railroad roller bearings in particular, is extremely competitive in terms of product performance and price. Brenco believes that its emphasis on service to its customers, including the development of a number of service facilities at various locations throughout the United States for the reconditioning of used bearings, has been important to the development of its competitive position.
There are numerous manufacturers of automotive forgings including the original equipment manufacturers themselves. Brenco's primary competition is currently these original equipment manufacturers. The market for automotive forgings is extremely price competitive.
Backlog
Brenco's backlog of orders at December 31, 1994 was approximately $51,494,000, compared to $9,000,000 and $19,900,000 at December 31, 1993 and 1992, respectively. The backlog at December 31, 1994, represented 5.2 months of sales based upon average monthly sales for 1994. This compares to 1.2 months of sales for 1993.
As demand for tapered roller bearings for new railcars increased in 1994, lead times were extended. With extended lead times, it became imperative that customers enter orders earlier and for longer periods of time. Many of our customers have placed orders with us through the first quarter of 1996. We are virtually sold out for 1995 and the backlog reflects this situation.
Raw Materials and Energy Use
Raw materials used in Brenco's business consist principally of high- grade steel bars, sheet and strip, wire and tubing. Such products are available from a number of major steel producers, both domestic and foreign. To date Brenco has experienced no difficulty in obtaining adequate supplies of these raw materials for production purposes. However, lead times for steel have been extended, dictating the need for good forecasting and advance ordering in anticipation of shipping at record levels. Brenco does not have any long-term supply contracts.
Brenco is a significant user of electricity. Natural gas is also used in one department. Brenco has had no difficulty in obtaining adequate gas supplies to date, nor has Brenco received any indication that its supply of electricity will be restricted or curtailed in the foreseeable future.
Capital Expenditures, Plant Expansion and Research
Brenco's capital expenditures were $5,871,000 in 1994.
Brenco's capital expenditure budget for 1995 is approximately $13,696,000, the major project being a new reconditioning facility in Little Rock, Arkansas, increased capacity and new business as well as maintaining continuity of operations.
In 1993, the Company purchased from Epilogics, Inc., an engineering design firm in California, the rights to a one-way clutch design for automotive transmissions. The MD clutch has the potential for substantially increasing the future sales of our Powertrain Products division, but will require substantial development and marketing efforts in order to gain acceptance of the product by the major U.S. automobile manufacturers.
The amount spent on research and development during Brenco's three most recent fiscal years is not material.
Environmental Matters
During 1994, the Company completed an environmental remediation project at the Company's original manufacturing site at Puddledock Road in Petersburg, Virginia. The total cost of the remediation project was approximately $7,000,000 which has been charged to income in various amounts each year since 1989.
The effect of these special charges in 1994 was to reduce net income by $915,000 or $.09 per share. The charges in 1993 decreased net income by $1,414,000 or $.14 per share.
The Company believes the remediation project to be complete.
Employees
Brenco had 915 employees at December 31, 1994. Though union organization campaigns have been conducted at its Petersburg, Virginia plant on several occasions in prior years, Brenco is not a party to any collective bargaining agreement. Brenco believes its employee labor relations are good.
Item 2.
Item 2. Properties
At December 31, 1994 Brenco operated a total of four manufacturing plants located on approximately 150 acres of land in Petersburg, Virginia. The four plants and surrounding facilities adjacent to its headquarters occupy approximately 60 of the 150 acre tract. The plants in Virginia are on land owned by Brenco. Brenco's production facilities at its Petersburg, Virginia plant occupy approximately 400,000 square feet of production area.
In general, the buildings are in good condition, are considered to be adequate for the uses to which they are being put and are in regular use. At December 31, 1994 Brenco was operating at approximately 90% of capacity at its Petersburg manufacturing facility.
Reconditioning plants are operated by Brenco affiliates at three locations in various states. Two of these facilities are leased and one is owned by Quality Bearing Service of Missouri, Inc. These plants are not considered material.
The Company leases approximately 14,000 square feet of a three story concrete and steel building in good condition in Midlothian, Virginia. Approximately 40 people are located at this location including Administration, Finance and Marketing personnel.
The Company owns the machinery and equipment which is necessary to conduct its operations.
Item 3.
Item 3. Legal Proceedings
In 1984 the Connecticut Department of Transportation ("CDOT") and the Metropolitan Transportation Authority ("MTA") filed companion lawsuits in the Superior Court of Connecticut against General Electric Company ("GE") alleging certain defects and failures with respect to 244 high speed railroad passenger cars supplied to CDOT and MTA by GE. In
performing its contracts to supply the railroad cars, GE had purchased certain journal bearings from the Company. GE initially chose not to bring a third- party action against the Company; however, in order to preserve GE's ability to do so at a later date, GE and the Company entered into an agreement tolling the statute of limitations, terminable by either party upon 30 days' notice.
In January, 1991, the Company was advised by GE that CDOT, MTA and GE had reached a settlement agreement in 1990 concerning the lawsuits on terms not disclosed by GE. On February 4, 1991 GE filed companion lawsuits against the Company and another major domestic bearing manufacturer in the Federal District Court of Connecticut alleging defects in the roller bearings sold to GE for use on the railroad passenger cars involved in the lawsuits previously settled with CDOT and MTA. In the present suits, GE is attempting to recover from the Company and the other bearing manufacturer the settlement cost and defense expenses it incurred in settling the earlier lawsuits. In September 1992, discovery and counter-discovery proceedings were initiated by the parties. The suits have been pending approximately 4 years. The Company believes it has meritorious defenses to the claims alleged against it by GE. The Company has primary liability insurance coverage applicable to claims such as these and excess coverage in an amount the Company believes to be more than sufficient to cover this exposure. The primary insurance carrier has indicated to the Company that no substantial issues appear to exist regarding the applicability of the Company's primary insurance coverage to the transactions at issue in this litigation.
On June 16, 1994, the Company and four of its subsidiaries filed an action in the United States District Court for the Eastern District of Virginia against Roller Bearing Industries, Inc. ("RBI"). The Company and its subsidiaries asserted claims under the federal Lanham Act as well as common law fraud and unfair competition. RBI filed a counterclaim against the Company for violation of federal and state antitrust laws, defamation and tortious interference with contract. After a trial on January 17-19, 1995, a jury found for RBI on its defamation claim and awarded compensatory damages in the amount of $374,000. The jury returned a verdict for the Company on the remainder of RBI's claims and returned a verdict for RBI on the Company's claims. The Court, on March 7, 1995, denied RBI's motion for award of attorney fees, but awarded RBI $25,000 for certain expenses. The Company has filed a notice of appeal to the United States Court of Appeals for the Fourth Circuit.
Except as set forth above, neither Brenco nor its subsidiaries is a party to any material pending legal proceeding before any court, administrative agency or other tribunal (See also Item 1, Environmental Matters, page 5).
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Brenco are elected by the board of directors of the Company to serve one year terms. Following is information about the executive officers of Brenco as of the most recent practicable date:
Needham B. Whitfield, age 58, has served as Chief Executive Officer and Chairman of the Board of Directors of the Corporation since 1985. Mr. Whitfield was a principal in the firm of Harper and Whitfield, P. C., Certified Public Accountants, until August 1989. Mr. Whitfield is the brother-in-law of John C. Kenny, a director.
J. Craig Rice, age 47, has served as President, Chief Operating Officer and Director of the Corporation since 1985 and is responsible for overall corporate policy.
Jacob M. Feichtner, age 57, has served as Executive Vice President, Secretary and Director of the Corporation since 1985.
Robert V. Lawrence, age 57, has served as Vice President of Engineering since 1984.
Howard J. Bush, age 41, has served as Vice President of Marketing and Sales since 1989.
Evan J. Roberts, age 39, has served as Vice President of Operations since 1994. Mr. Roberts previously served as Vice President, Harsco Corporation, a manufacturer of heavy duty trucks and school buses, from 1990- 1994.
S. Bruce Saunders, II, age 34, has served as Treasurer since 1994. Mr. Saunders previously held various positions with the Company from 1991-1994, including Financial Projects Manager and Director of Strategic Planning & Capital Management. Prior to that he served as Manager, Banking & Cash, Chesapeake Corporation, from November 1989 through March 1991.
Donald E. Fitzsimmons, age 53, has served as Vice President of Railroad Sales since 1994. Prior to 1994, Mr. Fitzsimmons held the following positions with the Company: Regional Sales Manager, Assistant Vice President - Sales and Vice President - Railroad Sales.
PART II
Item 5.
Item 5. Market for Brenco, Incorporated Common Stock and Related Shareholder Matters
The principal market in which the Common Stock of Brenco, Incorporated is traded is the NASDAQ Over-the-Counter-National Market System. The high and low sales prices for the Common Stock on the NASDAQ Over-the-Counter-National Market System and the dividends paid per Common Share for each quarter in the last two fiscal years are incorporated by reference to page 4 of the 1994 Annual Report. For information on restrictions on payment of dividends, see Note 5 of Notes to Consolidated Financial Statements under item 8 of this Report.
The approximate number of shareholders of record on February 24, 1995 was 2,118 (including brokers, dealers, banks and other nominees participating in The Depository Trust Company).
Item 6.
Item 6. Selected Financial Data
Information required by this item is incorporated by reference to the Brenco Annual Report to shareholders, page 14.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Information required by this item is incorporated by reference to the Brenco Annual Report to shareholders, pages 14 and 15.
Item 8.
Item 8. Financial Statements and Supplementary Data
Information required by this item is incorporated by reference to the Brenco Annual Report to shareholders as follows:
Financial Statements and Independent Auditor's Report - pages 5 through 13.
Supplementary data - page 4, the information under "Selected Quarterly Data".
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None. PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information required by this item concerning directors of the registrant is incorporated by reference to the Brenco Proxy Statement dated March 10, 1995, pages 4 and 5 under "Election of Directors". Information on the executive officers of the registrant is included in Part I under the caption "Executive Officers of the Registrant".
Item 11.
Item 11. Executive Compensation
Information required by this item is incorporated by reference to the Brenco Proxy Statement dated March 10, 1995, pages 6 through 10 under "Executive Compensation".
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated by reference to the Brenco Proxy Statement dated March 10, 1995, pages 1 through 3 under "Security Ownership of Certain Beneficial Owners and Management".
Item 13.
Item 13. Certain Relationships and Related Transactions
Information required by this item concerning certain relationships is incorporated by reference to the Brenco Proxy Statement dated March 10, 1995, page 5, footnote (1) through (3), under "Election of Directors."
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a) 1. Financial Statements:
The following statements are incorporated in Part II, Item 8 by reference to the Brenco Annual Report to Shareholders (page references are to page numbers in the Brenco Annual Report):
Page Number ----------- Independent Auditor's Report 13
Consolidated Balance Sheets as of December 31, 1994 and 1993 7
Consolidated Statements of Income for the three years ended December 31, 1994, 1993 and 1992 5
Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1994, 1993 and 1992 6
Consolidated Statements of Cash Flows for the three years ended December 31, 1994, 1993 and 1992 8
Notes to Consolidated Financial Statements 9 - 12
(a) 2. Financial Statement Schedules:
Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(a) 3. Exhibits
3.1 Articles of Incorporation, as amended. (incorporated herein by reference to Form SE dated March 27, 1991).
3.2 Bylaws, as amended. (incorporated herein by reference to Exhibit 3.2 included in the Company's Report on Form 10-K for the year ended December 31, 1993, as amended on Form 10-K/A, Amendment No. 1).
4.1 Note Agreements dated as of September 1, 1992, providing for the issuance in the aggregate of $10,000,000 7.50% Senior Notes due May 1, 2002 (incorporated herein by reference to Form SE dated March 26, 1993).
10.1 Employment Agreement dated as of September 8, 1983, between the Company and J. Craig Rice (incorporated herein by reference to Form SE dated March 26, 1993).
10.2 Employment Agreement dated as of September 8, 1983, between the Company and Jacob M. Feichtner (incorporated herein by reference to Form SE dated March 26, 1993).
10.3 Employment Agreement dated as of September 8, 1983, between the Company and Robert V. Lawrence (incorporated herein by reference to Exhibit 10.3 included in the Company's Report on Form 10-K for the year ended December 31, 1993, as amended on Form 10-K/A, Amendment No. 1).
10.4 1987 Restricted Stock Plan of the Company (incorporated herein by reference to the Company's Proxy Statement for the 1987 Annual Meeting of Stockholders dated March 13, 1987).
10.5 1988 Stock Option Plan of the Company, as amended (incorporated herein by reference to Exhibit 10.5 included in the Company's Report on Form 10-K for the year ended December 31, 1993 as amended on Form 10-K/A, Amendment No. 1).
10.6 Executive Incentive Retirement Plan.
13. Portions of the 1994 Annual Report to Shareholders which are incorporated by reference into this Report on Form 10-K.
21. Subsidiaries of the registrant.
23. Consent of Independent Auditors.
27. Financial Data Schedules.
Management Contracts and Compensatory Plans. Set forth below are the management contracts or compensatory plans and arrangements required to be filed as Exhibits to this Annual Report pursuant to Item 14(c) hereof, including their location:
Employment Agreement dated as of September 8, 1983, between the Company and J. Craig Rice - Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (filed under cover of Form SE dated March 26, 1993).
Employment Agreement dated as of September 8, 1983, between the Company and Jacob M. Feichtner - Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (filed under cover of Form SE dated March 26, 1993).
Employment Agreement dated as of September 8, 1983, between the Company and Robert V. Lawrence - Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (as amended on Form 10-K/A, Amendment No. 1).
1987 Restricted Stock Plan of the Company - Exhibit A to the Company's Proxy Statement for the 1987 Annual Meeting of Stockholders dated March 13, 1987.
1988 Stock Option Plan of the Company, as amended April 15, 1993 - Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 (as amended on Form 10-K/A, Amendment No. 1).
Executive Retirement Incentive Plan - Exhibit 10.6 to the Company Annual Report on Form 10-K for the year ended December 31, 1994.
(b) Reports on Form 8-K
There were no reports on Form 8-K for the three months ended December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRENCO, INCORPORATED
March 24, 1995 BY: /s/ J. Craig Rice -------------------------- J. Craig Rice President (Chief Operating Officer)
March 24, 1995 BY: /s/ Jacob M. Feichtner -------------------------- Jacob M. Feichtner Executive Vice President & Secretary (Chief Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Chairman of the /s/ Needham B. Whitfield Board and Chief Executive -------------------------------Officer and Director March 24, 1995 Needham B. Whitfield
President and Chief Operating /s/ J. Craig Rice Officer of the Company -------------------------------and Director March 24, 1995 J. Craig Rice
Executive Vice President & /s/ Jacob M. Feichtner Secretary of the Company -------------------------------and Director March 24, 1995 Jacob M. Feichtner
/s/ Steven M. Johnson Director March 24, 1995 ------------------------------- Steven M. Johnson
/s/ John C. Kenny Director March 24, 1995 ------------------------------- John C. Kenny
/s/ James M. Wells III Director March 24, 1995 ------------------------------- James M. Wells III
/s/ Frederic W. Yocum, Jr. Director March 24, 1995 ------------------------------------- Frederic W. Yocum, Jr.
EXHIBIT 10.6
BRENCO, INCORPORATED EXECUTIVE RETIREMENT INCENTIVE PLAN January 1, 1995
Brenco, Incorporated (the "Company"), hereby adopts the Brenco, Incorporated Executive Retirement Incentive Plan (the "Plan") for the benefit of the eligible officers and executive employees of Brenco, Incorporated, effective January 1, 1995.
1. Definitions.
A. "Actuarial Value" - means "Actuarial Value" as defined in the Retirement Plan.
B. "Average Compensation" - means "Average Compensation" as defined in the Retirement Plan except that, for purposes of the Plan, Average Compensation shall include 100% of any bonuses, commissions or other cash incentives received by a Participant instead of 75% as prescribed in the Retirement Plan.
C. "Base Benefit" - means an amount equal to three percent (3%) of a Participant's Average Compensation multiplied by his Years of Benefit Service, up to a maximum of 20 years, determined at the time that benefit payments commence under the Plan.
D. "Committee" - means the Compensation Committee of the Board of Directors of the Employer.
E. "Employer" - means Brenco, Incorporated and any of its affiliates.
F. "Offset Benefit" - means an amount equal to the sum of(i) the single life annuity retirement benefit which would be payable to the Participant under the Retirement Plan, and (ii) the Participant's Social Security Benefit, both of which to be determined as of the time that benefit payments commence under the Plan.
G. "Normal Retirement Age" - means age 62.
H. "Participant" - means an employee designated by the Committee as eligible to participate in the Plan. The Committee may at any time terminate an employee's designation as a Participant, in which case such employee's "Base Benefit" will be frozen, but his "Offset Benefit" may continue to increase. A Participant shall cease being a Participant in the event that his employment terminates prior to his attaining age 55 other than on account of his death or disability.
I. "Plan Year" - means the calendar year.
J. "Retirement Plan" - means the Brenco Retirement Plan.
K. "Social Security Benefit" - means the projected monthly retirement benefit which a Participant would be entitled to receive under the Social Security Act at age 62.
L. "Years of Vesting Service" - means "Plan Years of Service" as determined under the Retirement Plan for vesting purposes.
M. "Years of Benefit Service" - means "Years of Benefit Service" as determined under the Retirement Plan for benefit accrual purposes.
2. Purpose. The Plan is intended to advance the interests of the Company by providing a financial incentive to certain officers and other key executive employees to retire from the Company at or before attaining the Normal Retirement Age.
3. Administration of Plan. The Plan shall be administered by the Committee. The Committee shall have the right to interpret the Plan, and all decisions of the Committee with respect to the Plan shall be binding on all Participants.
4. Eligibility and Participation. The Committee may from time to time select those employees whom the Committee shall recommend to the Board of Directors of the Company (the "Board") for participation in the Plan. In selecting those employees who shall be recommended at any time, the Committee shall consider the position and responsibilities of the eligible employees, the total cash compensation and value of their services to the Company, and such other factors as the Committee deems pertinent.
As promptly as practicable after the Committee makes recommendations to the Board, the Board shall approve the recommendations of the Committee and each employee who is designated as a Participant in the Plan shall be advised in writing of such designation.
5. Eligibility for Retirement Incentive Benefit Payments and Computation of Benefit Amount. In order for a Participant to be eligible to receive the Retirement Incentive Benefit described below, except as provided in Sections 7,8 and 9 below, he must (a) retire before the first day of the calendar quarter next following the date on which he attains the Normal Retirement Age, (b) have at least five (5) Years of Vesting Service on the date that he retires, and (c) be at least fifty five (55) years old on the date that he retires.
The Retirement Incentive Benefit shall be an amount equal to the excess, if any, of the Participant's Base Benefit over the Participant's Offset Benefit.
6. Payments Following Retirement On or Before the Normal Retirement Age. If the conditions set forth in Section 5 are satisfied, the Retirement Incentive Benefit shall be payable monthly for the Participant's life commencing on the first day of the calendar quarter next following the date that the Participant retires.
If Retirement Incentive Benefit payments commence before the first day of the calendar quarter next following the date that the Participant attains the Normal Retirement Age, the Retirement Incentive Benefit payment shall be reduced in accordance with the table set forth below:
Age When Payments Commence Percentage of Benefit Payable * 62 100% 61 95% 60 90% 59 85% 58 80% 57 75% 56 68.8% 55 63.2%
* adjusted on a monthly basis for payments which commence between birthdates
After taking into account the reduction described above, if any, the Retirement Incentive Benefit shall be paid in such form as the Participant elects among the forms of payment available under the Retirement Plan; provided, however, that such payments will be reduced, in accordance with computations made by an actuary engaged by the Plan, in the event that the benefit is paid in any form other than a Single Life Annuity for the life of the Participant.
7. Payments Following a Participant's Disability. In the event a Participant's employment terminates on account of his disability, as defined in the Retirement Plan, before benefit payments have commenced pursuant to Section 6 above, Retirement Incentive Benefit Payments will commence on the date that benefit payments are first made to the Participant under the Retirement Plan.
8. Payments to a Spouse Following a Participant's Death. If a Participant dies after benefit payments have commenced under the Plan, his spouse or other beneficiary will be entitled to receive benefit payments only if the form of benefit payment originally selected by the Participant provides for the continuation of benefit payments.
If a Participant who has been married to his spouse for at least one year at the time of his death dies after attaining age 55 with at least five (5) Years of Vesting Service before benefit payments have commenced under the Plan, the Participant's spouse will receive benefit payments under the Plan commencing on the first day of the calendar month immediately following the month in which the Participant died. Such benefit shall be in the form of a single life annuity payable monthly for the life of the Spouse. The amount of such annuity shall equal the survivor annuity to which the spouse would have been entitled under the Plan determined as if benefit payments to the Participant had commenced on the day preceding the day of his death under the Joint and 50% Spouse Survivor Annuity form of payment.
If a Participant who has been married to his spouse for at least one year at the time of his death dies prior to attaining age 55 with at least five (5) Years of Vesting Service, the Participant's spouse will receive benefit payments under the Plan commencing on the first day of the calendar month in which the Participant would have attained age 55 had he survived. Such
benefit shall be in the form of a single life annuity payable monthly for the life of the spouse. The amount of such annuity shall equal the survivor annuity to which the spouse would have been entitled under the Plan determined as if the Participant had died on the day following the day that benefit payments to the Participant commenced after he had attained age 55 under the Joint and 50% Spouse Survivor Annuity form of payment.
9. Payments to a Designated Beneficiary Following a Participant's Death. In the event that a Participant who has at least five (5) Years of Vesting Service dies before benefit payments commence under the Plan, his designated beneficiary may be entitled to receive a Supplemental Death Benefit. The Supplemental Death Benefit is an amount, payable in the form of sixty (60) guaranteed monthly payments, equal to the Actuarial Value of the excess of:
(i) The Actuarial Value of the guaranteed ten-year certain portion of the benefit payment to which the Participant would have been entitled under the Ten-Year Certain and Life Annuity form of payment had he commenced receiving benefit payments under the Plan on the first day of the calendar month coinciding with or next following the later of:
(A) the date of his death, or
(B) the first date on which he could have retired and received benefit payments under the Plan, over
(ii) The Actuarial Value of the benefit payable to the Participant's spouse, if any, payable under Section 8 of the Plan.
If the Participant dies after attaining age 55 the benefit payable hereunder, if any, will commence on the first day of the calendar month immediately following the month in which the Participant died.
If the Participant dies prior to attaining age 55, the benefit payable hereunder, if any, will commence on the first day of the calendar month immediately following the month in which the Participant would have attained age 55 had he survived.
10. Cash-Out Provision. In the event that the present value of any benefit payable under this Plan, as determined by an actuary engaged by the Plan for this purpose, is $20,000 or less, such present value shall be paid to the Participant, his spouse and/or his designated beneficiary as the case may be, in a single lump sum payment as soon as practicable after such determination is made.
11. Non-Compete Provision. The continuation of benefit payments under the Plan will cease, and the right to all future payments under the Plan will be forfeited, if the Participant, without the written consent of the Company, directly or indirectly enters into or in any manner takes part in any business, profession or other endeavor which shall be in competition with the business of the Company, either as an employee, agent, independent contractor, owner or otherwise in any state or foreign country in which the Company is conducting business.
12. Limitation on Benefits. No Participant, spouse or beneficiary shall have any right to receive benefits under the Plan prior to the termination of the Participant's employment by the Company.
In the event that a Participant's employment terminates (i) before he attains the age of fifty five (55) for any reason other than his death or disability, or (ii) on or after the first day of the calendar quarter next following the date that he attains the Normal Retirement Age, or in the event that a Participant breaches the non-compete provision in paragraph 11, all rights of the Participant, his spouse and/or his beneficiary shall be forfeited and all obligations of the Company to make payments or further payments under the Plan shall cease.
The Plan shall not give the Participant, his spouse, his beneficiary or anyone else any right or claim to specific assets of the Company, regardless of whether the Company establishes a separate account or otherwise provides for funding its liability hereunder.
The Plan may be modified or amended by the Company at any time, provided however, the benefits payable to any Participant under the Plan determined as of the time of such modification or amendment shall not be reduced by such modification or amendment unless such Participant consents in writing to such reduction.
13. Waiver of Vesting and Benefit Accrual Limitations. The Committee may, in its sole discretion, waive, modify or amend all or any portion of the provisions of the Plan that have the effect of limiting the amount or the timing of payments that are to be made under the Plan. Such action by the Committee may be made on a case by case basis or may be made with respect to all Participants.
14. Miscellaneous Provisions.
(a) The Plan shall be governed by the laws of Virginia.
(b) Each Participant shall designate a beneficiary, in writing, in such form as the Company may prescribe. The Company may rely on such beneficiary designation until such time that it is revoked, in writing, by the Participant. In the event that a Participant fails to designate a beneficiary, the Company shall make all payments which would have been made to the Participant's designated beneficiary to such Participant's estate.
(c) No benefit payable under this Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or encumbrance of any kind.
(d) Nothing contained in this Plan shall be construed as a contract of employment between the Company and any Participant, or as a right of any Participant to be continued in employment by the Company, or as a limitation on the right of the Company to discharge any of its employees with or without cause.
IN WITNESS WHEREOF, the Plan has been duly adopted as of the 1st day of January, 1995.
Brenco, Incorporated
By
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders Brenco, Incorporated Midlothian, Virginia
We have audited the accompanying consolidated balance sheets of Brenco, Incorporated and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brenco, Incorporated and subsidiaries as of December 31, 1994, and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Richmond, Virginia January 31, 1995
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
(1994 compared with 1993)
Net sales in 1994 increased 19% over sales in 1993, to $117,897,000. Railroad products and services were up 22%, to $97,666,000 which accounted for the major portion of the increase. Sales for Quality Bearing Service (QBS), our reconditioning subsidiary, were up 30% as we continued to enjoy substantial market share. The revenues of Rail Link, our rail switching subsidiary were up 8%, with the addition of three switching locations, while automotive forgings were up 7%.
Operating income was up 63% in 1994 to $15,170,000, compared to $9,311,000 in 1993. The increase in operating income in 1994 was primarily the result of higher sales volumes and improved margins in railroad products and services. In 1994 a special charge to earnings was made in the amount of $1,490,000, representing additional environmental remediation expenditures to complete the cleanup of a former foundry site that has been inactive since 1979. In addition, during the first quarter, there was a gain on the sale of surplus equipment in the amount of $1,056,000. During 1994, Brenco brought an action against a bearing reconditioner for allegedly repairing Brenco raceway components in violation of AAR rules. Brenco was unsuccessful in its action, and the costs of its litigation resulted in a charge to income of $1,018,000, most of which occurred in the fourth quarter. Net income for 1994 was $8,802,000 or $.88 per share, compared to $4,241,000 or $.43 per share in 1993, an increase of 108%.
(1993 compared with 1992)
Net sales in 1993 increased 18% over sales in 1992, to $98,724,000. Railroad products and services were up 20%, to $79,859,000. Export sales of railroad products were $17,849,000, an increase of 61% over the prior year, to an all- time high. Revenues for Rail Link, our rail switching subsidiary were up 18%.
Operating income rose 167% in 1993 to $9,311,000, compared to $3,488,000 in 1992. The increase in operating income in 1993 was primarily the result of higher sales volumes and improved margins in our QBS subsidiary. In the fourth quarter of 1993 a special charge to earnings was made in the amount of $2,300,000, representing anticipated environmental remediation expenditures. Net income for 1993 was $4,241,000 or $.43 per share, compared to $1,977,000 or $.20 per share in 1992, an increase of 115%.
Liquidity and Capital Commitments
Cash and cash equivalents were $6,650,000 at December 31, 1994, compared to $3,582,000 at the end of 1993.
Capital expenditures totaled $5,871,000 in 1994, compared to $8,815,000 in 1993 and $5,533,000 in 1992. Capital expenditures in 1995 are expected to increase to approximately $13,696,000, which includes $2,766,000 of carryovers from prior years plus $10,931,000 in new projects approved for 1995. Increased capacity ($3,970,000) and new business ($1,058,000) account for 46% of the new projects budget for 1995. The cleanup of the former Puddledock plant site was completed in 1994.
During 1994, we completed the placement of a $1,000,000 term loan, to provide financing for constructing a new reconditioning plant in Little Rock, Arkansas.
In 1994 our investment in accounts receivable increased by $3,739,000, to $18,304,000, as the result of strong fourth quarter sales. Sales in the fourth quarter of 1994 were $30,990,000, compared to $22,770,000 for the same quarter of 1993, or an increase of $8,220,000.
The ratio of current assets to current liabilities was 5.57 at December 31, 1994, as compared to 4.44 at the end of 1993. The total amount of working capital increased by $5,849,000 to $34,438,000 at the end of 1994. This compares to $28,589,000 at the end of the prior year. The principal increase in 1994 over 1993 was in cash and accounts receivable, while current liabilities remained approximately the same.
The Company has a $5,000,000 revolving line of credit. This line was not used during 1994. Management believes that its cash balances and earnings before depreciation charges in the coming year will be more than adequate to cover its capital needs and dividend payments for 1995.
Exhibits 3.1, 3.2, 4.1, 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 21 and 23 which are listed under Item 14(a)3 are not included herewith but may be obtained for a fee of $2.00 by writing to:
Secretary Brenco, Incorporated One Park West Circle Suite 204 Midlothian, Virginia 23113
BRENCO, INCORPORATED AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
The Company has the following wholly-owned subsidiaries, incorporated in Virginia and included in the consolidated financial statements:
Quality Bearing Service of Kentucky, Inc. Quality Bearing Service of Missouri, Inc. Brenco Holdings, Inc. Rail Link, Inc. SealTech, Inc. Full Steam Ahead Rebuilding, Inc.
The Company has the following wholly-owned subsidiary, incorporated in California and included in the consolidated financial statements:
Q.B.S. of California, Inc.
Rail Link, Inc. has the following wholly-owned subsidiaries, incorporated in Virginia and included in the consolidated financial statements:
Carolina Coastal Railway, Inc. Commonwealth Railway, Inc.
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23
As independent auditors, we hereby consent to the incorporation of our report, dated January 31, 1995, incorporated by reference in this annual report on Form 10-K, into the Company's previously filed Form S-8 Registration Statements: File No. 2-65364 (Post-Effective Amendment No. 2), 33-31361, 33- 45650 and 33-55745.
McGLADREY & PULLEN, LLP
Richmond, Virginia March 24, 1995