Financial analysts, professional accounting groups and investors have frequently asked diversified companies to provide supplementary financial information which will be useful in understanding the results of their operations. Recognizing the need for this disclosure, we are presenting in this annual report the sales and earnings of our operating groups, the relative importance of internal growth and acquisitions to our progress and the historical sales growth of our operating groups for the past five years.
Sales and Earnings
Sales and other revenues reached $258,895,000, a 61% increase over the prior year's sales of $160,585,000. Approximately 17% of the increase resulted from internal sales growth and 44% represented sales of acquired companies not included in the preceding year. The historical sales growth of each of our groups for the past five years appears elsewhere in this annual report.
Operating income rose 61% to $13,294,000 from $8,271,000 in 1967. Our effective tax rate, however, increased to 44% in 1968 from 32% in the prior year because of the 10% tax surcharge in 1968 and the substantial investment credit carryover in 1967. Net income of $8,243,000, including a net gain of $949,000 from the sale of properties and securities, was 48% higher than the preceding year.
Our Public Security and Leisure Time groups recorded the greatest growth in sales during 1968, and together contributed 63% of group operating income. An analysis of sales and profit contribution by group appears in the charts on page 25.
Earnings per share amounted to $2.61 in 1968 and $2.41 in 1967. Earnings per share for both years have been computed based on the average number of shares outstanding including residual securities. A residual security is a security which clearly derives a major portion of its value from its common stock characteristics, which are usually present in the form of the right to convert the securities into common stock.
Under these circumstances, residual securities are treated as the equivalent of common stock in computing earnings per share. Our $1.25 convertible preference stock, $2 convertible preference stock—Series C, and 6% convertible notes have been treated as residual securities, as were the 51/2% convertible subordinated debentures which were converted into common stock during the year.
Dividends of 60¢ were paid on our common stock during the year as compared with 500 in 1967. Dividends paid during fiscal 1968 on our preference stocks and common stock may qualify as a return of capital to the recipient rather than as ordinary income. However, the revenue agent currently auditing the Federal income tax returns of the Corporation for the years 1964-1966 has questioned whether dividends paid in those years qualified as return of capital.
The Corporation understands that the matter is currently being considered by the National Office of the Internal Revenue Service. The Corporation has been advised by Messrs. Dewey, Ballantine, Bushby, Palmer& Wood, its counsel in this matter, that in its opinion, dividends paid for fiscal years 1964 through 1967 have been a return of capital for Federal income tax purposes. Advice as to dividends paid in fiscal year 1968 will be forwarded to stockholders and will be made available to the public after appropriate determinations have been made.
Through a public tender offer in December 1967, Bangor Punta acquired 98% of the capital stock of Producers Cotton Oil Company, which has been included in the financial statements as a consolidated subsidiary since that time. Producers furnished us with an entry into the expanding agribusiness field.
In July, 1968, Waukesha Motor Company was merged into Bangor Punta in exchange for shares of our common stock and a new issue of $2 convertible preference stock. The acquisition of Waukesha has been accounted for as a purchase and its operations for August and September are included in our Statement of Consolidated Income for 1968. Waukesha, a manufacturer of diesel engines and total energy systems, becomes the nucleus of our new Energy Systems group.
Other acquisitions made during the year include Metcalf & Eddy, which provides engineering services and becomes part of our Professional Services group; Seagoing Boats, a manufacturer of houseboats which has been integrated into our Leisure Time group and the Stephenson Corporation, which helps to round out our Public Security group as a manufacturer of resuscitators and radar speed measuring devices. We also acquired the remaining outstanding stock of Starcraft Corporation and merged it on September 30, 1968.
In accordance with our policy of continuously reviewing the return on investment which our operations produce, we determined that our Pacific Coast foundry operation was not meeting our corporate goals and it was disposed of during the year.
The number of shares of outstanding common stock increased to 2,627,508 at September 30, 1968 from 1,627,309 at September 30,1967, an increase of 61%. On September 18, 1968, our 51/2% convertible subordinated debentures were called for redemption and substantially all were converted into common stock by the holders. Approximately $19 million of these debentures had been issued since April 1967, and their conversion was an important factor in increasing our shareholders' equity to $113,513,000 at September 30, 1968, from $47,144,000 at September 30, 1967.
In anticipation of continued corporate growth, shareholders approved at a special meeting held on July 30, 1968, an increase in the number of authorized shares of common stock to 20 million and an increase in the number of authorized shares of preference stock to 10 million. At the same time, shareholders approved the merger with Waukesha Motor Company, which resulted in the issuance of a new $2 convertible preference stock. This new $2 convertible preference stock, together with our common stock, $1.25 convertible preference stock, and 53A% subordinated bonds is listed on the New York Stock Exchange.
In order to support our continuing internal growth and expansion, additional financing arrangements were made during the year. On July 2, 1968, Bangor Punta International Capital Company, a wholly-owned subsidiary, sold $15 million of 51A% guaranteed convertible debentures outside the United States. These funds will enable us to enter foreign markets through the acquisition of equity interests in companies which can use our production and marketing knowledge, especially in the Public Security and Leisure Time areas.
The debentures are convertible into Bangor Punta common stock after January 15, 1969, at a price of $55 per share. On July 31, 1968, we borrowed $20 million under a 71/4% loan agreement with John Hancock Mutual Life Insurance Company. The proceeds will be used to further our acquisition program. In order to finance our working capital needs, the revolving credit of $30 million with our lending banks was extended to June 15, 1970. Producers Cotton Oil Company has formed a wholly-owned subsidiary, Prodco Finance Co., to provide financing of grower loans. A condensed balance sheet of Prodco is included in the notes to consolidated financial statements.
Capital expenditures of our consolidated companies during 1968 amounted to $6,630,000 as compared with $4,315,000 expended in 1967. Depreciation and amortization charges in 1968 amounted to $4,058,000. The current year's capital expenditures, together with the properties o the companies acquired during the year, increased the company's consolidated net property, plant and equipment to $63,734,000 at September 30, 1968, from $26,765,000 at the end of 1967.
Consolidated working capital increased to $120,157,000 at September 30, 1968, from $45,334000 at September 30, 1967. Our current ratio was 3.5 to 1 at the end of fiscal 1968 as compared with 2.7 to 1 at the end of the prior year. A statement of source and application of funds for the year ended September 30, 1968, follows:
Source and Application of Funds
Year Ended September 30, 1968
|Source of funds|
|Net income||$ 8,243,536|
|Add noncash charges:|
|Depreciation and amortization of properties||4,057,529|
|Provision for deferred Federal income taxes||1,500,000|
|Revolving credit loans||12,500,000|
|Insurance company loans||28,000,000|
|5 1/4% guaranteed convertible debentures||15,000,000|
|Fair value of securities issued for companies acquired — $19,486,000 principal amount of 51/4% subordinated bonds, $3,839,500 principal amount of 51,4% convertible subordinated debentures, 310,311 shares of common stock, 6,000 shares of $1.25 convertible preference stock and 573,854 shares of $2.00 convertible preference stock—Series C
|Working capital of companies acquired||33,338,328|
|Application of funds|
|Acquisition of companies, including payment on prior year's acquisition||$81,049,682|
|Additions to property, plant and equipment||6,630,338|
|Cash dividends paid||2,141,180|
|Payments on long-term debt||2,400,438|
|Increase in working capital||$ 74,823,367|